Before I get into this newsletter, I wanted to remind readers about two webinars this week:
1) Roccy’s Favorite Marketing Tool– Webinar- Thursday, March 24, 2016 at 1:00 pm EST. I’m reintroducing what I call my favorite marketing tool that was recently improved with a NEW MOBILE APP. To sign up, click on the following link:
2) AG 49 Phase 2 – Mulitipliers and Bonuses for IUL—Webinar—Wednesday, March 23 at 1pm EST. Learn how the new IUL illustration regs. will dramatically affect how policies are illustrated (and how companies are trying to pump up the numbers) click on the following link:
What AXA did should anger many readers. If you would like to download the 18-page complaint against AXA in PDF, click on the following link:
Cost of Insurance (COI)
When an insurance company sells a life policy, the insurance contract states when the company is allowed to raise the COI. The main reason insurance companies try to raise rates is because the company has a financial hardship and a rate hike is needed to keep the company financially solvent. Hardship is defined in the insurance contract.
When rates are raised, it’s typically on an entire class of policies. For example, company ABC mispriced product X and then decided to raise rates on EVERYONE who previously purchased product X.
AXA Selectively Raised Rates
If it’s happened before, I’ve not seen it. AXA, instead of raising rates on “all” policy holders of a particular type of policy, selectively chose a small group to raise rates on. This is at the heart of the lawsuit.
-The policy in question is the Athena Universal Life II (“AUL II”).
The principal benefit of UL policies is that they permit policyholders to pay the minimum amount of premiums necessary to keep the policies in-force (meaning the insured could choose to pay excess premiums that would become the cash value in the policy or simply pay the minimum leaving virtually no cash in the policy).
-The AUL II was marketed as a “Flexible Premium Universal Life Insurance Policy” where the policyholder can, within limits, “make premium payments at any time and in any amount.”
-It is alleged that AXA unlawfully sought to punish policyholders for making only the minimum payments. AXA announced that it will dramatically increase COI rates on certain AUL II policyholders, targeting those who exercise their contractual right to keep their accumulated policy account values as low as possible and pay flexible premiums.
According to the complaint, AXA is raising COI rates for a block of nearly 1,700 universal life policies that were selected in part for their pattern of premium payments; specifically, the increases are targeting owners who minimize their premium payments and keep policy values as low as possible – even though the policies expressly allow them to do so.
-The premium increase sought by AXA is so large (25%-70%) that policy holders will have little option but to surrender their policies.
-The complaint alleges that the premium hike will result in a $46 million increase to AXA’s net earnings.
-AXA is permitted to adjust the cost of insurance rates periodically based only on certain specified factors, such as reasonable assumptions about mortality and investment experience. “Minimal funding” is NOT one of those enumerated factors.
Those being targeted are issue ages 70 and above and have a current face value amount of $1 million and above. It is alleged that the policy does NOT permit AXA to use issue age or face value to determine who gets a COI increase.
– The policies at issue require that any change in COI rates, “will be on a basis that is equitable to all policyholders of a given class.” AXA admits that it is not abiding by this when only raising rates on certain policy holders.
-AXA claims that the COI increase is warranted because the affected insureds are dying sooner than AXA anticipated and its investment experience has been less favorable than expected. Of course we all know that people are living longer, so the claim that people are dying earlier seems dubious makes me believe that the main reason rates are being increased is because of poor investment returns at the company level for AXA.
This point is important because many insurance companies who sold policies years ago did so assuming certain investment returns on general assets of the company. Much of those returns are based on bond yields that are in the toilet right now and could stay there for years to come (which could cause many other companies to try and raise rates).
What can we learn from this class action lawsuit?
1) It should remind readers to make sure you go over the fine print with your clients so they know what an insurance company could potentially do under the contract.
2) It’s important to try and work with companies that don’t have a history of screwing selected clients. I don’t know how many other times AXA has tried to raise rates, but to the best of your ability, it’s important to work with companies that have a history of not screwing clients (whether that be through a COI increase or in the indexed world by lowering caps and participation rates).
3) You might want to think twice next time you are looking at using AXA vs. a similarly situated product at another company. All things being equal, you might want to stay away from AXA if you can confirm that the other company doesn’t have a history of sticking it to certain policy holders.
Roccy DeFrancesco, JD
Founder, The Wealth Preservation Institute
144 Grand Blvd
Benton Harbor, MI 49022