As the end of the year approaches, life insurance carriers are in a mad dash to implement product changes mandated by the new 2017 CSO mortality tables and the Principle-Based Reserving (PBR) requirements. Most carriers have already updated their term and no-lapse guarantee universal life products to meet these new requirements, but many cash accumulation products still need to be revised.
Why did carriers wait to the end of the year to make changes to their cash accumulation products?
A couple of real-life cases will demonstrate why carriers delayed implementation of the CSO/PBR requirements for these products and the unfortunate consequence of this delay.
Female client, age 63
Looking at a single pay no-lapse guarantee variable life policy
Face amount: $2 million
The current non-compliant product will cost $524,376.
The new CSO/PBR compliant product is less expensive at $494,808
Commentary: The new product, with a lower price is great when looking at the product from the nolapse guarantee perspective; however, the cash value side of the policy takes a significant hit. By age 90 the new product is short $278,100 in cash value and has a correspondingly $369,778 smaller death benefit – a significant hit for just a $25,568 difference in premium.
Clearly, the client is better off in the old product. This result is not unusual. Many cash accumulation products are less attractive under the new guidelines.
While the delay in implementing the CSO/PBR requirement for cash accumulation products appears to generally benefit clients, there is one significant consequence: namely, life insurance products that do not meet both the CSO and PBR requirements must be issued and paid by December 31, 2019. There are NO exceptions to this deadline. Where a client wants to 1035 exchange values from an existing policy, like this client, time may have already run out. In this case, if the 1035 exchange does not happen until 2020, the client will receive the new product.
While this result is not ideal, at least there is an alternative carrier product. The next case demonstrates a situation where the carrier did not have an alternative product!
Client contemplating the purchase of a $5 million policy in a not yet drafted ILIT. The use of loan regime split-dollar arrangement being considered, so client selected a high cash value product.
Unfortunately, the most competitive product was a non-compliant product where the carrier’s CSO/ PBR compliant replacement product was not expected to be available in January 2020, creating a product gap.
Commentary: Where the carrier does not have a replacement product, it is imperative that the noncompliant policy get paid by December 31.
Unfortunately, the December 31 deadline is also creating problems when a client desires to own the policy in an irrevocable trust (ILIT) that has not yet been drafted. Where a policy is going to be owned by a yet to be drafted ILIT, it’s possible to begin the medical underwriting without the formal trust/ owner. However, the client must have a conversation with his legal advisor concerning the urgency of getting the trust drafted.
In addition to getting the trust established in an expeditious manner, the timing of the premium payment to the trust must take into consideration the beneficiaries’ typical 30-day Crummey withdrawal right. While it’s possible to transfer funds to a trust once it is established, even where the policy is still in the underwriting process, often clients wait until the policy is issued. If the policy is issued in December, the Crummey period will cause the premium to be delayed to 2020.
Obviously, DBS instructed the financial advisor to make sure the client and the client’s legal counsel are aware of the need to have the trust funded and the Crummey time period completed in time for the trustee to write a check to the carrier prior to the end of December.