Is Your Life Insurance Policy Going to Lapse?
If you were one of many people who bought a universal life insurance plan in the 1980’s or 90’s, you might want to revisit your policy. According to the ABC affiliate out of Cedar Rapids, Iowa, KCRG, there is a very real possibility that your policy could lapse, leaving you and your loved ones empty handed. The article, “Your Life Insurance Policy Could Expire Before You Do,” by George C. Ford, blames the bad stock market and extremely low interest rates for the collapse. When policies were purchased in this time frame, the prime rate was hovering around 20%, which made universal life a great option for insurance and investments, as the product was advertised with a tax-free or tax-deferred cash buildup. Currently rates have hit an all time low, around 4%, making it impossible for monthly premiums to earn enough interest or returns to maintain the death benefit, and insurers are dipping into the cash supply to make up the difference. The result is a worthless policy long before you ever need it.
Loren Coppock, managing director at TrueNorth Cos., believes that as many as 50% of policies purchased in the late 80’s and early 90’s will lapse prematurely, resulting in a cash value of $0. There will no longer be a death benefit and the insurer legally gets to keep all of the paid premiums. And worse yet, insurance companies are not required to make policyholders aware of the situation. Coppock claims that many policyholders don’t examine their statements closely enough and are often shocked when they receive notice that their policy is about to lapse. At this point, the cash value is so low, there are very few options. And while the stock market and interest rates are taking most of the heat, experts believe there are other factors that are contributing to this problem. People are living longer, for one, which lowers the cost of insurance. But this usually only applies to newer accounts, causing insurers to take more cash to maintain the older, more expensive policies. Another issue is that premiums aren’t always recalculated with the change in interest rates. When the 20% rate dropped significantly, the premiums didn’t reflect this and therefore were too low to sustain the death benefit.
If you find yourself in this precarious situation before your policy has lapsed, there are options to make the best of what’s left. You can sell the policy (often for much more than the cash worth) to a viatical settlement company, who in turn sells to hedge funds and other investors who are able to cover the difference and receive the full death benefit. Additionally, you can cash out and purchase a new policy with a competing company. Often the company who you have the life insurance policy with will offer a replacement policy with a guaranteed death benefit, as a way to keep you from cashing out and taking your money elsewhere. The situation is obviously undesirable but is occurring all over the country. The best way to protect yourself is to pay attention to your statements, as you are your own best advocate.