Did you purchase flexible premium adjustable life insurance policy in the 1980s or early 1990s? You may have received a letter from your insurer claiming that your adjustable life insurance policy is not performing as originally illustrated.
Policyholders getting these notices are usually required to contribute additional premiums to prevent their adjustable life insurance coverage from lapsing sooner then initially projected. If flexible premium adjustable life insurance policy is considered permanent life insurance, how did this happen?
Flexible Premium Adjustable Life Insurance
First, we need to look at what is a universal life insurance? Then, further define a variation of universal life called flexible premium adjustable life insurance.
What is a Universal Life Insurance?
Universal life insurance is like to term life insurance, but adds a cash value component. So, part of each premium goes towards the cost of insurance for the policy, and the remainder goes into a cash value account inside the policy.
There are a few variations of universal life including flexible premium adjustable life, interest sensitive universal life, and variable universal life.
What is Adjustable Life Insurance?
Flexible premium adjustable life insurance policies was popular in the 1980 and 1990’s, but it is still sold by some companies today.
Adjustable life insurance purchased decades ago, typically did not have a guaranteed premium. If interest rates changed the risk fell on the insured to make up the difference in premium.
When you contribute premiums, the insurance company deducts for expenses, including the cost of the death benefit, and the rest of the money stays in the policies cash value earning interest to help pay some of the future costs.
Unlike whole life’s guaranteed cash value, adjustable life insurance has a fluctuating interest rate on the money contributed towards the cash value.
Problems with Adjustable Life Insurance
Policies sold during this period of historic double-digit interest rates, are now crediting much lower interest rates. As interest rates fell, insurers’ investment returns could not keep up with the premium projections.
An extremely long period of low interest rats has caused a shortage in policyholder cash values requiring additional payments in order to maintain coverage.
Insurers say they had to reduce interest payments on adjustable life insurance policies when yields in their own investment portfolios fell.
Now, policyholders are getting notices that their policies’ cash values are spiraling downward, which increases premiums and can cause policies to lapse or implode.
Furthermore, a long period of low interest rates has undermined millions adjustable life insurance policies sold when rates were at all time highs. Insurers designed these policies around the false promise that healthy investment earnings would keep these polices in force as long as you live.
There are many industry articles covering the subject of falling interest rates causing increasing premiums for policyholders.
However, many life insurance companies do not widely publicize this problem in fear of jeopardizing their reputation. But, before you get further upset by reading additional articles, there is a solution to this problem.
Is your Adjustable Life Insurance Performing?
Has your policy gone off course?
It is not to late begin smooth sailing again!
All adjustable life insurance policyholders receive an annual statement showing how your policy is performing.
You should pay attention to both the current interest rate and the minimum interest rate column of this policy statement. These statements can be confusing and may not have the proper information needed to make an informed decision.
Many policyholders make a more educated evaluation by contacting a life insurance specialist to conduct a policy audit. A life insurance specialist is an agent familiar with many insurance policies and life insurance companies.
Two step process to find the best option available for you:
First, the specialist will work with your existing life insurance company to evaluate “in-force” illustrations which calculate your current policies future under different scenarios.
- What is your cash surrender value?
- How long will your adjustable life insurance policy last, assuming you keep paying the current premium?
- How much more you would have to pay to maintain the current benefit until your target age?
- How much a smaller death benefit would cost you?
- If your insurer is crediting your policy with more than the minimum guaranteed return, a guaranteed illustration so that you will have a worst-case scenario.
Secondly, a market evaluation will be conducted to determine if a newer policy could be more beneficial to you.
- How is your overall health in order to qualify for new coverage?
- Illustrations will be generated on new guaranteed premium policy for death benefit you require without using your policies cash surrender value.
- Illustrations will be generated on new guaranteed premium policy for the death benefit you require by transferring your using existing policies cash surrender value.
Can I Qualify for Coverage?
New policies are also medically underwritten, so it is important check into whether you can qualify for coverage. First, your general medical history is initially evaluated to determine which company may be best suited for your particular medical history. Most companies also require a brief insurance examination.
Okay, I qualify for new coverage, now what are my options?
Cash Out, Buy New Coverage
You may ask, so what is the cash surrender value?The cash surrender value of your life insurance policy is calculated by taking your cash value and subtracting any surrender charges, withdrawals, or loans against the policy.
So, your first option would be to keep your cash surrender values, and simply buy a new policy with a higher premiums.
Transfer using 1035 exchange rules for life insurance
Another option, would be to transfer your existing cash values by using a 1035 tax free exchange.
What is a 1035 Exchange? The IRS’s section 1035 exchange of life insurance falls under IRC section 1035. A section 1035 exchange occurs when the cash in an existing life insurance policy is transferred to a new policy, without incurring any tax.
If you follow the 1035 exchange rules, you can directly transfer the money from your old interest sensitive life insurance policy into a new insurance contract.
This strategy could lower your future premiums, and eliminate the potential taxes by surrendering your adjustable life insurance policy.
More importantly, the newer contract offers premiums and death benefits which are contractually guaranteed not to change. These new policies are often called guaranteed universal life insurance or GUL.
Now you need to decide the best option for you?
If your need for life insurance has changed, you might get by with keeping your adjustable life insurance active with a smaller face amount.
More likely, though, your choice will be either to boost the premiums on your current death benefit, or to shop for a new policy.
Today’s insurance buyers are lucky because 35 states have moved to adopt rules that would require more realistic sales illustrations. Universal life policies now include a worst-case scenario, and a projection based on interest rates halfway (midpoint) between current and the minimum rates.
So, this is good news for modern day applicants, who now have more transparency, cheaper premiums, and guaranteed lifetime coverage.
But policyholders of older adjustable life insurance may still be sitting on ticking time bombs.
You can utilize our universal life insurance calculator to obtain Universal Life Insurance Quotes for a guaranteed universal life insurance. You accomplish this by simply selecting the duration or age you wish to guarantee your coverage. (i.e age 90, 95, or 100).
Affordable Life USA can help you find a new life insurance policy from a network of 186 top life insurance companies. We work diligently with our clients to match their unique needs with a customized life insurance plan from highly rate insurance companies like:
- Banner Life
- American General
- Protective Life
- Lincoln National
We can assist you with your existing policy or help you find the best life insurance plan for new coverage. If you need our assistance because you have existing cash value in your policy, please do not hesitate to call us 1-877-249-1358.