Life insurance companies (lifecos) are beginning to overhaul their product lineups to accommodate the new exempt-test tax rules that take effect in January.
Universal life (UL) insurance products are taking the biggest hit, with lifecos being forced to eliminate features, raise prices and, in some cases, withdraw UL products altogether – at least, temporarily – as they adapt to the new, more restrictive tax framework.
The long-awaited changes to the exempt test, which govern the amount of tax-exempt cash that clients can hold in permanent life insurance policies, have significant implications for certain life insurance policies that have an investment component.
“The products that are going to have the biggest impact are the UL products,” says Dan Doyle, partner in the life actuarial practice with PricewaterhouseCoopers LLP (PwC) in Toronto. “Those were the main contracts used to accumulate funds on a tax-deferred basis. They’re not viable the way they are now.”
Although whole life (WL) insurance policies also are affected by the changes, the effect on UL is greater because many features of the UL products available are designed specifically to maximize the tax-sheltering opportunities available under the previous tax rules.
Kingston, Ont.-based Empire Life Insurance Co. has withdrawn its UL product, called Trilogy, from the marketplace altogether.
“We are no longer offering a UL product at this time, and we will wait and see what happens in the marketplace in 2017 before we decide next steps with regards to UL,” says Mike Stocks, vice president and chief marketing officer, retail, with Empire Life.
In addition to the tax changes, the low interest rate environment is a key factor in Empire Life’s decision to exit the UL market, Stocks says. Specifically, sustained low interest rates have squeezed the profitability of UL, prompting insurers to boost premiums significantly in recent years, which has hurt sales.
“UL, as a category, has been in decline for several years,” he says. “It was just becoming cost-prohibitive.”
The Independent Order of Foresters, based in Toronto, also is discontinuing its UL product, called Passport, with new applications no longer accepted as of Nov. 11. The company states it is developing new products, but hasn’t revealed specific details about whether there are plans to reintroduce UL.
Some lifecos are tweaking their UL offerings to fit the new rules rather than shuttering those offerings completely. For example, Waterloo, Ont.-based Equitable Life Insurance Co. of Canada has announced that even though it’s discontinuing EquiLife Limited Pay UL, the firm will maintain Equation Generation IV UL with certain changes. Specifically, the firm will eliminate various features and riders that previously were available, such as the yearly renewable term to age 85 cost of insurance option, and the option of joint last-to-die account value payout on first death, among other features.
Equitable Life also is increasing premium rates on level cost of insurance UL policies by 3.7%.
Similar price increases are expected to follow across the industry. That’s partly due to changes to the administration of the tax on investment income – a tax that insurers are required to pay on tax-exempt funds – beginning in 2017, according to Asher Tward, vice president of estate planning with TriDelta Financial Partners Inc. in Toronto. Those changes will increase the amount of taxes that insurers must pay, particularly for UL level-cost policies.
“As the insurance companies are responsible for paying [those taxes], what those firms are doing is they’re increasing premiums,” Tward says. In fact, premium rates could increase by 10% or more for some policyholder age groups, according to some estimates.
Given the blow to UL products, some insurers are focusing on enhancing their other product offerings.
Empire Life, for example, is redirecting its efforts to participating WL and term insurance. It has launched new products in these categories with features that are likely to resonate with clients who like certain aspects of UL.
Empire Life’s new term life insurance product, Solution ART, is a new option for clients in the absence of the annual renewable term (ART) pricing model previously available on Empire’s UL product. Solution ART’s premiums are low at the beginning, then increase over time, making it a good option for clients looking for affordable short-term insurance coverage, Stocks says.
“[Solution ART is] designed to provide the lowest-cost coverage for those people who have short-term or changing needs,” he says.
Meanwhile, Empire Life’s new par product, Optimax Wealth, offers clients greater shorter-term flexibility compared with the insurer’s other par offering, Estate Max. Specifically, Optimax Wealth provides cash values that grow faster in the early years of the product, enabling clients to access the cash in the policy sooner.
That type of flexibility could appeal to clients who previously may have opted for UL, Tward says: “I think [Empire Life] is trying to fill the hole in the UL market [with Optimax Wealth], which provides greater flexibility to cash values.”
Empire Life also plans to introduce a new, eight-pay option on its par policies, enabling clients to pay up their policy over eight years. As these types of options will be eliminated in the UL market, insurers are likely to introduce more flexibility of this kind in the WL market, Tward adds.
“The WL universe is going to get better, I think, given that there’s going to be limited UL products out there that are as flexible as they used to be,” he says.
Insurers won’t likely be giving up on UL, however. Once companies adapt to the new rules, they’ll likely begin to introduce some innovative new UL products, says Byren Innes, senior strategic advisor, consulting and deals at PwC.
“They’re trying to redesign [products], trying to be creative within a new set of rules,” says Innes. “Over time, I think we will see some creativity.”
© 2016 Investment Executive. All rights reserved.