Do you have a life insurance policy purchased in the 1980’s or 90’s? It’s time for an independent review. Do not necessarily expect the agent or financial planner that sold it to you to give you objective recommendations on its status. I reviewed a policy this week where a financial planner gave years of bad advice and continued to do so, even as the policy projected to go off the cliff. A financial planner may be unqualified, too busy or lack the financial incentive in revamping your life insurance coverage. Here’s what you should recognize if you bought a policy in that era:
- Do not assume the policy is whole life. Generally, they are universal life (UL). There’s a big difference.
- Do not assume UL coverage is permanent. Not necessarily true. Universal life are year to year, unless they have a no lapse guarantee. Policies written in the ’80 and ’90’s did not come with lapse protection guarantees.
- Assume a UL policy started in the 1980’s and 90’s has performed poorly due to a declining interest rate crediting environment.
Each year you will receive an annual statement if you have universal life. The annual statement generally leaves out or buries the most important information: how long the policy last. The best way to see how your policy is doing is to call up the company and request an in force illustration.
An in force illustration is the year by year projection of coverage and will make clear how long coverage is projected to last at the current premium.
Here’s an example:
Mr. Bellwether in 1995 at age 55 buys a universal life insurance policy with $5,000 annual premiums. The financial planner shows a table with the policy building cash value to the point where in his 70’s the cash value will cover the need for additional premiums and coverage will last to age 100. 10 years later in 2005, Mr. Bellwether carefully reviews his annual statement. Coverage is projected to lapse at age 82, so he calls his financial planner to seek an explanation. The financial planner says interest crediting is down and recommends Mr. Belwether either increase premiums or perhaps wait it out until interest rates bounce back up. Mr. Bellwether, in retirement and on a budget, opts to keep the premiums the same. At age 70 in 2010, Mr Bellwether annual statement shows the policy projected to lapse to age 79 at current premiums. Financial planner advises to pay a higher amount in premiums.
That’s the wrong advice and should only be the last option, especially if the insured is healthy. At this point the policy is in trouble and all options should be explored. The best option may be to replace the policy with either term coverage or transferring the cash value in his current policy into new coverage. That’s called a 1035 exchange, and lowers the premiums, often substantially.
If the math doesn’t work out on replacement, because of health or finances, the policy owner should consider dropping the coverage and take the cash surrender value. No use throwing good money after bad.
If you obtained universal life coverage in the 80’s or 90’s, starting around 2001 your agent or financial planner should have informed you about new UL products called no lapse universal life which guaranteed coverage for life, and gone over replacement options. If that didn’t happen, it was a disservice.