1 November 2013 0 Comments

Bigger Isn’t Always Best

big and smallWe’re talking about life insurance policies here!  If you’re buying a Universal Life policy and your agent asks if you want the death benefit to be level or to increase as the accumulation value increases, don’t automatically decide that a bigger death benefit is best.  The long range cost of that increasing death benefit can come back to bite you.  An increasing death benefit that is left to run in a Universal Life Policy essentially produces an annual renewable term death benefit with a non-competitive premium plus a side fund of cash that is not helping to support the costs of the policy.

Recently, I was assisting a man in his late 50’s with his long range plans for life insurance.  He had two Universal Life Policies purchased 12-14 years ago; one was a variable policy and the other was fixed.  The total death benefit started as $1,000,000, both had the cash accumulation added to the original $1,000,000.  Premiums were calculated assuming that the high interest on the fixed policy would continue and that the variable policy’s cash would earn double digit percentages each year.  The fixed policy’s earnings didn’t hold up and he withdrew cash from the variable policy for current needs.

In short, what he now has is level death benefit term whose premium increases each year and side funds with next to no cash.  He’s done very well financially but he’s now looking for life insurance protection with a competitive premium that will remain level for the next 10 years and then decrease with an ultimate amount to be carried until his death—whenever that may be.  These policies won’t do that.  Had the level death benefit been elected, the net amount at risk would have decreased and therefore the annual cost of insurance would not have continued to increase every year.  We could have salvaged the policies by applying the cash to help pay for the decreased net amount at risk. The concept of permanent insurance is to provide a level death benefit whose premium does not increase.

If your agent is recommending an increasing death benefit in a Universal Life Policy, ask why.  There are times when this is done for a few years in order to maximize the amount of premium without destroying the tax advantages of living access to the policy’s cash value.  But, that increase should be reversed after a few years.  If there is another reason, ask what the plans are downstream when the rising cost of insurance begins to erode any cash build up.  Bigger is not always best!

Now, I’ll be returning to some health conditions that often accompany the aging process and their effect on life insurance premiums.

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