Understanding The Levers, Trap Doors & Other Moving Parts Of Permanent Life Insurance

permanent life insurance products are sophisticated financial instruments
with levers, 
potential trap doors and other moving parts for the unwary

lever
Brick wall blocking the office doorway for a businessman concept
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WHAT CAN CHANGE?  PLENTY!

How Long Are Your Premiums Guaranteed For in The Policy?

Are your premiums guaranteed to a pre-determined period of time, average life expectancy, or to age 100 and beyond?  

Once the premium guarantee ends and you’re still around, now what will you pay?  Will the policy end or will the premium increase substantially and be impossible to pay producing the same result?

Projected Level Premiums and Current Assumptions – Trust Us!

Personally speaking, I don’t like a “trust us”, strategy from the insurance company.   

The life insurance industry’s success and reputation are built largely on trust.  Consumers enter into decades-long contracts paying premiums with the belief that the insurer will honor the original terms of their policies even if they are not guaranteed.

I have learned and seen working with many different insurance companies over the years.  The insurance company will always do what’s in their best interest first to maintain profitability and won’t consult me or my clients to ask permission before making any policy changes.    

It is not that the insurance company will, but they can make changes.  They have the legal right to alter current assumptions that benefit their bottom line.      

Unfortunately, initial life insurance illustrations showing premiums PROJECTED to remain level and based on CURRENT ASSUMPTIONS, which are subject to change become a guess, and a real potential future problem for any projected level premium life insurance policy.     

Current assumptions are monthly internal costs paid out of premiums the insurance company receives from the insured / owner.  They include current mortality or cost of insurance charges, the pure insurance protection element of the policy and current interest rates.  What does projected level mean and if they do change?  Now what?

When changes occur the consequences can be devastating with large premium increases causing frustration with unintended policy lapses in the future.  No one needs an unexpected surprise like this especially when it matters most later in life.

Insurance companies have struggled with the high-interest rates of the ’80s to declining and historically low-interest rates impacting the profitability on blocks of universal life insurance business. This has created a financial burden throughout the entire life insurance industry.  

One company I’m aware of has increased current mortality costs on an older in-force block of universal life insurance business.  By Increasing the cost of insurance this will require the insured / owner to pay more causing premium funding difficulties, especially for those who cannot afford to pay more, and if a policy’s cash value deteriorates to the point where it bottoms out and can no longer fund the contract.  Policies will lapse more quickly than expected.  Who wins the insurance company?

The insurance company can assert they have the right to do this under the cover of worse-than-expected mortality results, (more insureds die than expected for a particular group of policies) and pass these costs along to the insured / owners.  A closer look reveals a couple different things could be going on here.  They are essentially subsidizing the cost of meeting interest rate guarantees on older blocks of life insurance business, recouping past losses on its investment portfolio, or making policies more profitable by inducing policy terminations on those policyholders who cannot afford the increased premium costs.  

Another potential problem, consider all of the life settlements on policies that are not lapsing and resulting in more death claims to the life insurance industry.  What impact will this have on current mortality in the future?

Understanding Guaranteed Universal Life Insurance Premiums

These policies mirror a term life insurance policy with guaranteed premiums and death benefit to age 100 and beyond.  These policies are sensitive to the timing of when premiums are received, and the policy guarantees can significantly change if premiums are late, skipped or missed.  I normally recommend for these policies to have premiums paid by monthly bank withdrawal so premiums are always received on time.  Quarterly, semi-annually or even annually premiums that rely on mailed premium notices and payments run the risk on occasion of being lost, missed or received late, altering the premium and death benefit guarantees of these policies.

Cash Values That Didn’t Perform As Illustrated, and What Impact Can Policy Withdrawals, Loans, or Borrowed Interest Have On Future Policy Performance and Your Premiums?

For more info see “Understanding Permanent Life Insurance Policy Cash Values”.

Understanding Dividends On Whole Insurance Policies

Dividends on whole life insurance policies are not guaranteed and subject to change causing a reduction in cash values, lower than illustrated death benefit increases and premiums to be paid longer than illustrated when a premium offset option was elected.

I BELIEVE PERMANENT LIFE INSURANCE IS A PROMISE THAT MUST BE KEPT.  This is why an essential part of any life insurance policy is to make sure it lasts as compared to other investments that cannot provide that certainty.  

My best advice is to understand what is guaranteed and not guaranteed in every type of permanent life insurance policy.  No permanent life insurance policy will perform as illustrated.  In-force illustrations are a valuable tool and allow you to review and manage policy performance and certainly use them before considering any significant policy changes.       

In-force illustrations are available with every insurance company, which allow you to request any number of scenarios you can imagine that will help you understand your policy and prevent problems going forward e.g., premium payments, face amount changes, loan requests, loan repayments, etc.  In-force illustrations are your best friend?

Surprises, no thank you!

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Marc Maretsky Personal Insurance Services based in Beverly Hills, serves all of California and the United States.  I help my clients acquire life, disability, long-term care, and critical illness insured solutions, as well as enroll them into Medicare when eligible.

“No matter how fast technology changes our world and everything around us.  I believe the personal touch and a human voice are more important than ever.”

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