This article could also be titled “Universal Life Insurance Horror Stories”. Many people call us asking for advice regarding a pending policy lapse letter. “Should I pay a higher premium or let the policy lapse?” Neither option is good and this all-too-common dilemma is very unfortunate.
In this article, we will look at how and why this problem occurs. You will learn how you can avoid this unenviable situation. Additionally, if you have this problem, we will show you what is the best path forward.
Non-guaranteed universal life is another name for traditional universal life (UL). This is to distinguish it from guaranteed universal life (GUL). We’ll elaborate on that important distinction later.
If you have a non-guaranteed UL in danger of lapsing and want to skip past the why (history) and the what (describing the problem), just skip to the section, Where To Go From Here.
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A Brief History of Life Insurance (with a point)
Let’s look at how this problem developed. Prior to the 1980s, you had a simple choice of term life or whole life insurance. This was back in the day of the stereotypical life insurance agent. If you were in need of life insurance, you would invite a few agents to give their pitch at your kitchen table.
You would learn all about the wonderful features of whole life insurance and how it would solve your protection and investment needs all in one product. Well, you could always opt for term life insurance, but only if you were able to resist the repeated attempts of the agents to sell you whole life. Yes, whole life was (and is) much more expensive, but it lasts your entire life.
A New Movement In the Life Insurance Industry
Most people were not well informed about life insurance like they are today. They accepted the standard advice, for the most part – that they needed some whole life insurance. Unsurprisingly, not everyone agreed.
The “buy term and invest the rest” crusade began thanks to the likes of A.L. Williams, founder of Primerica. This started in the late 1970’s. It was considered a revolutionary movement that empowered people to make smart decisions with life insurance.
We agree with the principals of this “movement”. For the vast majority of people, term life insurance is the best choice for most, if not all, all their protection needs. There is a place for permanent life insurance for some people in certain situations. However, it’s important to understand the different permanent life insurance products and what they are designed to accomplish.
Response of the Life Insurance Industry
Partly in response to the “buy term and invest the rest” movement, life insurance companies introduced Universal Life (UL) insurance in the early 1980s. This was a very high interest rate environment, so the UL product allowed policyholders to take advantage of these high rates of return. Whole Life – although guaranteed – offered much lower interest rates and cash value growth compared to the potential of a UL.
Describing the Root of the Universal Life Problem
The life insurance industry wasn’t highly regulated at the time and agents were free to sell UL products by showing illustrations with very high interest rates. They would frequently show products illustrated at 12% and 15% rates.
Current assumptions were in that range, so people were feeling some irrational exuberance (to borrow a term coined by former Federal Reserve Chairman Alan Greenspan from the dot-com bubble of the 90s).
Agents would sell policies by highlighting the abundant cash value growth and minimize the “guaranteed” rates. People assumed their policies would stay in force their entire life and provide significant cash accumulation. The policies seemed great. They could borrow from the cash account for college education or other needs. Unfortunately, it all looked great – at the time.
What Happened to those UL Purchased in the 80s and 90s?
As we know, interest rates dropped and this caused UL policies to suffer. Not only did the cash accumulation diminish, policyholders started to receive notices that the premium – that they have been paying for 15, 20, or 25 years was insufficient to keep the policy in force.
Not Just Interest Rates Changed
Low interest rates are the primary reason why these UL policies have performed poorly. However, UL policies have other non-guaranteed components. For example, there is a non-guaranteed “monthly deduction charge” that can increase. Carriers have increased internal policy fees and most policyholders have no idea they were allowed to do so.
As a result, there have been many lawsuits filed against large insurance companies. You can read more about this, as it relates to Transamerica, in an article by the New York Times. If you had or have one of these policies that have “blown up”, then you understand the frustration and probably want to sue your carrier too.
Should you step up your premium payments to keep the policy in force or just allow the policy to lapse? This is a tough question that nobody should have to ask.
Let’s say you purchased a $150,000 Universal policy 28 years ago. The planned premium is $150 per month. Over time, you have seen your cash account decrease to the point where it is almost zero. Let’s say you’re 67 years-old and in very good health. You find out that to keep your policy in-force to age 100 will run an additional $90 per month.
On a Fixed Income
You’re retired and not so sure you can handle paying $240/month. This is quite upsetting because your agent (who retired 10 years ago), told you that you wouldn’t have to pay premiums past the age of 65. He called it “the vanishing premium policy”. The premium would be paid from the cash account or so you were told. What a turn of events. So, what do you do?
Where To Go From Here
The example described above is not uncommon. Literally, tens of thousands of people (some estimate tens of millions) were sold UL policies improperly. Since over 20% of the life insurance policies sold in the 1980s and 1990s were UL policies, this is an enormous problem.
It is a “black eye” on the life insurance industry. Since then, many positive changes have occurred, including stringent consumer protections. However, that doesn’t help you now.
First Step: Request In-force Illustrations
What you will decide to do depends on several factors. The first thing to do is request an “in-force illustration” from your insurer. This is also referred to as an “in-force ledger”. Ask the insurance company to show you specifically what premium is required to keep the policy in force under current and guaranteed interest rates to age 90, 95, and 100. Remember, you want to see at least a few scenarios.
It will be important to ask an independent advisor to help you evaluate the illustration and give you advice. However, you can make your own decision. If you only need to step up your premium by 10% or 15%, it might be worth keeping the policy. If you need to pay an additional 30% to 40%, it may not.
Factors to Consider
- Your Loved Ones If you have loved ones depending on the life insurance proceeds, it will make a big difference. However, if you need to keep the life insurance active for just another 5 or 10 years, you might be better off replacing the policy with a 10-year term. If you keep the policy, you should re-evaluate every year or two, as interest rates change.
- Your Age and Health If you are 75 years old and have been paying premiums for 30+ years, then you might want to continue with the policy. If you are in poor health (with a reduced life expectancy), that will also be an important factor. If your health isn’t good, then a replacement is probably not an option.
Run The Numbers
- Internal Rate of Return. You want to look at the Internal Rate of Return (IRR) Along with the in-force illustration, ask your insurer for the IRR based on the new required premium. The internal rate of return shows what you would need to earn in investments or savings to reflect what your beneficiaries would receive from the life policy.
- Your Financial Condition. Let’s say you simply can’t afford the premium, yet you really want your adult children or grandchildren to benefit from the policy. If the IRR is decent, you might want to ask your children to help out with the premium payments. Knowing they will receive the death benefit, it could be smart financial move.
- Consider Reducing the Death Benefit. It’s not necessarily all or nothing. You could reduce the death benefit and keep the policy in force with a lower premium.
The last thing you want to do is keep paying premiums knowing you will likely lapse the policy due to exorbitantly high premiums. Yes, it’s a difficult decision to make. None of us knows how long we will live.
Better Life Insurance Options Today
Perhaps you are looking to replace your traditional universal life policy. Well, there are better options today. UL policies are still offered, but they are less popular. Agents are required to show detailed illustrations, showing current and guaranteed rates. Additionally, there are still the non-guaranteed components, so UL isn’t the most popular choice.
Guaranteed Universal Life insurance (GUL) is a product that was introduced in the early 2000’s in response to the failing ULs. GUL is not designed to build cash value, but to provide a permanent, guaranteed death benefit. No letters or surprises down the road. Everything is fully guaranteed.
This isn’t the place to elaborate on all the permanent life insurance options available. Furthermore, you can read about the pros and cons of guaranteed universal life insurance here.
Non Guaranteed Universal Life Insurance Lapses – Conclusion
Hopefully, this article has provided some insight into the problem and the steps you can take going forward. As we mentioned earlier, it would be a good idea to consult with an agent. If you get the sense that the agent is steering you towards a replacement, without going through the steps outlined here, then you should move on.
Some agents will be more interested in selling you a new policy without helping you fully understand your options. Keeping your existing policy – even with the increased premiums – could be your best move.
Finally, Ask for advice from an experienced, reputable agent. Please call us for a free consultation and we’ll be glad to help.