11 February 2014 0 Comments

The Less-than-permanent Permanent Policy

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You purchased a life insurance policy that you thought was permanent, but now it turns out that it is not…at least not unless you start paying a lot more premium than you had planned.  You probably purchased either a Universal Life (UL) or Whole Life (WL) Policy that is now threatening to implode.  Let’s deal with each of these policy types:  what went wrong and what can you do about it now.

The Imploding Universal Life policy.

Your Universal Life Policy was supposed to provide you with a level premium—or even vanishing premium—that would guarantee your death benefit forever.  Now the insurance company is telling you that any cash value it once had is gone and unless you pay a much higher premium—likely to increase each year—the policy will lapse.  What went wrong?  Most likely it was one, or both of these occurrences:

  • The original premium was calculated assuming that the interest being credited at that time would continue forever.  That didn’t happen—interest rates dropped—so even though you always paid the planned premium on time, the cash value has now dwindled to practically nothing and, with current interest much lower than the original assumption, this policy needs a ton of extra premium to keep it going.
  • You set up a planned premium, but there were times when you just couldn’t make that premium payment.  You remembered your agent telling you about the flexibility of UL, not having to pay a planned premium, so you let a few premiums slide and the policy charges were paid from the cash value.  This increased the net amount at risk and therefore the cost of insurance charges.  The original premium plan wasn’t followed so much more premium is now needed.

The occurrences described above are most likely to happen to first generation UL policies.  For the past several years many UL polices have been designed with a no-lapse premium that, if paid, will keep the contract going.  But, if you are faced with the above scenario, what are your options.   First, before taking any steps that would decrease the amount of insurance you have with your current policy, determine if you could qualify for a new policy today and at what premium class.  Taking this to its extreme, if you have terminal cancer, find some way to keep your current policy going at its full death benefit at any premium.

Once you have determined that you are currently insurable, determine if your UL policy’s death benefit is level or increasing.  If it is increasing, change it to level.  Likewise, if the policy includes a rider that provides for an increased amount of term insurance, discontinue that rider.  The pure cost of insurance of either the increasing death benefit, or the term rider is generally very high when compared to a stand-alone term policy.

So, what do you do about this dilemma?

Before describing your options, my next entry will deal with Whole Life Policies that are being cannibalized and since the options for both UL and WL policies in distress are very similar, they will be handled together.

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