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Universal Life Insurance, Has Become Unaffordable

A favorite insurance product of the 1980’s and 1990’s has come to haunt several older Americans bank accounts.

Universal life was a sensation when it premiered, and for a few years, it worked as publicised. It contained both insurance and a bank account that earns financial profit to aid in paying future incidental costs and keep the premium constant.

That was back when interest rates were within the high single digits or higher. Today, interest rates are finishing a decade at traditionally low levels, curling the savings accounts. Meanwhile, the aging of the earliest customers into their 70s, 80s and even 90s has driven the yearly value of ensuring their lives a lot of higher.

The result is a surge of surprisingly steep life-insurance bills that are shredding a vital safety web. Some notice they owe thousands of dollars a year to keep modest policies in good standing. Individuals with million-dollar policies will owe tens of thousands annually. Some retirees are letting policies expire on which they paid premiums for many years. Not a fun thing to experience I’m sure of that.

The Wall Street Journal wrote a recent article on this catastrophe affecting many Americans today and interviewed one case in particular. “I’m very scared that everything will go down the drain,” said Bernice Sack, a 94-year-old former hospital billing clerk in North Carolina.

According to the article [Scism 2018], a $56 monthly premium Mrs. Sack paid when she purchased the policy 35 years ago has climbed to $285, despite her efforts to keep the cost down by reducing her death benefit. Living with a daughter and getting by on Social Security, she skimps on medications to pay the insurance bill, sometimes runs late on her share of household costs and considers ice cream a splurge.

John Resnick, the co-author of an American Bar Association book on life insurance, said of hundreds of older policies he has reviewed over a decade, “easily 90% or more actually were in trouble or soon to be in trouble.” Many people “are sitting on a ticking time bomb, and most probably aren’t aware of it,” he said.

Universal life is among the reasons Americans are approaching retirement in the worst shape in decades. The insurance policy type emerged in an era nearly four decades ago when the Federal Reserve was fighting inflation with high-interest rates. Some financial advisers suggested people forgo traditional “whole life” insurance and buy less-expensive policies that covered just a limited term, investing what they saved in the mutual funds and money-market funds then proliferating. Insurance companies embraced this mantra of “buy term and invest the difference” by inventing a new product.

With universal life, the customer buys a one-year term-insurance policy and renews it annually. In the early years, the premium the customer pays is a good deal more than the actual cost of the insurance. The excess goes into a tax-deferred savings account. The policies are designed so the gains in the savings account, which the industry typically calls a “cash-value” account, offset part of the cost of renewing the term insurance each year. Which is a great way to safeguard certain things until interest rates change.

Interest rates at the time these policies were sold were sky high, until the market crash of 2008. Now that interest rates have been below 4% for so many years it has affected the payouts to the savings accounts making money for these policyholders slim to none.

Compounding the problem, universal life offers flexibility that is alluring but dangerous. Within reason, customers plan their own monthly or annual premium payment. They can set it low, counting on high-interest income in their savings account to keep the policy financially sound.

Customers also can choose to pay less than their planned premium sometimes if money is tight. Or they can skip a payment altogether and they can borrow against their savings account.

Any such move, of course, will spell skimpier earnings in the account. It is widely accepted that not all customers—or even all insurance agents—fully understood years ago how borrowing or skipping payments could undermine a universal-life policy leading to this problem we have today.

If you are like Mrs. Sack and have an unmanageable premium, let us try and help you. We have many clients that come to us with old policies that are constraining cash flow. We have been successful the majority of the time setting up a new retirement gameplan to offset some of these growing premiums with our patented WorryFree Retirement® process. There is never a cost, high-pressure situation, or obligation to meet with Tony or I. Schedule an appointment today!

-Trey

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