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Universal Life Insurance - Disrupted by a Decade of Low Rates

It’s Life Insurance Awareness Month

It’s Life Insurance Awareness Month which is usually a good time to remind everyone how important it is to get the proper coverage. I’m a huge fan of life insurance and could go on and on about how it is a foundational tool for financial security and tax-savvy estate planning strategies but I’ll spare you the hard sell.

Instead I will share some recent developments in the life insurance industry that may prompt you to pay closer attention to the policies you or your loved ones may have tucked away safely and haven’t thought about for some time.

Troubled Water for Older Universal Policies

Interest rates have been at historically low levels for 10 years now and it’s wreaking havoc on the viability of permanent policies that were purchased years ago in a significantly different market environment.

You see, if an insurance agent showed you an illustration of a universal life policy in 1985 using a scenario of 10-13% rates on the internal account, the end result (on paper) was a significant cash value in the later years. Unfortunately, that was wishful thinking. Even when the policy’s guaranteed minimum rate is 4-5%, that often won’t sufficiently cover the rising cost of insurance as the insured reaches age 70, 80, 90 and beyond. Although universal life policies are cheaper than whole life in the early years, the cost of insurance (COI) increases as you get older. Whole life COI remains constant throughout the life of the policy.

Room for Error in Universal Life Policies

The following factors can put a policy in the danger zone of lapsing:

  • Subpar performance in the internal account

  • Withdrawals or loans taken from the cash value

  • Insufficient premiums paid into the policy over time*

  • Lack of oversight – not reviewing policies properly

*Universal life policies allow flexibility in the premium amount so policyholders may choose to underfund.

The increased premium required to keep the policy from lapsing in the later years is often so exorbitant, many have been forced to drop policies they’ve paid into for years.

Unfortunately, that is precisely what is happening now. Imagine paying $25,000 cumulatively into a policy over the past 30 years for a $25,000 death benefit and you’re now 80 years old. Do you keep paying just to get what you’ve paid for? It’s altogether depressing and it’s a decision that is exacerbating the retirement crisis for many older Americans.

A Wall Street Journal article quotes an 85 year-old man whose annual premium recently doubled to $30,000 for a $475,000 policy, “I don’t think I understood completely what the hell I was doing.”

Taking Action

Life insurance policy designs are not just complex but confounding to many. It’s important to remember: life insurance companies generally do not have a financial interest in seeing policies persist so it’s up to you to take action.

  • Ask for help. It’s important to review your insurance policy with a trusted advisor. I can help advise you on your options. Getting an updated illustration from the insurance company on your policy can take some time but they are required to provide it to you.

  • If your cash value is low, we can review your options for lowering the face-value if paying a higher premium is not a workable solution. Lowering the death benefit (say from $500,000 to $300,000) reduces your cost of insurance and allows the cash value to stretch longer.

  • If you are in good health you might qualify for a new policy at a possibly lower cost. I can help you assess what’s available to you for comparison.

  • Although it is a rare opportunity, you may be able to sell the policy on the secondary market and receive a one-time payment from a life settlement company who then pays all expenses on maintaining your policy. This is called a life settlement. The investor takes over your policy and receives the death benefit in exchange for an upfront purchase price.

I started my financial career with significant training in the life insurance industry and understand the nuance and complexity of a wide variety of insurance products. In my first years in the business, I met with many AXA Equitable policyholders and reviewed the policies they had purchased in the 1980’s-2000.

If you no longer have an agent on your policy or would like help understanding how your policy works and if it is in good standing, I would love to help.

Despite this concerning news about universal life policies from a particular period of time, I continue to promote insurance as a fundamental aspect to financial security for my clients.

Thanks for reading and please share with anyone who may benefit from this content.


DISCLAIMER: Universal life insurance has certain features that make the policy suitable for some individuals. Whether universal life insurance is appropriate for you will depend on your goals, needs, and circumstances.

Accessing the cash value in your insurance policy through borrowing — or partial surrenders — has the potential to reduce the policy’s cash value and benefit. Accessing the cash value may also increase the chance that the policy will lapse and may result in a tax liability if the policy terminates before your death.

Universal life insurance can be structured so that the cash value that accumulates will eventually cover the premiums. However, additional out-of-pocket payments may be required if the policy’s dividend decreases or if investment returns underperform.

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Withdrawals of earnings are fully taxable at ordinary income tax rates. If you are under age 59½ when you make the withdrawal, you may be subject to surrender charges and assessed a 10% federal income tax penalty. Also, withdrawals will reduce the benefits and value of the contract. Life insurance is not FDIC insured. It is not insured by any federal government agency or bank or savings association.

Generally, loans taken from a policy will be free of current income taxes, provided certain conditions are met, such as the policy does not lapse or mature. Keep in mind that loans and withdrawals reduce the policy’s cash value and death benefit. Loans also increase the possibility that the policy may lapse. If the policy lapses, matures, or is surrendered, the loan balance will be considered a distribution and will be taxable.

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