If you own a whole life, universal life, or any other kind of cash-value, permanent life insurance, this is a topic you need to bring up with your advisor. Particularly if the policy was put in place back in the high-interest rate environment of the 1980s.
I’ve received a number of calls from people looking for help and advice; they thought their premiums were set in stone (or even paid up), their advisor has long since retired or left the business, and they just got a letter from the insurance company saying if they want to keep their insurance in force they need to add a big lump sum of cash, and likely increase (or start again) their regular premium payments! For many of these people, their plans were made 20 or 30 years ago, they are now much older and on retirement income, maybe uninsurable or at best facing drastically increased costs for new coverage. They thought they had done the responsible thing, and now everything is falling apart.
For almost every person in this situation, their options are not great. Come up with more money, significantly reduce their coverage, or cancel their plan entirely after paying into it for years. It’s heart-breaking, and being told “it was in your contract” is not exactly comforting.
Have you ever discovered a bank entry error in your checking account register, resulting in $100 or $1,000 less than what it should be? Imagine how much worse it would be if your client’s $1,000,000 life insurance policy’s death benefit was suddenly unavailable to a spouse or child due to a technicality. Unfortunately, as a result of sustained low interest rates over the last twenty years, as well as policy owner and trustee inattention to performance monitoring, approximately 35 percent of existing non-guaranteed life insurance contracts are expected to expire prior to an insured’s normal life expectancy.
Very few lay people and professionals are aware that their life insurance contracts can expire prior to their lifetime. Clients and trustees often incorrectly assume that either the agent or the insurance company is monitoring their contracts to make sure they will always remain in force, but that’s not true. As a matter of fact, it would be in the insurance company’s best financial interest if, after all those years of paying the premium, it became exorbitantly expensive to maintain the contract and the death benefit had to be reduced or the policy surrendered. According to Donald Walters, General Counsel for the Insurance Marketplace Standards Association, (IMSA), “While insurers have not publicized the issue, there is a growing concern in the industry about lapsing universal life policies.” Carriers and agents have no obligation to monitor policy performance relative to original performance expectations. Carriers are merely required to send a scheduled premium billing and an annual policy value statement. It is solely the responsibility of the policy owner to review the policy value statement and determine the needed premium adjustment to achieve originally illustrated policy values.