A while back, a family member of mine bought a life insurance policy they thought was going to last their whole life. They paid the premium the insurance company told them to pay when they got the policy. They never missed a premium. They paid on this policy for 10 years.
However, when they reached 65 years old, they got a letter from the insurance company that let them know the insurance company would have to raise the premium because there wasn’t enough cash value in it. Since they couldn’t afford the premium, they had to let the life insurance policy lapse.
The end result?
Essentially, the life insurance company got out of the life insurance even though my family member did everything they were asked to do.
The sad thing is that his isn't an isolated case. Here's a story in Forbes, another one in the New York Times and yet another in InsuranceNewsNet.com. These articles and many others I found detail the same problem.
I call this problem the underfunded universal life insurance trap.
What is the Underfunded Universal Life Insurance Trap?
What Causes Underfunded Policies
- Premium too low If the premium is the lowest the insurance company will accept, there's a good change it'll be underfunded down the road.
- Not paying your premium If you don't pay your premium, then your policy will eat away at the cash value and cause it to be underfunded.
- Borrowing against the universal life cash value If you borrow from the cash value, you increase your chances of underfunding (especially if you don't pay the interest).
- Returns too low If you don't earn a high enough return, there will be less money in the policy. This creates an underfunded situation.
- Cost inside the policy have increased If the insurance company increases the costs inside the policy, it will also increase the likelihood the policy will be underfunded.
How to Tell if You Have an Underfunded Universal Life Insurance Policy
- The sales illustration provided when you bought the policy The illustration should provide additional details on what to expect from the policy.
- The life insurance policy The policy will you give you more information into what premiums are needed to keep the policy inforce.
- The annual statement The annual statement usually says how long the policy will stay inforce under the current assumptions. Figure out how old you’ll be and that’s how long the policy will stay inforce.
Actual Example of an Underfunded Universal Life Insurance Policy
- Based upon guaranteed maximum cost of insurance rates (the highest rates We may charge) and the guaranteed minimum interest (the lowest interest rates We may credit), coverage will expire before the Final Policy Date unless premiums in excess of the Minimum Premium Due at Issue are paid.
Steps to Avoid Losing Your Life Insurance When You are Older Because it's Underfunded Now
- Don't buy universal life insurance Unless you know what you are buying just don't buy it. Most people have no clue that they may have problems with their universal life policies down the road. I never offer universal life insurance to anyone for purchase.
- Pay more than the minimum premium Look at your life insurance documents to identify the best premium to pay and then pay that. For my son's policy I talked about above, that meant I needed to pay about $100 more per year than what the insurance company told me I needed to pay.
- Pay every premium on time If you don't pay your premiums, then a universal life insurance policy is almost guaranteed to fail down the road.
- Review your policy annually When that annual statement arrives each year, evaluate if you have to put more money into the policy. The best way to do this is take a look at the illustration you received when you bought the policy. If the value you are supposed to have is less than what you actually have, then pay that difference then.
- Don't borrow against the universal life policy Never borrow against a universal life policy.
- Buy whole life insurance instead of universal life insurance if you want permanent coverage If you really want a permanent life insurance policy that lasts your whole life, then buy a whole life policy which moves the interest rate risk back to the insurance company where I think it belongs. Here's a video I did that talks about the difference between universal life and whole life insurance.
- If you can't fund your universal life policy properly, consider buying term insurance instead If you don't fund a universal life policy properly, it'll lapse at some point. If it's going to lapse, then it's basically an expensive term policy. You'd be better off buying a term policy in that scenario.
These tips won't guarantee you that you won't have an underfunded policy but they will lessen the risk of it being a problem. The key is you have to really stay on top of your policy every year and fund it properly.
In addition to that you also want to avoid a huge list of other life insurance mistakes as well.
Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the blue button just below or click ask for a proposal.