February 2009

Many have asked about the “state of the market” in terms of life insurance carriers and – specifically – about the Key Person Life (KPL) segment. There are too many aspects of this to cover in a reasonable short piece, so here is my assessment of the “high points”. 

Let us start with the GOOD NEWS in what has been a quarter filled with challenges within as well as outside of the life insurance sector. The forecast for life insurance premium levels is largely for a year of “no change.” Within certain individual carriers, we may see increases or decreases, but the overall macro forces that are affecting the U.S. and global economies will not immediately change life insurance premiums. Since KPL insurance is satisfied with TERM life insurance in most all instances, this market will be shielded from price movement. Term life insurance pricing is predominantly tied to mortality costs and carrier expense efficiency. These two factors trend much more slowly than the macro forces that have drawn such attention in 2008.

AIG, Genworth and …

We have seen a focus on the financial health of a life insurance company like no other time in the recent history of the industry. Was it really just a few months ago that this focus began with AIG? After the renegotiation of the first AIG bailout, we appear to have a company that is now financed to have sufficient time to get their “house in order.” American General Life Insurance Company is the AIG life insurance operating company. American General Life was a profitable company before the AIG acquisition and they remain a profitable entity within the AIG family. We have no “inside” information to support this, but most interested parties point to a likely sale of American General as one of the ways in which AIG will produce the liquidity that they need. 

Genworth Financial (formerly a part of G.E. Capital) has been under a tremendous amount of scrutiny as their stock price has hit levels that – at times – were 5% of the value seen just 18 months prior. While of concern and worthy of close review, this matter allows insight into the stark difference between the equity of a life insurance company and the claims paying ability of a life insurance carrier. Genworth entered the summer of 2008 with solid financial ratings for their claims paying ability; they maintain competitive ratings as 2008 draws to an end. Policies and contracts are supported by the assets held within the “underwriting” insurance company of Genworth, which is separate from the holding company, Genworth Financial. The insurance underwriting company is required, by law, to set aside (reserve) a certain amount of money to ensure that there are sufficient assets to pay claims. A decline in stock price does not directly affect their ability to pay a claim. With that said, a sustained period of turmoil, bad press and depressed stock price could necessitate the sale of the underwriting insurance company. As with AIG above, this type of transaction could be done to raise liquidity for the holding company.

This brings us to the more general subject of how a policy-holder is treated when their insurer is in transition or being sold. 

First, one interested in KPL coverage should take solace in the fact that most all KPL policies are term insurance. So long as the insured has not had a change in health, a term policy can be moved to a different carrier. However, this does necessitate new underwriting which involves time and the likely outcome of a modest increase in price (since the insured is older).

One statement that the industry has rested upon for decades goes as follows… “In the history of the life industry, there has never been a claim that has gone un-paid as a result of the financial insolvency of a carrier.” While we have never found this statement to be untrue, one cannot rely upon this blindly. 

Bankruptcy

In light of the present economic climate, we have fielded inquiries in regard to bankruptcy and the implications for a KPL scenario. In a situation where a lender has placed a UCC filing against the company that owns a KPL policy, the KPL policy is an asset of the company and would be subject to bankruptcy proceedings. However, in practical terms, most all KPL policies are TERM life insurance and term policies have no present value (i.e. no “cash value” or surrender value). The most likely outcome is that a KPL policy will be terminated – rather than having a party continue making premium payments.

There is one scenario where a term life insurance policy CAN have a present-value; this is in reference to a “lifetime settlement”. However, the necessary circumstances make this so remote that this would very rarely come into play; further, a discussion of lifetime settlements is beyond the scope of this paper.

In the situation where a CASH VALUE life insurance policy has been chosen as the funding vehicle for the KPL policy, the surrender value of the policy is an asset that can be accessed. The surrender value of a KPL policy is an asset of the company that owns the policy; thus, the cash value is subject to same rules as any other asset of the company in a bankruptcy scenario.

Financial Qualification 

Due to factors other than the present state of the economy, ALL life insurance carriers have increased their scrutiny on the underlying financials of a KPL insurance policy. The basis for this change is predominant a concern over an individual being “over-insured.” The statement … “just because you can afford the premium, it doesn’t mean you can buy as much as you want” … pertains to KPL coverage.

The rule-of-thumb in terms of quantifying the maximum allowable coverage for a particular individual is “10 Times” the annual compensation for that individual. However, there is some movement in this multiplier AND we have the ability to bolster the annual compensation figure with as many ancillary figures as can be found and reasonably justified. We do NOT see requests for actual personal tax returns from an individual, but corporate returns are requested and consistency between corporate returns and statements within the application are sought.

How long does it take?

It is rare that when we start an engagement for a KPL policy that we are not ask … “you said it would take HOW LONG?”… We caution all buyers of a KPL policy that it will take more than 60 days and – realistically – more than 90 days to have a KPL policy issued, paid-for and in-force. This timeframe starts when the decision is made to “go” and ends with the finalization of the policy. The typical bottle-necks in the process include the time it takes to:

There are a variety of reasons a carrier might refuse its consent for a policy assignment.

• Complete and return the application papers
• Schedule and complete the insurance medical exam
• Have a physician office copy and send medical records
• Obtain the financial information requested

The fact is that most large life insurance companies maintain as thin a staff as they can for underwriting. The larger and more complicated a file is, the more hands that will have to touch it at the carrier level. Add that to a situation where there is some medical history and one can be looking at process that will go beyond the 60 to 90 day time frame.

Our office maintains a constant vigilance on pushing each file through the underwriting process – from beginning to end. With that said, one should be prepared to have an application take two to three months to be completed.

Equity Risk Partners

We are prepared to meet the needs of the high net worth individual and corporate client for life insurance, disability insurance and long-term care insurance. We have specialized in the placement of high-limit Key Person Life insurance placements for a decade. By facilitating over 100 placements per year since 2000, we have insight into the unique needs of this market, we have the access to all markets necessary and we have the relationships with these markets to secure coverage for a KPL placement in as professional and timely a manner as can be done.

Under no obligation, we willingly offer to help you review your existing life, disability or long-term care coverage to assess the strength of your contract, your carrier or the underlying pricing.

In these difficult times, we stand ready to help you secure the coverage that you need to keep your family or your business secure.

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David N. Richter, CLU, ChFC
Hannah O. Wilson
Partners – Key Person and Executive Life Insurance Services
Equity Risk Partners
drichter@equityrisk.com.
hwilson@equityrisk.com
(925) 975-0640 – office
(925) 975-0646 – fax