Your Life Insurance May Need a Checkup

05/23/2011 11:05 am EST


Terry Savage

Author, The Savage Truth on Money

If you think your life insurance will last your lifetime, you may be in for a rude surprise.

Many people who purchased cash-value life insurance—and have been paying scheduled premiums for the past 15 or 20 years—are finding out their policies are about to lapse!

If you own term life insurance—the kind of insurance that does not build cash value—then this problem does not apply to you. As long as you keep making the scheduled payments, your insurance will stay in force.

But many cash-value insurance vehicles, sold as “universal life” policies, contained features that projected a growing cash buildup inside the policy—either through “illustrations” of interest rates to be paid on that “extra” cash value, or by allowing policy owners a choice of variable, mutual fund-like investment accounts for the extra cash.

It’s pretty obvious that a decade of bad stock-market returns would impact the cash value of those policies. But what’s not so obvious is that a decade of very low interest rates could also have a devastating effect on the cash buildup inside the policy.

Those projected cash accumulations were supposed to be used in the future to help subsidize your annual premiums. So the policies looked much more affordable to buyers, because the premiums were based on planned future growth of the cash.

Few people paid attention to the “minimum guaranteed” interest rate, which was often 3% or lower. Instead, they focused on the then-current rates of 6% to 8%. But years of sub-par earnings on the cash have suddenly resulted in policies with no cash remaining to subsidize those annual premiums.

Suddenly the owners receive a notice that policies will lapse—in other words, default. Or the owners must come up with premiums that may be six times as high as the annual amount they had been paying—just to keep the policy in force.

A Sad Story
For example, in June 1993, Tom and Denise each purchased a $400,000 universal life insurance policy, which together cost them $2,700 a year. They chose these policies because, unlike term insurance, universal life was a permanent solution that was sure to outlive them.

They were also promised that the universal life would build cash values that would grow free of taxation and could also be tapped into—tax-free!—to supplement their retirement.

Over the years, Tom and Denise had never missed a single premium payment on their policies. Then, one day, on the advice of a financial planner, they decided to review their life insurance coverage. To start, they contacted their insurance company to order an “in-force ledger statement”—which would show its current funding status.

They were shocked to learn that even if they continued making their premium payments on time, Tom’s policy would lapse at age 67 and Denise’s at age 70—far below the age of 95 that they expected, and had been forecast when they purchased the policy.

The cash in their policies, which was currently nearly $27,000, would be gone by the time they reached retirement age. If they wanted to continue with coverage, they would need to increase their annual payment to $19,320!

NEXT: It Could Happen to You!


It Could Happen to You!
Tom and Denise are not a unique case. Experts suggest that more than 75% of universal life policies sold in the 1990s could face this problem—if they did not have the “no-lapse” guarantee that is now part of most current policies.

Phillip Cook, a certified financial planner and registered investment advisor from California, says he has uncovered many of these potential lapsed policies as he reviews clients’ situations.

Says Cook: “Life insurance illustrations are designed to make consumers comfortably numb as they continue to pay the annual premium. But it’s important to be vigilant, just as you would be with your health. You need to get a policy checkup at least every two or three years.”

What to Do
You don’t need to go through your agent. Just contact the insurance company and ask for two different documents, which you should receive within days:

  1. An in-force ledger illustration showing policy performance at the current premium
  2. An in-force ledger illustration showing the amount of premium required to keep the policy in force until age 100

You need both statements because they each tell a different story. The first illustration will show you when your policy is set to run out of cash at your present premium and interest-rate assumptions. The second illustration will tell you how much you will need to “pony up” to keep the policy in force until you die.

If you want a professional analysis of your policy, get these documents and then contact insurance guru James Hunt at For a fee of $85, he will appraise any existing (or proposed) life insurance policy, with subsequent policy comparisons at a discount. Hunt is a noted consumer advocate for life insurance issues.

It’s better to find out the truth about your cash-value life insurance policy sooner, rather than later. If you’re still insurable, you might be able to transfer the remaining cash value into a new, more sustainable policy. Or some policies allow you to cut the face value of the insurance to keep it in force under the current premium schedule.

You want your cash-value life insurance to last as long as you do. So you must check your policy now to make sure your beneficiaries will have something to collect.

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