Changes to 7702 (b)(2)(A) Minimum Interest Rate

[scagnt83]

Congress snuck in changes to life insurance laws in the new covid relief bill. It's Sec 205 of HR 133 (2020). Page 2456. https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR133SA-RCP-116-68.pdf

SEC. 205. MINIMUM RATE OF INTEREST FOR CERTAIN DETERMINATIONS RELATED TO LIFE INSURANCE CONTRACTS

—Section 7702(b)(2)(A) is amended by striking ‘‘an annual effective rate of 4 percent’’ and inserting ‘‘the applicable accumulation test minimum rate’’.

Basically, they are using a floating rate to calculate the minimum interest rate. CVAT gets lesser of 4%, or the floating rate. GPT gets the floating rate + 2%.

The floating rate is called the "Insurance Interest Rate", and is the lesser of the Fed MidTerm Rate (1.7%), or the NAIC 20y life ins min rate (3.5%).


This was pitched as a way to undo some of the restrictions that 7702 originally put on insurance contracts. It was also pitched as a way to "keep up with decreasing interest rates" since the 4% & 6% numbers were enacted back in the 80s.

It will increase policy reserves, thus increasing CV. However, carriers who commented on this change were split about it's effects. Some welcomed the change, others fear it will drive up premiums to levels making it prohibitive to sell small life insurance policies.

From what I can tell, its going to take more premium to create the same amount of guarantee within the contract. If you pay $100 and get 1.7% on it instead of 4%.... well... thats a huge difference on the guarantee you receive. Perhaps this is optional. And from what I can tell, has not been implemented at all yet despite the effective date being 01/01/2021. Crazy times yall. I doubt most in congress have any clue what they just did. And it seems like a small handful of industry insiders pushed for this, not a unified effort.

 

[DHK]

It'll take the rest of the year and the insurance companies will need to come out with their next series of insurance contracts - just like they did for the new CSO tables. At least for the WL companies. I *believe* that IUL can just keep going, but anything with a guaranteed interest rate will need to have a new series.

Great news for max-funding contracts, although commissions will have a slight decrease since the premiums will buy a little less death benefit.

I'm hoping that ratings of companies go up to increases agent and consumer confidence. Ohio National used to be a 'AA' or whatever. They've been A+/A for a while. I hope this helps.

 

[Allen Trent]

Congress snuck in changes to life insurance laws in the new covid relief bill. It's Sec 205 of HR 133 (2020). Page 2456. https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR133SA-RCP-116-68.pdf

SEC. 205. MINIMUM RATE OF INTEREST FOR CERTAIN DETERMINATIONS RELATED TO LIFE INSURANCE CONTRACTS

—Section 7702(b)(2)(A) is amended by striking ‘‘an annual effective rate of 4 percent’’ and inserting ‘‘the applicable accumulation test minimum rate’’.

Basically, they are using a floating rate to calculate the minimum interest rate. CVAT gets lesser of 4%, or the floating rate. GPT gets the floating rate + 2%.

The floating rate is called the "Insurance Interest Rate", and is the lesser of the Fed MidTerm Rate (1.7%), or the NAIC 20y life ins min rate (3.5%).


This was pitched as a way to undo some of the restrictions that 7702 originally put on insurance contracts. It was also pitched as a way to "keep up with decreasing interest rates" since the 4% & 6% numbers were enacted back in the 80s.

It will increase policy reserves, thus increasing CV. However, carriers who commented on this change were split about it's effects. Some welcomed the change, others fear it will drive up premiums to levels making it prohibitive to sell small life insurance policies.

From what I can tell, its going to take more premium to create the same amount of guarantee within the contract. If you pay $100 and get 1.7% on it instead of 4%.... well... thats a huge difference on the guarantee you receive. Perhaps this is optional. And from what I can tell, has not been implemented at all yet despite the effective date being 01/01/2021. Crazy times yall. I doubt most in congress have any clue what they just did. And it seems like a small handful of industry insiders pushed for this, not a unified effort.

I know this is likely a new item you linked, but carriers were already having to reprice all cash value products this year I believe due to the low interest rate rolling averages. (interest valuation and/or nonforfeiture rates). Understood it to impact WL, UL & ROP. Many carriers have already started filing these changes that do alot of what you are mentioning in terms of raising premiums, etc.

So, if this is another item added, it could be even more interesting I guess.

 

[Allen Trent]

It'll take the rest of the year and the insurance companies will need to come out with their next series of insurance contracts - just like they did for the new CSO tables. At least for the WL companies. I *believe* that IUL can just keep going, but anything with a guaranteed interest rate will need to have a new series.

Great news for max-funding contracts, although commissions will have a slight decrease since the premiums will buy a little less death benefit.

I'm hoping that ratings of companies go up to increases agent and consumer confidence. Ohio National used to be a 'AA' or whatever. They've been A+/A for a while. I hope this helps.

wonder if this will help clients with old UL contracts that cant put enough money in to save them because no guideline room. Or only for new business going forward?

 

[Tahoe Ray]

I guessing this really hurts non-par WL more than any other product if it's a requirement.

I know this is likely a new item you linked, but carriers were already having to reprice all cash value products this year I believe due to the low interest rate rolling averages. (interest valuation and/or nonforfeiture rates). Understood it to impact WL, UL & ROP. Many carriers have already started filing these changes that do alot of what you are mentioning in terms of raising premiums, etc.

So, if this is another item added, it could be even more interesting I guess.

It is new (late Dec...it's in the COVID bill for some ridiculous reason. No wonder that thing is over 5k pages long).

What this essentially let's an insured do is to stuff more money into a CV-focused contract w/o creating a MEC.

It also (as scagnt83 points out) is going to make it harder on the guaranteed column and may increase costs overall.

Good for max funding, bad for the non-par WL type products or anything not max funded/db focused (imo). Will be interesting to see how this affects carriers that focus on the latter market.

 

[Allen Trent]

I guessing this really hurts non-par WL more than any other product if it's a requirement.

Max funding might not be helped that much because the lower int rates & lower caps are impacting performance a bit, so it will be nice to be able to have a lower face to fit the money in.

Final expense & especially prepaid funeral plans are likely gonna get hit the most with some of these changes, pretty soon a carrier will need $10500 for a 10k prepaid funeral that is non underwritten & has issue & comm costs

Would be nice if those ULs from 80s & 90s that are on life support & had face reductions or changed to level or took distributions, etc could benefit from this so they could at least pay the premiums needed to make them last.

It is new (late Dec...it's in the COVID bill for some ridiculous reason. No wonder that thing is over 5k pages long).

What this essentially let's an insured do is to stuff more money into a CV-focused contract w/o creating a MEC.

It also (as scagnt83 points out) is going to make it harder on the guaranteed column and may increase costs overall.

Good for max funding, bad for the non-par WL type products or anything not max funded/db focused (imo). Will be interesting to see how this affects carriers that focus on the latter market.

 

[scagnt83]

I know this is likely a new item you linked, but carriers were already having to reprice all cash value products this year I believe due to the low interest rate rolling averages. (interest valuation and/or nonforfeiture rates). Understood it to impact WL, UL & ROP. Many carriers have already started filing these changes that do alot of what you are mentioning in terms of raising premiums, etc.

So, if this is another item added, it could be even more interesting I guess.

Totally different than the nonforfeiture rate changes. But it does use a similar benchmark.

This is a change to CVAT and GPT calculations.

 

[scagnt83]

wonder if this will help clients with old UL contracts that cant put enough money in to save them because no guideline room. Or only for new business going forward?

The legislation says "contracts issued after Dec 31 2020".

 

[scagnt83]

It'll take the rest of the year and the insurance companies will need to come out with their next series of insurance contracts - just like they did for the new CSO tables. At least for the WL companies. I *believe* that IUL can just keep going, but anything with a guaranteed interest rate will need to have a new series.

Great news for max-funding contracts, although commissions will have a slight decrease since the premiums will buy a little less death benefit.

I'm hoping that ratings of companies go up to increases agent and consumer confidence. Ohio National used to be a 'AA' or whatever. They've been A+/A for a while. I hope this helps.

I dont know about that. Legislation for CSO tables were given a 1 year transition time written into the legislation. Same with nonforfeiture rate changes, the transition time was written into the legislation.

There is no transition time stated in this legislation. It says point blank "all policies issued after 12/31/20".

Perhaps they will go back and clarify about the transition. But as it currently reads, there is no transition time for policies.

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And I dont know that they will have to issue new policy lines.

This is a government legislated rate. Most contracts have clauses to add amendments to the contract for future government legislation. This could very well fall under that clause.

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Good news for overfunding. Bad news for the main purpose of life insurance.

I also see this as transferring more risk onto policyholders. Having to come up with more out of pocket money for the same benefit is adding risk.

I see carriers going lower on DB after this though. It will hopefully be a lot easier to find carriers with min DBs going under $100k

 

[DHK]

I agree. I bet Non-lapse GUL premiums are going to go up even higher for their increase risk... or see even less of them in the future?