Who Said Life Insurance Can’t Be Exciting?
The life insurance industry has a reputation for being staid and unchanging. It’s true, we don’t see a lot of excitement around these parts…that is until now. A monumental change has occurred to how permanent life insurance products operate, and if you ask me, it’s long overdue.
At the very end of 2020, Congress approved the Consolidated Appropriations Act (CAA), which included changes to section 7702 of the Internal Revenue Code – the part that deals with taxation of life insurance policies and what constitutes legitimate life insurance. Up until now, the interest rate used in creating life insurance policies was fixed at 4%. That was all well and good when interest rates were high, as they were in 1984 when 7720 was enacted. But it simply doesn’t work in a prolonged low interest rate environment, as we’re in now and will likely be in for the foreseeable future.
CAA swooped in and lowered that fixed 4% to 2% for 2021 and variable thereafter, effective January 1, 2021. Why is that such good news for life insurance? Because permanent products like whole life and universal life wouldn’t be able to survive if carriers were forced to continue to reconcile the current less-than-1% interest rate with the 4% guaranteed by 7702. The very guaranteed endowment that makes permanent products so attractive is what was also making them unsustainable. If CAA hadn’t come about, I believe we would’ve seen whole life and universal life change substantially or drop off carriers' product line. Now, carriers are allowed pricing flexibility (I’ll talk about this further in a later post), and we can continue offering these solutions and the benefits they afford to customers.
Aside from the fact that carriers can afford to continue offering permanent life insurance products, CAA is also good news because a policyholder can contribute more premium per dollar of death benefit without the product being classified as a Modified Endowment Contract, which enjoys none of the tax benefits of a life insurance policy.
No one said change is easy, and it certainly won’t be in this case. To take advantage of the law, carriers will need to reprice products and, in some cases, overhaul their system. But for those who do, I believe the end product will be well worth the effort.
Owner, Problem Solving Enterprises, Inc, FSA, MAAA
3 年I don't want to be critical and I appreciate the essence of your message about life insurance. But there are somewhat misleading statements about the 7702/7702A interest rate changes. First, those 7702/7702A interest rates don't define the interest rates that a company bases their pricing on. So the change has very little to do with the problems of low interest rates that products are based upon (that problem remains!). Many traditional WL products had a problem in that the Standard Nonforfeiture Law (SNFL) interest rates dropped below 4% creating a conflict between the 7702 CVAT test and SNFL. That had to be fixed to avoid major disruption in the traditional WL products (not so much UL generally). Also it's not true that 7702A (MEC) violations eliminate ALL the tax advantages of life insurance (it just restricts/penalizes living distributions - the tax advantage of the death benefit is still there). All that said, I agree that the changes bring on some product opportunities, allowing people to stuff more money into contracts (which should only require product mods in some situations, but not all).
Nationally recognized life insurance expert
3 年Is been exciting for me, for almost 35 years! Nice piece Michael!
Using safe leverage to enhance the purchase of life insurance for estate planning, tax-free retirement solutions & key employee retention
3 年Couldn’t agree more. Thanks for sharing
Retired from insurance after 43 years!!! Still love playing with cars. Test driver for Michelin and High Performance Driver Education Instructor with Porsche Club of America.
3 年Hi Michael, Good and important update as carriers struggle with this interest rate environment. However as far as life insurance being exciting, meh. I never complained about lack of excitement, but it is certainly dynamic. Stay well my friend.
CMO | Strategist | Father | Husband
3 年Nice work Michael.