New York Financial Superintendent Lacewell Warns of Hidden Costs in Universal Life Policies

New York Department of Financial Services Acting Superintendent Linda Lacewell has issued a consumer alert that talks about hidden costs and risks in universal life insurance policies. It is her first public act since taking the helm of the agency earlier this month.

“Beware of increasing charges,” the consumer alert warns in a message that appears on the website and was tweeted Thursday by the New Department of Financial Services.

(Related: Life Policyholder Sues Over Reinstatement Amount Calculations)

Lacewell noted that the internal charges for these policies can increase annually, and can spike in later years as a policyholder ages. These internal charges are funded by premium payments, the existing cash value of the policy and interest credits or investment performance, as with variable UL products.

Consumers need to know that their payments plus the existing cash value of the policy need to cover its expenses or they might lose coverage with a lapse, according to the alert.

In addition, premiums themselves are likely not guaranteed and could increase, the department warns, adding that cash value and benefits are often not guaranteed, either, with UL policies.

The cautionary note appears to be prompted by numerous complaints filed with the department, including complaints about cases in which policies had lapsed even though the owners had made their payments, or had not realized that an infusion of cash was required to keep the policies in effect.

Market volatility and a decline in interest rates are among the factors that have affected the policy values, the department found when consumers complained.

The department has received about 1,400 complaints from New York consumers about UL policies over the past five years, and the number of complaints is higher than for other life products, according to department figures.

The department recommended that consumers understand how UL premium payments work, as well as the flexibility UL policies can offer, to and ask about illustrations for worst-case scenarios for the products, as regulations require.

The department also suggested New Yorkers get their one free in-force illustration allowed by regulation per year. The policyholder should also ask the agent annually the amount of premiums needed to continue expected coverage based on current market and other conditions, the department said.

The department reminded consumers that they can cancel any life policy, including a UL policy, and ask for a full refund, within 10 days of making the purchase, under the state’s “free look” rule.

Jack Dolan, spokesman for the American Council of Life Insurers, the trade group representing insurance underwriters, said Friday in a statement shared with ThinkAdvisor that, “We agree fully with the acting superintendent, who recommends to people who own or are thinking about buying a universal life insurance policy to carefully review their policies. Regardless of the type of life insurance coverage, life insurers encourage current and prospective policyholders to ask questions and ensure they are comfortable with the purchase they make.”

Awareness is key for consumers throughout the buying process and the life of the contract,  Dolan said, referring to ACLI consumer guides.

“With Americans’ financial security being our core business, we want people to be secure in the coverage they have obtained,” Dolan added.

Total universal life new annualized premium rose only 1% in the third quarter 2018 over the previous quarter, according to the LIMRA U.S. Retail Individual Life Insurance Sales Survey. UL premium was flat for the first three quarters of 2018 compared with 2017, according to LIMRA.

“Product discontinuation and rate hikes (mainly related to persistently low interest rates) continued to beset the fixed UL market,” LIMRA stated when the research was published in late November.

However, there have been strong sales in indexed universal life, as the product includes protection against market-related loss while economic conditions can juice up the policy’s accumulation potential, according to LIMRA.

Previous New York department consumer alerts have involved topics such as information on the Equifax, Anthem and Columbian Mutual Life Insurance Co. data security breaches; Holocaust survivor compensation and fraud warnings; and disaster relief loans after Superstorm Sandy. The department has also sent alerts about impostor scams, and a cautionary warning on rent-to-own strategies for purchasing homes.

— Read Insurers, Life Settlement Firms Clash Over UL Cost-of-Insurance Hikes, on ThinkAdvisor.

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