In most instances, any individual 55-plus shopping for life insurance would be facing high premiums unless their health proved pristine. Few people at middle age are without some health issues.
An increasing ‘catch 22’ faced by consumers having had the foresight to buy universal life insurance policies – products which have a cash value and are designed for long-term (as opposed to shorter-term ‘term insurance’) – represents an environment whereby premiums for universal life policies are skyrocketing.
One couple identified in The New York Times (05/20/16) are facing a conundrum over rising rates on their universal life policy. Lloyd Tanner, of Hot Springs Village, Arkansas, purchased a universal life insurance policy from Transamerica in 1992 for $250,000. Tanner and his wife Carolyn have been told their monthly premiums could quadruple in the coming years, escalating their monthly premium to as high as $2,900 per month.
Lloyd Tanner is in his seventies and is in poor health. The Tanners can’t afford such an increase. “We still do not understand how Transamerica can do this,” Carolyn Tanner told The New York Times.
Transamerica, which defends the increases as necessary, takes the position that policyholders are not being charged anything above maximum rates specified in the contractual language of their polices.
Policyholders are having none of it, and have filed a Bad Faith Life Insurance lawsuit. The litigation is proposed as a class action.
The New York Times notes in its report that universal life policies – unlike basic life insurance or straight term insurance – feature a savings component or ‘cash value’ that accrues over time. The cash value accrues based on interest rates that were agreed to at the time the policies were put in force.
In the 1980s and 1990s – the decades during which universal life policies were most popular – interest rates were much higher than they are now.
The Life Insurance Rip Off lawsuit filed in February takes Transamerica to task for sharp increases in the monthly deduction rate, which The New York Times describes as the amount taken from policyholders’ accounts to cover premiums, the cost of the policy’s death benefit and other expenses and fees. The lawsuit asserts that Transamerica is putting through these increases as a pretext to avoid paying policyholders the higher interest rates agreed to when the policies were sold.
The Bad Faith Life Insurance lawsuit holds that Transamerica is breaching the terms of its universal policies by doing so.
“In 2015, based on its expectations about future performance of certain universal life policies, Transamerica prospectively increased monthly rates of these older policies,” said Gregory Tucker, a spokesman for Transamerica, in an emailed statement to The New York Times. No policyholders are being charged more than the maximum rates specified in their policies, with premiums based on multiple factors, including “interest, mortality, taxes and expenses associated with the policy.
“Transamerica is in full compliance with its contractual obligations and intends to contest vigorously the recently filed litigation,” Tucker said.
Transamerica is not the only player raising their rates. Other companies, such as AXA Equitable Life Insurance Company and Voya Financial, are reported to be also pushing through rate increases. Some policyholders have reported rate increases of as much as 38, or 40 percent.
Policyholders can opt not to pay the increased premiums, but the consequences are not in their favor, since insurance companies can get their money anyway by deducting from the cash value of the universal life policy until the cash value is depleted. At that point, without the policyholder paying the increased premiums and with a depleted cash value, the policy suddenly lapses.
Policyholders have the option of surrendering their policies (rather than pay the higher premiums) and take whatever cash value there is – but they could be taxed on the income. And by surrendering their policy, they have summarily discontinued their life insurance coverage. Shopping for a new policy – and finding a viable and affordable option – would prove difficult given the seeker’s advancing age and potential for health issues, which makes insurance more expensive.
Faced with the inability to pay increased premiums with their existing policy, and with an inability to source an affordable alternative, many consumers will be filing a Denied Life Insurance Claim lawsuit.
Some policyholders have, indeed, surrendered their universal life policies due to the rate increases. The class action Life Insurance Rip Off lawsuit against Transamerica is seeking reinstatement of any policy surrendered as the result of the rate increases. The lawsuit also seeks a reversal of the premium increases, and damages.
The Consumer Federation of America is urging the National Association of Insurance Commissioners to examine the justification of rate increases at the state level.
“It does not take much imagination to imagine that millions of [universal life] policyholders will be adversely affected if insurers are free to raise” their rate schedules, says James H. Hunt, the consumer federation’s life insurance actuary, in a letter to the association.
Class plaintiffs in the Bad Faith Life Insurance lawsuit argue that language in existing universal life policies bar Transamerica from recovering “past losses by changing the monthly deduction rates.”
The Life Insurance Rip Off lawsuit was filed in Los Angeles. The case is Feller et al v. Transamerica Life Insurance Company, Case No. 2:16-cv-01378, US District Court, Central District of California. Lead plaintiff Mary Feller is a freelance writer in San Francisco. According to The New York Times, Feller and her husband Gordon purchased universal life policies from Transamerica in 1989 as security for their retirement years.
“It’s represented as the best of both worlds,” Feller, now 62, said in a phone interview. “It has life insurance to protect your family, and a nest egg when you choose to cash out.”
Their rates have increased over 40 percent, and Feller fears increases will be even bigger. The Fellers expect they would have to work longer just to pay the higher rates to maintain the policies, or to make up the six years of retirement income they would lose were the policies to be surrendered.