While most of the news in the insurance biz has been about health reform, the "news behind the news" has been about how so many people are being sent "Send us some money" letters from their life insurance companies. Why? Because their universal life (UL) plans are going "paws up" big-time.
If they are healthy all is not lost as they will be able to buy a more stable kind of UL called guaranteed universal life... or better yet, a whole life plan which will accumulate money so that when they are in their 80s they are not living in a housing project eating cat food!
Below is an article which should explain traditional UL to you. While this makes them look "evil" the truth is that for younger, upscale, wealthy people who can "roll with the flow" and have the cash to prop-up the plans, they are OK... because markets and rates always come back (if you live long enough!)
But for middle-aged people without a large cash asset base, ULs have been highly problematic. If you are being told that you need to come up with a ton of cash to keep your plan in force (and there isn't much cash in the policy to put to this) you need to call your agent (or a new agent!) and get some options put in front of you ASAP. You snooze... you lose!
-Al
Did you get a letter about your insurance policy needing an influx of cash? If so than you probably have a universal life plan... and the "tech" term for "we want more money" is "implode."
A lot of people who bought these plans years ago were told, "Don't worry, implosion will never happen." Yeah, and I'm the Easter Bunny!
Universal life insurance has grown in popularity thanks to its flexibility. But policyholders may not realize their coverage could be dwindling.
Universal life is considered permanent life insurance, yet it actually has an expiration date that's usually set past most life expectancies. But lower interest rates, a falling stock market -- or a combination of both -- may limit how long these policies remain in force.
Shoring up these policies may require handing over more money to your insurer or reducing coverage. Policy holders need to keep a close eye on statements for any changes.
It can be just as important to manage your insurance policies as it is to manage your portfolio. With universal life policies, "you don't set it and forget it."
Universal life insurance generally falls in between the permanent coverage of whole life and the temporary benefits of a term policy. Unlike term or whole life, policyholders have flexibility with the amount and frequency of premium payments, after the initial payment.
However, with universal life policies, the length of time that coverage is in place can change mid-policy. It can vary depending on complicated math that factors in the amount of premiums paid, investment earnings and the size of the so-called mortality and expense charges deducted by the insurer.
Believe me, this IS rocket science!
Still, most policies are issued with the aim of lasting until a policyholder reaches age 95 or 100.
Basic or Variable
Universal life insurance comes in two flavors. In a basic policy, the death benefit and cash value can build just as with a whole-life policy -- by accumulating the premiums and dividends paid to the policyholder by the insurance company, which invests the premiums mainly in bonds.
There is a variation of the basic universal life called the guaranteed (or no-lapse) plan... and these will NOT have the problems we're talking about here. The problem is that they are relatively new... and a lot of carriers have taken them off the market... more on that next issue.
Then there's the variable universal life, or VUL, policy. With a VUL policy, the holder chooses investments -- commonly stock mutual funds -- and those returns help create a policy's value. Higher projected returns on stocks can make it possible to get a bigger death benefit with lower premiums.
The catch isn't just the possibility of losing money in stocks. When a policy is issued, the stated premiums and death benefits are typically premised on the investments returning the same amount year after year. When the markets are volatile and don't live up to those expected returns, policyholders risk seeing their policies expire years earlier than they expected.
Take the case of a client rolled $425,000 from another life-insurance policy into a VUL policy in 1999. With a 12% assumed annual return, the death benefit was $10 million and was expected to last at least through age 100, without the need for additional premiums.
For that to happen, the policy needed to have an account value today of $850,000. But thanks to the stock market's weak performance during the past decade and fees taken by the insurer, it's just $225,000, Mr. Witt says.
As a result, if the clients, now age 65, don't pay any more premiums, the policy could expire worthless when the clients reach age 78.
In order to get back to the original coverage, the clients would to need to pay premiums of $64,000 a year until age 100. If they didn't want to pay any more premiums, but wanted the coverage to last the rest of their lives, they could reduce the death benefit to $2.7 million. But neither would guarantee they wouldn't fall behind again if the stock market was to again post big losses. They also could switch to another policy, but the commissions could eat away at the remaining money.
It's very punitive once you fall behind on these policies.
Watch for Changes
Even basic universal-life policies are feeling the pinch as the lower long-term interest rates of the past two decades have reduced the dividends that insurers pay to policyholders.
On a whole-life policy, this merely reduces the available cash value. But on a universal life policy, it also reduces the length of coverage.
Consider a 70-year-old man who took out a universal-life policy with $500,000 coverage until age 100 when interest rates were at 8%. The policy assumed rates would stay at 8% during the first 10 years of the policy, but they actually fell to 5.5%. To maintain his coverage, the holder would have to increase his annual premium to $22,200, from $16,395.
Of course, should interest rates rise and stocks enter into a long bull market, these forces will reverse and benefit universal-life policyholders.
In the meantime, policyholders should give their statements a close read to see the status of their coverage. If it looks like it has changed, call your insurer or insurance agent to discuss what steps can be taken -- including running different scenarios for rebuilding coverage.
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