The Problem with Insurance That’s Universal

While I certainly hope that no one reading this is currently involved in a fight with their insurer over the rising costs of their universal life premiums, I know better.

That’s because over just the last two years, tens of thousands of universal life insurance policy holders have been hit with shockingly big cost increases.

More increases targeting long-time policy holders are expected.

How Universal Life Is Different

To understand why these sudden premium increases are happening, and whether or not you should be concerned, it’s probably best to start from the beginning.

For those unfamiliar with universal life, it’s a permanent (as long as you pay the premiums on time), and somewhat flexible hybrid life insurance that combines the reasonably affordable aspects of term life, with a savings element, similar to whole life.

Universal life insurance typically allows buyers a “cash value,” along with the flexibility to adjust premiums, increase or decrease death benefits, and earn tax deferred interest.

In short, universal life provides policy holders with a death benefit with a tax advantaged savings account.

Over the past couple of years, thousands of universal life insurance customers, some holding policies dating back three decades, have been informed that their insurance companies are using the fine print in their contracts to increase their long-static monthly premiums.

Just how much of an increase are we talking about? Depending on the death payout, some policy holders have been hit with increases of over 200 percent.

That means 70 and 80-year olds, many on fixed incomes, are being told they need to pony up anywhere from a few hundred to thousands of extra dollars each month for policies they purchased long ago.

Just how much are these increases?

Nicholas Vertullo, an 82-year old Long-Island retiree who was interviewed by The Wall Street Journal back in August, reported that his premiums for three universal life policies had more than doubled to an almost unimaginable $30,000 a year (for a $500,000 death benefit).

He’d paid into the policies, on time, he said, for almost 30 years.

Naturally, policy holders want to know how this has happened. But whythis is happening might be just as important.

Insurers blame the economy.

Interest rates began to slowly decline in the 1980s, but then plummeted during the 2008 recession as the Federal Reserve tried to breathe life into the economy by making money cheap to borrow. But as we all know from our high school economics classes, low interest rates are bad for most investors. And because insurers invest their money a lot like you and I, these low interest rates mean lower profits for the companies headquartered in the Manhattan skyscrapers.

In response, insurers have begun to do something that was once unthinkable: Raise rates on older policies.

Understandably, policy holders, most of whom were assured by eager, and perhaps naive salespeople that their premiums would never increase, are not taking this well.

If you have a universal life insurance policy, especially an older policy, and you have yet to get hit with higher premiums, the consensus is that those increases are probably coming. If you’re proactive, however, you might still have time to make a move before you get hit with an increase that you simply can’t afford.

What can you do to combat the increases?

When it comes to combating premium increases, knowledge is essential. Get ahead of the curve by:

• Contacting your insurance company to find out just how much your cash reserves are worth. Depending on the amount you’ve accrued, you just might be able to afford any future increases.
• If that doesn’t work, consider working with your insurer to lower the benefit amount, and by extension, your costs.
• You could inquire about changing policies. What else does your insurer have to offer you?
• If all else fails (and I hate to recommend this), you could work with an agent on the secondary market to sell the policy for cash right now in exchange for the death benefit later.
• Learning everything you can about risk management so you’ll be less likely to buy insurance you don’t need. I talk about this is my book, Personal Decision Points, or you could view our 7 Personal Decision Points webinar for an introduction into this complex topic.

Invented in the 1970s, 25 percent of life insurance policies purchased in the 80s and 90s were of the universal life variety, so the number of people who may eventually be impacted could number in the tens of millions. And while some companies, perhaps fearing the bad press, have reportedly partially reimbursed persistent clients who’d complained after being forced to drop their policies, I’m sorry to say that I, for one, wouldn’t bet on any warm-hearted insurance industry trends sweeping the nation any time soon.

Do you have a universal life insurance policy? (Or do you know someone that does?) Contact your advisor ASAP to figure out what your options are.