BY TERRY SAVAGE
Dangers are likely lurking inside your life insurance policy.
If you have a life policy that is intended to build cash value over time, and you haven’t had an insurance checkup in the past few years, it’s time to find out whether your policy will last as long as your life. Otherwise, you might not understand what’s happening until it is too late, or very expensive, to “fix” your life insurance policy.
Note: The issues and advice below do NOT apply to term life policies, which remain in force when you pay a fixed premium for a set number of years, typically 20 or 30 years.
Here are the issues to review in cash-value whole life policies.
–Investment returns on cash value. About 20 years ago, many people were encouraged to buy “universal life insurance,” adding extra cash to the policy, which would grow tax-free at a projected interest rate. Another variety was “universal variable life,” which allowed investment choices such as mutual funds for the extra cash within the policy. The growth of your cash value would vary depending on your choice of investments.
When these policies were purchased years ago, many of these projected premium “illustrations” were based on the assumption that interest rates on universal life policies would continue to be 8 percent to 10 percent — and that enough extra cash value would build up to help pay premiums in future years. But illustrations are not promises.
Interest rates have dropped to the minimum guaranteed rate and have stayed low for years. So now there is not enough cash inside many policies to pay the annual premiums. If you want to keep your policy in force, now that you’re older and closer to needing it, you might be asked to pay huge annual premiums to keep the policy going. (And you might not be healthy enough to qualify for a new, less expensive policy.)
–Insurance charges skyrocket. The insurance companies can’t change the face amount of their policies. And they must continue to pay the guaranteed minimum interest rate, as high as 4 percent on some older policies.
So they are doing the one thing that is allowed in the contract: raising the “mortality charges” and expenses — the cost of insurance (COI) within the policy. That means your cash value doesn’t grow as fast. It also saves the insurance company a lot of money. And it may mean you’ll need to pay higher premiums down the road to keep the policy in force.
–Policy loans cause problems. One of the most attractive things about life insurance, besides the tax-free growth of your excess premium inside the policy, is the ability to borrow some of that cash out of the policy on a tax-free basis. It is so convenient that many people forget to repay the loan!
That means the death benefit will be lowered by the amount of the loan plus interest. In some cases, those unrepaid policy loans trigger a larger premium requirement to keep the policy in force. That can come as quite a surprise, especially if you’re older and retired.
This is your life insurance policy, and you must stay informed and updated on any changes. Here’s how to get a policy checkup. (Those who have policies owned by an insurance trust should encourage the trustees to do this type of review.)
The first step is to get an “in-force ledger” — a current analysis of the cash in your policy, the premiums and the outlook for future premiums. Ask your insurance broker or call the insurance company directly at the toll-free number on your policy or premium statements. This report will reveal how long your insurance will stay in force at the current payment schedule or how much more you will have to pay each year to keep it going.
Once you have an in-force ledger, get a policy analysis. Here are two credible sources for that:
At EvaluateLifeInsurance. org, the Consumer Federation of America and Dr. James Hunt, insurance ombudsman, will provide personalized evaluation and advice for a fee of $125 for the first policy, and $85 for each additional policy. They also compare existing policies with policies being considered as a replacement.
Arthur J. Gallagher, one of the largest insurance brokerage firms in the world, routinely does this analysis for corporate customers and wealthy individuals. They offer a free policy analysis service at https://gbslife.wixsite. com/gbs-life-insurance. AJG represents almost all major insurers, so are not conflicted in their advice.
You cared enough to buy life insurance, and to pay premiums all these years. Now don’t be afraid to do a life insurance checkup. You’ll sleep better. And that’s The Savage Truth.