If you own a Universal Life Policy, there is a possibility that the policy is not doing what you had intended. Even worse, the policy may be imploding on you. In a previous article “Universal Life Insurance – A Ticking Time Bomb” I discussed how and why such a policy may be failing. Don’t worry, Universal Life policies are actually a very strategic tool, and even those that are performing poorly can be fixed.
There are several ways in which a life insurance policy may be failing you, but for now let’s focus on Universal Life policies that are imploding. By imploding, I am referring to policies that are seeing an increase in premiums in order to keep the policy in force. In other words, if you maintain the current premium level, your policy will lapse in X number of years. Usually “X number of years” is too soon.
There are several main options you can take to correct an imploding Universal Life policy:
Adjust the premiums higher
Add a lump sum of money
Adjust the death benefit
Replace the policy
Adjusting Premiums: The first step to handling this situation is to determine what it will take to get the policy back on track. Call up the company and ask for this specific information. They should be able to tell you the premiums required to keep the policy in force for your desired time period.
For instance, let’s assume Peter, a 65 year old, wanted his Universal Life policy to last at least through his 105th birthday. Let’s also assume that his current premium of $145 per month will result in the policy lapsing in 6 years at age 71. This means that at 71, Peter will be faced with a large premium increase or the policy will lapse. Peter does not want this scenario, so he calls his insurance company and they tell Peter that if he pays $273 per month going forward, the policy will remain in force through age 105.
In this example, the premiums needed to keep the policy in force through the desired time-line are almost double the current amount. Although this is a financial burden, it may be the most efficient way to maintain the insurance coverage you need.
Add a lump sum of money: Like increasing your premiums, you can get your Universal Life policy back on track with a cash infusion. This can be accomplish by perhaps paying off a loan you have taken on the policy or by just adding a lump sum of cash to the policy. The increased cash value can then be used to offset future premiums, allowing you to maintain the policy in force for your desired timeline. Keep in mind that over-funding or adding extra money to a life insurance policy can lead to tax implications that must also be considered.
Adjust the death benefit: The cost of the life insurance is partially related to the amount of coverage or death benefit. So, if you find your policy is imploding and do not want to increase your premiums to keep the policy in force, you can consider lowering the face amount, or death benefit, of the policy. By working with the insurance company, you can potentially find a death benefit amount that results in a more appropriate premium amount. However, keep in mind that while it may be easy to lower your death benefit, should you want to raise it in the future, it won’t be as easy. To raise the death benefit to prior levels will most likely require a new round of underwriting to prove you are in good health.
Replace the policy: If you have determined that the cost of keeping your current policy in force is too high, but you want to maintain the amount of coverage, you can look at replacing the policy with a new one. Before you consider replacing a life insurance policy, keep in mind that it isn’t as simple as calling a different company and asking to switch. Life insurance replacements can be tricky and should be handled with care.
The primary rule of replacing a life insurance policy is – don’t stop payments or cancel your current policy. While you might be shown a quote for a new policy that is more favorable, until that new policy is issued, you don’t have anything. More often than not, people who attempt to replace their current policies wind up sticking with what they have. If the new policy doesn’t work out, you don’t want to find yourself without any coverage.
Keep in mind that when it comes to getting quotes, an insurance company often does not care about your existing policy (although some carriers do have programs that will honor existing policy ratings). What you are fundamentally doing is obtaining a new life insurance policy. With that comes a new set of underwriting requirements- medical tests and medical record reviews. Just because you qualified as preferred when you obtained your current life insurance policy 10 years ago does not mean you would qualify for a preferred rating now. If your health situation has deteriorated since your first policy was issued, it may be difficult to find a reasonably priced replacement.
Another important consideration is the cash value of your existing policy. Usually if your policy is imploding, your cash value is minimal to none. If there is cash value when replacing a policy, you must determine what to do with it. If you replace the policy, you can take the cash and put it in your pocket, but there may be tax implications of such a move. An alternative is known as a 1035 exchange. 1035 is a reference to the IRS code for handling cash values in life insurance exchanges. You can take cash value from one life insurance policy and transfer it to another life insurance policy without the tax penalties you might experience if you simply cashed out the policy.
When it comes to replacements, many people are surprised to find that they can improve their life insurance situation. Between the overall decrease in life insurance prices over the years, and the relatively high costs of poorly managed policies that are imploding, it is often wise to review options.
Regardless of how you handle an imploding Universal Life policy, it is important to stay on top of it. Complacency has been the downfall of many good intentions with life insurance. If you review your policy regularly, you will be in better control and most likely more satisfied with the results. If it has been a few years or decades since you reviewed your policy with a professional, now is a good time to be proactive.
Daniel J. Wendol is the owner of the Dolphin Financial Group. He is a CERTIFIED FINANCIAL PLANNER™, licensed as an Investment Advisor Representative, and also has an insurance license. He combines the investing and insurance worlds with a focus on retirement. ‘
Each week Dan hosts Dolphin Financial Radio, a podcast about the wide-ranging issues people face leading up to and through retirement.
Dolphin Financial Group acts in a fiduciary capacity to help people make life’s toughest financial decisions.