THE BLOG

Don't Let Your Life Insurance Die a Slow Death

03/05/2012 12:38 pm ET | Updated May 05, 2012
  • David Shucavage President, Carolina Estate Planners, LLC; co-founder and chairman, Rogo, LLC

Interest rates are lower than we have seen in many decades (and, if you believe the Fed, expected to stay there for years to come). Because of this, many life policies are not earning what they were projected to earn when the policies were set up. In fact, they run the risk of running out of money, which means suddenly your policy lapses, you have no coverage, and all the money you paid in for all those years is gone. Don't count on the company warning you of this; the warning may show up buried in a report that you routinely file without reading. This problem is more prevalent with the newer Universal Life policies than with the more traditional "Whole Life" policies.

Be proactive. If you have a Universal Life policy that is several years old, call the company that issued it and ask them to send you an "in-force illustration." When this arrives, examine it closely to see how long they expect the policy to remain in force. There is usually one table of "guaranteed" numbers that may run out in a few years which assumes that the policy both earns the minimum it is guaranteed and that the company raises rates to the maximum allowed by the contract (which, with increasing life expectancies companies seldom if ever do). It is unlikely the projections in this table will come to pass. The important table is the one labeled "current projections," which is what the company expects will happen. If this table shows that the policy will end, you need to take some action.

First talk to the company that issued it. Insurance companies usually have very competent people manning their help lines. They can verify if what you think is happening is true. You can also contact the agent who sold it, get an opinion from a different agent, or a financial advisor can help you go over your options.

There are a number of potential options: You can increase the premium you pay to make up for the drop in earnings or you can decrease the death benefit which will allow the cash in the policy to carry it further. The company should be able to run illustrations that will show you these options upon request. If you have built up significant cash value, you should evaluate moving the cash in the policy to a new policy that won't run out. Insurance costs have dropped over the years and a new policy may be significantly less expensive. If you move it to a new policy, there are a number that have new "no-lapse" riders that guarantee the death benefit will remain until you die. I have seen such a move make sense, even for clients who are over 70 years-old. As a last resort, you can cash it in and take the cash value rather than let it disappear.

This does not mean that Universal Life is a bad tool for your financial life. Properly configured, it can be used for much more than just protecting a family against the loss of a breadwinner: It can be used to build up tax advantaged savings for retirement without all the regulations of a Roth IRA, or used to transfer wealth to your heirs in a tax free manner. There are even policies where the death benefit can be used for long term care expenses, if needed. But, like any asset, it must be monitored and maintained.

Don't ignore the situation. The sooner you can identify the problem, the more options you will have. With all the excitement the stock market has brought us the last few years, life insurance seems like a relatively boring asset, and yet it can be essential to your family's bottom line. Be sure your policy is not dying a slow death.

www.carolinaestateplanners.com

YOU MAY LIKE