You have all read Universal Life Failure Part I, so you all understand a little bit about the history and the structure of a Universal Life insurance policy. Well let’s get right into it. It’s the 1980s now. Interest rates are easily in double digits. You’ve decided you need life insurance and are sitting down with an insurance agent. You’re thinking ‘buy term and invest the rest’ and the agent says, ‘oh, we have that’. He shows you a Universal Life insurance policy with an illustration. The illustration looks great. Huge cash value build up. He shows how you can stop paying premiums in retirement, if you want to. He even shows how you can pull a lot of money out into retirement. What he doesn’t show you is the illustration is projecting 12% or maybe it was 15% interest rates for the rest of your life. Is that even possible?
Let’s face it. Most people never follow through on the ‘invest the rest’. They say they will. They might even want to and mean to. Unfortunately, life happens. Things come up and there are other things that money gets spent on. I mean once you don’t put it into the insurance it’s spendable. So you loved the idea of a policy that does it for you. The all-in-one packaging. The funny thing that isn’t the problem. It can work as you’ll learn later.
Back to our example, you purchase your new Universal Life insurance policy, then interest rates slowly fall. What no one predicted is the lowest rates in history. Maybe it was the 7% interest rates that meant your policy returns weren’t keeping up with the mortality costs. Or maybe it was the 4 or 5% interest rates that finally caught up with you. It doesn’t matter but now you have a problem. The only way to fix it is to put more money in the policy. Now you have a failure.
The Problem
Herein is the problem with Universal Life insurance policies. You have falling returns coupled with increasing mortality costs. As we said last time, once the policy is up and running the biggest expenses are the mortality costs. This policy is built like Annual Renewable Term insurance which means every year the insurance costs go up. Then you add in the economy. As the life insurance company looks into its own performance it might just have to make changes to the policy. Those changes aren’t usually better for the policy holder. They usually mean increasing the mortality costs higher and/or faster. Again you add this on top of falling interest rates, which equate to falling returns. You have a big problem.
The other problem is the life insurance agent or whoever sold you the policy. Have you heard from them? It would be nice if they gave you some sort of heads up as to what was happening. Maybe if they did a policy review you would have known. Then you might just need to put in a little extra money over the years. Instead none of this happened. Instead you received a letter from the insurance company that says your policy is about to lapse because you don’t have enough cash value to cover the difference between the premium and the costs of the insurance. This is the too little too late news which means the insurance company is probably asking for a good chunk of change.
When faced with this problem there are really 4 things you can do.
- Put more money into the Universal Life insurance policy.
- Lower the face amount of the policy which lowers the costs of insurance.
- Some combination of the #1 and #2.
- Get a new life insurance policy.
There is one thing that you most definitely need to do, get a new life insurance guy to help you.
Universal Life Insurance Policies Today
In case you didn’t know or haven’t heard, as of January 1st, 2008 life insurance policies were required to be based on the 2001 CSO tables as opposed to the previous 1980 CSO tables. If you could imagine that people have been living longer in the previous 20 years or so. What this means is that the costs of insurance have gone down. For permanent policies this also means that instead of going out to age 100 they now go out to age 121. Today we also have the lowest interest rates in history. This means that today you cannot, I repeat cannot, get good cash value performance out of a Universal Life insurance policy.
Due to this fact, life insurance companies had to adjust again and they did. They now have what is called secondary guarantees on Universal Life insurance policies. This means that even if the policy runs out of cash value, as long as the secondary guarantee premium amount is paid, the policy is guaranteed to stay inforce for the life of the insured. What does this mean? Permanent term insurance. It means nothing else but that. The insurance company is admitting that the cash value won’t be there later on, so they are guaranteeing coverage if you pay the proper premium. However, this gives up a lot of flexibility of the policy. It becomes like a term insurance policy where if you don’t pay the premium you lose the policy.
The Solution
So there it is. In today’s marketplace the position of a Universal Life policy is permanent term insurance. If you already have one of these policies without the secondary guarantee or bought before January 1st, 2008, then my advice is to get a Life Insurance Audit. Chances are you can save money and add guarantees that will only help your insurance coverage. Hopefully this post helps you get an understanding of how Universal Life insurance policies have come to be what they are today. I also hope that you can begin to understand how they work in today’s marketplace. I’ll save the talk of Variable Universal Life insurance policies for another post. So I will leave you with two questions…
- Do you currently own a Universal Life insurance policy?
- When was the last time it was reviewed and an analysis done?
If you have any questions or want a review and/or analysis done, e-mail me or get an insurance assessment.
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25 years ago my brother purchased a UL policy for my mother. After reading your articles, we experienced exact problems outlined. However, my mother turned 95 years old this year. Earlier this month my brother received a letter with a check for $78.00 stating that the policy was cancelled as requested. How are we to bury my mother with $78.00? Do we have any recourse in this matter? We are all senior citizens and retired living on fixed incomes.
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