Arthur Abramson: Seniors Hurt by Policy Lapses

The 46-year-low interest rate period that we are slowly emerging from has created a very disturbing problem for many seniors; their Universal Life Insurance policies are lapsing at record levels - leaving many with no death benefit and no cash value - after many years of premium payments.

To make matters worse, the silence about this problem in the media has been deafening and, as a result, the first warning many people get is a letter from their insurance company telling them that their policy has lapsed. (Insurance companies don't mind lapsed policies - each one is a death benefit that never has to be paid and the company gets to keep all of the premium payments that have been made.)

Universal Life Insurance (Flexible Premium Adjustable Life) policies, which first appeared in 1979 as an alternative to Whole Life and Term Life (which have their own serious problems), were sold on the assumption that the higher interest rates credited to the policy at that time would stay level and subsidize the cost of the insurance policy. This assumption proved to be false. Lower interest rates were credited to these policies in later years than were assumed at policy issue. Rarely did insurance agents or insurance companies remind policyowners that higher premiums would be needed to compensate for those lower credited interest rates.

So, if you are more than 60 years of age and own a Universal Life Insurance policy, it is almost certainly underfunded. (You can confirm this by comparing your most recent annual statement's cash surrender value with the projected cash surrender value for the same year on the policy illustration you got when you bought your policy.)

This means that your policy will not last as long as it was projected to last unless you add more premium, or reduce the death benefit, or both. (The only exception to this is if your policy was designed to be extremely overfunded when you bought it, but it probably wasn't).

Now, if you do have this problem, every day you delay adding that extra premium or reducing the death benefit makes your problem worse. Do nothing, and if you live long enough, your policy will lapse because there is insufficient cash, from premiums and cash value, to cover the increasing cost of insurance. And don't kid yourself into believing that the recent increase in interest rates is going to solve your problem. It won't, and you can confirm that, as follows:

Call your insurance company's policyowner service department (and have someone on the call with you, as I am with my clients), write down the full name of the person you're talking to, the date, what they say they'll do by when, and repeat the following, verbatim:

"I need two in-force policy illustrations immediately. The first should show how long the original death benefit will last based on current interest rates, expenses, mortality costs and scheduled premiums. The second should show how much premium must be paid every year (or every month, if you must pay monthly), starting with my next premium due date, to carry the original death benefit so that the policy endows at maturity, based on current interest rates, expenses and mortality costs. Print both illustrations to show every year's death benefit and cash surrender value up to and including policy maturity."

Upon receipt, you can decide whether to: 1) keep your policy but increase your premiums and/or reduce your death benefit; 2) replace your policy by a 1035 Tax-Free Exchange into a possibly less expensive policy despite your older attained age (the best Universal Life Insurance policies today can be stripped of most cash value, creating a fully guaranteed, pure tax-free death benefit that can't be outlived, with no possibility of lapse, at much lower rates than older policies that used the 1980 rather than 2001 mortality tables; 3) surrender your policy for its cash value; 4) sell your policy to an institutional buyer or; 5) give it to a charitable organization.

With the help of an experienced insurance professional who uses 2001 mortality table policies with extended maturity and no-lapse guarantees, (from several investment-grade insurance companies for competitive underwriting results), and who has relationships with Life Settlement, Reverse Mortgage and Stock Hedge Specialists to cover every conceivable problem and opportunity, the best solution for you will clearly emerge, and your problem will be simply and quickly solved once and for all.  You may even find yourself paying lower premiums for better coverage.

Art Abramson is one of 33 licensed insurance analysts in California (DOI license #0629410), and has lived and worked in the Sunset District since 1981. To get a copy of his free report for life insurance owners over 60 years of age (which includes client testimonials), call (800) 249-4570. For a free five-minute telephone consultation, call (415) 753-2122. You can also hear his Better Business Bureau Report at (415) 243-9999 or visit his website at LifeInsurance911.com.