The Price of Optimism

Scenario

Years ago you may have been told by an insurance advisor that your Universal Life (UL) Insurance policy would “remain in-force for life” and “provide you with great cash accumulation to help supplement your retirement income.”  Sounds perfect, right?

Years later, you lose touch with that advisor and realize you haven’t reviewed your policy in years. In fact, you have no idea where you stored the policy, let alone how it’s performing. You are comforted in a sense that you continue to receive annual statements showing cash value growth. So you file away your statements, and again hold off on sitting down with an advisor and properly reviewing your policy.

Problem

The problem is that your policy may face a high risk of lapsing, and your policy statements don’t clearly show it.

UL policies work like this – The insured pays money into the policy. The insurer then deducts for policy expenses and the cost of insurance (which increases year after year), and the rest of the money remains in the policy earning interest to pay towards the future costs of insurance.

These policies are typically sold with illustrations showing interest accumulations between 8%-10%, however, these illustrations are only projections and are NOT guaranteed.  Early on, when the insured is young and the cost of insurance is minimal, these policies perform well and begin to accumulate attractive cash-value balances. Perhaps they aren’t receiving the 8%-10% return as originally illustrated, but the cost of insurance is so low that the policies keep accumulating positive cash value.

The problem is that the cost of insurance continues to increase year after year. Once the insured reaches a certain age, the annual increase in the cost of insurance surpasses the annual increase in policy cash value.  At this point, the annual premium payments are not enough to fund the increased costs in insurance so the policy begins to cannibalize itself by taking money from the cash value to pay for this increased cost for insurance. From this point forward, unless interest rates dramatically increase, or the insured begins over-funding their premium payments, the cash value will continue to deteriorate. At some point, the entire policy will likely lapse and the insured will lose out on years’ worth of premium payments.

Concerns

Consumers buy these UL policies under the false impression that they can withdrawal money from the policy’s cash value to supplement their retirement income. And for those who have sufficient cash value balances that have yet to be impacted by lower interest earnings and higher insurance costs, they can.  Unfortunately for the vast majority, this is far from reality and what actually happens is quite the opposite – they must pull funds from their retirement just to keep the policy in force!

Action Item

If you have one of these (UL) policies in place, or any policy for that matter, it is extremely important to closely monitor and review it annually.

If you would like to learn where you stand, ask your insurance advisor for two in-force ledger illustrations:

  • The first showing the state of the benefits at the current premium
  • The second showing the cost to keep a policy in force to age 100 years

    Annual reviews with a trusted advisor may help protect you and your family’s retirement funds!  

For an illustration, click here for a recent Wall Street Journal highlighting the issue.

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