There are numerous types of insurance policies in the marketplace. Most consumers are familiar with term insurance policies which do not build any cash-value within the policy. The insured buys a policy that lapses after a certain period of time. For example, a 20-year non-renewable term policy will terminate after the 20th year. Term insurance is an excellent financial tool for those who wish inexpensive insurance coverage for a certain event. For example, a family may wish to have insurance protection to ensure that there are ample financial resources to pay for a child’s college education in the event that the family bread-winner prematurely passes away. Term insurance is relatively inexpensive because the experience of the life insurance companies is that the vast majority of the insureds do not pass away during the life of the policy and the policies lapse after the period of coverage. The policies lapse because the premiums become very expensive and/or the insured no longer has a need for insurance to cover the event for which the policy was originally written (e.g., the child has graduated from college).
Many people use permanent life insurance to fund their retirement. Permanent life insurance has a cash value that grows within the policy tax-free, and withdrawals can be taken out of the policy as loans which are equivalent to tax-free distributions to the insured. Don’t the loans have to be repaid? Yes, they do. However, when the policy owner dies the life insurance proceeds are applied against the policy loans outstanding, and the beneficiaries of the policy receive an amount equal to the amount of life insurance coverage less the policy loans outstanding.
Some insureds purchased a universal life insurance policy (a type of permanent life insurance) thinking that the policy would last through their lifetime and provide an adequate source of retirement income. These insureds may be in for a rude surprise, especially in today’s markets where both equities and bonds are having lackluster performances. These policies were sold with policy illustrations showing a cash buildup inside the policy to help pay future premiums. When these policies were purchased, the insured believed that the cash value within the policy would grow allowing future premiums to be paid from the cash build up. While the insurance company provided an illustration of the guaranteed interest rate, which may have ranged from 0% to 3%, the insured likely focused on the illustration that showed the then current market rates of 6-8%. After a decade of dismal stock market returns and the recent historically low interest rates, many policy owners will receive a notice that the policy will lapse unless additional premiums are paid, assuming that the policies were purchased without a “no-lapse” guarantee that many policies sold today include.
If you are a owner of a universal life insurance policy and are wondering how your policy is performing in today’s markets, you should contact your insurance agent or the insurance company and request (1) an in-force ledger illustration showing policy performance at the current premium; and (2) an in-force ledger illustration showing the amount of premium required to keep the policy in force until age 100. This request should be made every 2-3 years as part of your financial plan.
Be sure to read our Disclaimer Page as these blogs are for educational purposes only.
