Life Insurance Premium Games

If you bought a life insurance policy in the 1980s you very well may have bought a Universal Life policy. The agent, in all good intentions, probably told you that it had flexible premiums, a death benefit that could increase or decrease and it was the last policy you would ever need. It was term and savings with premiums that you could modify depending on your financial condition. You may have thought it was swell.

Back in the 80s interest rates were high. Money market  funds were paying 8% and  everyone thought that rates could only go higher. What happened was just the opposite. Today money markets earn nothing and we hope to see 1% sometime late in 2011. People are not upgrading or buying more insurance but keeping what they have and counting on it as their only death benefit. Life insurance sales are down.

The original whole life cash value (old fashioned as a buggy whip) insurance policy had a fixed premium, a guaranteed cash value and the possibility of varying interest earned on the cash value. The important thing is that both the cash and the premiums were fixed and once the policy was issued nothing could change that unless the policyholder cash surrendered or the owner did not pay premiums on the policy. It was a policy that was fundamentally solid like a rock.

The Universal Life contact was and is not like that. In fact the cash value could and would be used to pay premiums if the insurance company did not earn a certain rate of return. In addition the premiums could be increased by the company if the cash did not make up the difference. This small print provision was passed onto policyholders who only believed that rates would stay the same and interest rates had only one route to go and that was up. Few people thought that rates would fall as far as they have.

Recently an 80-some year old client called and told me that a policy he bought back in the 1980s just doubled in premium and could theoretically double in premium again. What, he asked, could he do? He could barely afford the original premium let alone the increase.

Unfortunately my friend and client is not of the age and health he once was and so buying a new policy is out of the question. I told him if he needed insurance he could call the company and reduce the face amount which would reduce the premium. It would not, however, stop the company from raising rates on the policy in the future. He could also cancel the policy or use whatever cash was in the policy to buy a paid up contract. This last suggestion would only net him only a few hundred dollars of paid insurance.

The lesson I am passing on is that if you bought a life insurance policy in the 1980s it wouldn’t be a bad idea to get the policy out and see what type of a policy it is. If it is a Universal Life check the premium schedule and see what the maximum the company can increase your premiums. You may already be getting charged a higher rate and the future may hold even higher costs. The older you get the less the chance of buying a new policy, or at a price you can afford if you want to get a stable premium.

If you still have a need for life insurance there may be time to do some planning on costs and benefits. Call me if you have questions. Don’t wait for the insurance company to force you to do something.

Call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.