Life insurance price increases come under fire

by Paul Lucas05 Feb 2016
Rates on some life insurance policies are being raised unfairly, according to one consumer group.
Criticisms have been fired at several insurers south of the border, including Transamerica, AXA Equitable and Voya Financial, after the Consumer Federation of America found that it had increased its “cost of insurance” schedules that are linked to the policyholder’s age.

Stating that it was concerned that insurers were using their right to increase rates as a way of preserving their profitability, the federation has now written to state commissioners about the issue claiming that the impact on policyholders could be “extraordinarily high”.

The controversy has arisen over universal life insurance policies. They work similarly to whole life policies in that a fixed premium steadily increases the cash value of the policy so that the death benefit is reached by 100: however, these policies differ in that they give the buyer the chance to make changes to premium costs and the benefit.

However, such concerns over price rises do not need to arise in Canada due to a fundamentally different pricing model.

“Typically, Canadian cost of insurance rates for Universal Life policies are fully guaranteed for the duration of the contract,” said Ron Sanderson, director of policyholder taxation and pensions at the Canadian Life and Health Insurance Association.  “Those ‘COI’ rates are applied to the difference between the death benefit and the accumulated savings (the ‘net amount at risk’, or NAAR) within the policy each year, and the resultant charge is then subtracted from the accumulated savings.

“To the extent that investment returns differ from those illustrated at issue, the NAAR will vary, and the COI charge will accordingly vary.  And lower investment returns over the last 10-plus years mean that NAARs are larger than may have been anticipated, leading to larger COI charges. But the COI rates are guaranteed.  While the charge mechanism works the same way in the US, their COI rates are not guaranteed, and increased COI rates combined with increased NAARs can increase consumer costs to a point where coverage is not sustainable for some policyholders.”

As for the USA, the state commissioners are expected to review the letter from the Federation before determining if any further investigation is required.