I want to discuss something with you that I have seen over the past several years that has caused a lot of heartache with many families. Universal Life or Flexible Premium Adjustable Life policies as they are sometimes called can be a great option for someone as long as these policies are funded correctly. If not, they can be disastrous for policyholders that have not been advised properly by the agent who wrote the policy. Below, I’m going to recount my first year with my first company that employed me as a rookie agent.
So back in 2008 I worked for a very large company focusing on life insurance, specifically Universal Life policies. In fact, this company was so heavily focused on these types of policies I didn’t think there were any other types of policies. I was also heavily encouraged to sell these types of policies and trained to tell potential policyholders they were permanent policies that would be there when they needed them, but priced so affordably they were comparable to Term Life policies.
Part of my job with this company was to meet with policyholders that have not been contacted by the company in the past 10 to 20 years and review their coverage. Doing this and meeting with people who were already clients of the company, I discovered that these policies were failing. This means that most of these policies were going to lapse within the next six months to three years without the policyholder ever knowing the policy was going to lapse. And why should the policy lapse? The policyholder had faithfully paid their premiums for several years. They never expected this to happen, especially when most of the policyholders were seniors 65 to 80 years old. That’s when they need the policy the most for their families.
I remember one appointment specifically at a couple’s home who were in their upper 70’s. I knew that I had to break the news to the wife that her husband’s policy was going to lapse within the next 6 months. Her husband was in very bad health and wasn’t insurable except for one policy this company offered, a very expensive whole life policy that was going to cost this couple over $500 per month for a policy that was $25,000 in coverage. At that time, his current policy was $75,000 in death benefit and they were paying less than $100 per month. When his wife discovered that the policy was due to lapse within the next 6 months she began crying and it tore me apart. There had to be a way to prevent this from happening.
So, why do these policies lapse without the policyholder ever knowing they are going to lapse? The main reason is the agent who wrote the policy did not have the policyholder fund the policy correctly based on the guaranteed interest rate of the policy. Instead, the agent gave the policyholder a teaser premium based on the non-guaranteed interest rate. The prospective policyholder sees the great rate and decides to purchase the policy on the teaser non-guaranteed rate only to be surprised later in life that their premium did not fund the policy properly so it would be there when it was needed. I could go in detail about the rates and how they can fluctuate, but it’s always safer to base these policies on the guaranteed interest rate stated in the policy.
This is exactly why you should pay attention to your yearly statements and stay in touch with your agent every couple of years, so you know how the policy is performing. Also, when you check your statements, pay attention to the cash value of the policy. If you ever see the cash value decreasing from year to year, that is a sign the policy is failing, and you need to get in contact with the agent or the company to fix the problem. Once these policies get down to zero in cash value, they lapse.
So let’s discuss how these policies work. You, the policyholder, pay your premiums. Let’s say you’re paying $50.00 per month for $100,000 in coverage. The policy gains interest from the premium you pay based on the interest rate you’re getting at the time based on a specific chosen index by the agent or the company. On the other side of that, the cost of insurance (COI) based on your current age and rating comes out of the premium you pay plus a small load or administrative fee the company charges. Now as you age, the cost of insurance increases, but you never increase your premium. Eventually, if the policy is underfunded and you never increase the premium, the cost of insurance surpasses the premium you pay into the policy and your cash value decreases to the point it gets down to zero and the policy lapses.
As you can guess, I’m not a fan of Universal Life policies unless they are funded properly, or it is a certain type of Universal Life policy called a Guaranteed Universal Life policy that is guaranteed to a certain age. If these policies are funded correctly, premiums are very similar in cost to whole life and are expensive compared to Term Life policies.
If you have a Universal Life policy and are concerned that this could be happening with your policy, I encourage you to talk with your agent or reach out to us.
