Will Your Premium Payments Maintain Your Life Insurance Policy?
Many people have purchased universal life insurance policies and think that the premium payment the policy was issued at will maintain their life insurance for the rest of their life. Unfortunately, some universal life policies issued during the 1980’s and 1990’s are running into issues requiring the owners to pay additional premiums or letting it lapse. Back then, these policies were often crediting cash values with double digit interest rates. This resulted in life insurance carriers’ projections to reflect no further premiums would be required. Interest rates however, have been far off from those double digit days and now many of these policies are in jeopardy. So, how does a universal life policy become under funded or lapsed with no value to maintain the death benefit?
Let’s discuss the elements of universal life insurance policies to understand the potential problem of under funding or lapsing the policy. Universal life polices consist of premium payments, expense charges including cost of insurance charges and a cash value which contains the excess of premium payments after the charges are applied. The cash value earns a declared interest rate with a minimum guarantee interest rate, and costs of insurance have a current level, as well as, a guaranteed maximum that could be charged.
Insurance carrier projections typically provide both a current and a guaranteed projection when the product is proposed to a prospect. Universal life projections during the 1980’s and 1990’s displayed high interest rates and low current costs of insurance. Since policies were assumed to be credited with such high interest rates, it lead to the idea that you could put in larger premium payment upfront, stop premium payments altogether, and then let the cash value growth cover the future cost of insurance charges. Basically, people thought those double digit interest rates would continue on forever. Unfortunately, interest rates over the past decade or so have been in the lower single digit range. Since those policies are not being credited with the high rates originally assumed, the cash value within the policies were not building at the expected rate. Now more premiums are required to keep the policies.
Under funding occurs when the premium payments made into the policy are insufficient to cover the expenses and cost of insurance. Universal life policies are interest sensitive products and need to be carefully reviewed by policyholders who purchased them expecting a level premium payment to keep coverage active.
I would suggest policyholders owning universal life policies issued many years ago to request an in-force policy ledger from their insurance carrier to get an updated projection of the policy performance. This may result in the need to adjust premium payments, death benefits or both before you receive a letter stating your policy is about to lapse because of insufficient cash value to cover the cost of insurance. Better to find out now if your premium payments will maintain your life insurance policy.
About the author: Ken Buccico holds a LUTC designation and has been in the life insurance business for 39 years. His wealth of experience empowers clients to make best possible decision regarding a life insurance policy. To explore the best life insurance option, contact Ken at 1-800-651-1953 or KBuccico@Pivot.com.