The recent Lincoln National policy buyback caused issues for trustees making decisions around policy surrender. Lincoln National recently announced that some policy holders have the opportunity to receive an “Enhanced Cash Surrender Value” if they surrendered their life insurance policies within a specific time frame. A few weeks before this was widely known, we received letters from the carrier, along with a Frequently Asked Questions (FAQ) brochure explaining the offer.
The offer is not unlike offers extended to variable annuity policy holders after the 2008-09 financial crisis. At that time, insurers offered additional incentives above the annuity’s value to holders of variable annuities with guaranteed minimum income benefits (GMIB), typically in the 6-7% range, to surrender the contracts. Those offers continue today with a few carriers in the last couple of years reportedly “enticing” consumers to surrender their annuity “in exchange for some incentive such as a cash lump sum or another product from the insurer.” In fact, variable annuity buyout offers have occurred “among at least one or two carriers every year for the past four to five years.” (1)
According to a report by Moody’s, “companies selling VA’s with guarantees misestimated and underpriced” the product. The mistake “forced insurers to take significant, unexpected earnings charges and write-downs.” (2)
The Lincoln National policy buyback is the first enriched buyback offer we have seen for life insurance policies. Some policies offer a contractual return of premium or enhanced value to surrender a policy at specified points in the future, but we have never received an unsolicited offer.
According to information from the carrier’s FAQ, Lincoln extended the offer to those policy holders who have “stopped making regular payments” on their policy. The offer is determined by a formula based on policy “cash surrender value, the length of time…[the] policy would remain active without future premium payments, and an actuarial calculation incorporating mortality and interest assumptions.”
Like carriers offering variable annuity buybacks, Lincoln will release reserves tied to the policies, which should help. According to the FAQ, “Lincoln must hold financial reserves in accordance with statutory and accounting regulations.” If a policy owner surrenders the policy, “Lincoln would no longer be responsible for the death benefit on the policy, allowing the release of these financial reserves and redeployment of the funds for a different use. This option could be mutually beneficial to both you and Lincoln.”
The Worth Of Surrender
So, does it even make sense to surrender a life insurance policy, even if receiving an enhanced value? It depends on specific facts and circumstances, like all policy decisions. For these policies, no one has paid out-of-pocket premiums. How long will the policy last without additional premium costs? What is the health of the insured? Will the policy last past the life expectancy of the insured without additional cash contributions? If not, how much more cash would have to be put in for the policy to run to life expectancy? Should a life expectancy report be obtained to provide another data point? These are some of the questions that trustees must ask before they make a decision. Lincoln believes that buying the policy back for an enhanced value makes economic sense for them. If you are a trustee, you will have to decide whether it makes sense for the trust and document the prudent decision-making process to reach your conclusion. It is all part of a trustee’s job.
Our trust-owned life insurance solution tolimonitor helps trustees mitigate the risk of administering trusts and managing policies by assigning our team of experts to advise on decisions like this. To learn more about tolimonitor, contact us.
- Insurers Still Grappling with Costly Variable-Annuity Promises, April 13, 2018, Greg Iacurci, http://www.investmentnews.com
- Moody’s Investors Service, Unpredictable Policyholder Behavior Challenges US Life Insurers’ Variable Annuity Business, Global Credit Research, June 24, 2013