Were you one of millions who purchased a universal life insurance policy 30 some odd years ago because of the large death benefit with small premiums?
Have you been faithfully paying that premium every month since then?
Have you looked at a statement for this life insurance policy lately?
If not, you may want to. Many people have recently begun getting notices that their low cost life insurance policies will lapse unless they begin making larger premium payments (many have seen increases of 3 times or more of the initial premium).
Why is this happening?
According to a Forbes article, Retirement Disaster Looms for Universal Life Policyholders1, these universal life products were sold at a time when interest rates were high and stocks were performing well. The insurance companies charged a low premium that covered the cost of insurance at the age of the policyholder when they purchased the policy (typically very low when a client is younger and then increases each year as the client ages). The insurance companies sold the policies by telling clients that the combination of high interest rates and growth in stock prices will boost the cash value of the policy, with the thought that as the client ages and the cost of insurance increases, the increased cash value through gains in the stock market would cover the higher premium costs. Here’s the catch that many clients did not know about: as the client ages, the cost of insurance increases and the small premium the client has paid for the last 30 years is not sufficient, so the insurance company takes the difference from the cash value of the life insurance policy.
While this was intended to keep the life insurance policy from lapsing, it has been happening to many clients’ policies without their knowledge. Further, less-than-projected gains in the markets mean many policies no longer have the needed cash value to support these higher premium payments. Universal Life Insurance policy holders are continuing to pay their small premiums, blissfully unaware that they may be just a few short months from losing the policies completely.
What should you do?
If you purchased a Universal Life insurance policy 20 – 30 years ago with a small monthly premium that has never increased, you may want to pull out your latest statement and examine it. You want to look at the cash value (also called accumulation value) of your contract. You would like to see that number increasing slightly each month. If you see a declining cash value month after month, you may want to consider calling your life insurance provider to request the current cost of insurance. Odds are, the cost of insurance that they tell you will be significantly higher than what you are currently paying. Do not let this shock you – this is typical for life insurance! (Many life insurance companies who charge a level premium (the premium remains the same each year the policy is in force) will ask you to pay a higher premium at the start than what the cost of insurance may be. They know that the cost of insurance will only rise as a client ages, so they charge a larger premium that will build the cash value while continuing to pay the cost of insurance throughout the life of the policy. Needless to say, the Universal Life Insurance policies that we are discussing are not structured in this way.)
If you call your life insurance provider, they state that you need to be paying a higher premium to cover the cost of insurance, then, if you can afford it, you should increase your monthly bank drafts to this amount.
If you would feel more comfortable, you may also call in to our office and ask for our assistance. We would be happy to help you review your existing policies, request the necessary information from the insurance company and discuss your options with you in light of your current plans and goals.
1https://www.forbes.com/sites/investor/2012/09/13/retirement-disaster-looms-for-universal-life-policyholders/#2bad2c5a23e1
The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement.