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Could You Have More Life Than Your Life Insurance?

By John Dietz - Email Editor

Date : Oct 31, 2006

Dear Subscriber:

Today I would like to tackle a topic that is not very popular. Before you make the big sigh and shut off your gray matter, consider how you can save a ton by revisiting the cost of your insurances every so often, and specifically for this article, your life insurance. It’s not sexy, nor is it interesting, but it may be urgent to take a look see.

While we in the U.S. have not exceeded Japan as the populous that lives the longest on planet Earth, it would be fair to say that we in the U.S. are outliving our insurance policies. Most life insurance policies were designed (or at least sold to us) for a much shorter life span than we are currently living. Medical breakthroughs and technology are advancing at such a rapid pace that we are now living beyond the span of our insurance policies.

It‘s time to dust off the old policy and take a look, and here is why: You originally bought a policy probably based on higher interest rates and/or higher portfolio returns that have since all but evaporated. The fact is whether you purchased whole life, universal life, or variable life, you are probably in the same boat.

What is happening is that policy owners end up not being able or willing to make up big shortfalls, and therefore, end up surrendering their policy.

Most insurance agents assumed death would occur at younger ages when they structured life insurance policies, and they also assumed higher interest rates in universal policies, higher after expense returns in variable life, and higher dividends in permanent policies.

The insurance agents made the assumption that policies would “carry” themselves after paying a certain premium for a stated period of years. These assumptions were created when interest rates and dividends were at higher than present levels. Policies sold under these strategies, as you might have guessed, are not working out.

A fair amount of policies bought under high dividend or interest rate assumptions will severely disappoint their owners. The reason is that many of the calculations in current policies assumed returns of 7 or 8 percent. In many cases, more money has to be put into these policies to counter the prior erroneous assumptions and to assure that the policy “lasts” until the insured dies even beyond his/her 90s.

What most insurance owners don’t realize about their life insurance (not withstanding that many have actually looked at original proposals) is that the additional sums required by these policies to stay in force past an age of say 90 or 95 may be horrific. For example, an owner of a million dollar policy which runs out of money at the insured’s age of 91, (due to lower interest rates than originally projected) may have to put in more (much more) than $100,000 a year just to keep the policy in force. Many people will have little choice but to “walk away” from their insurance policies at the discovery. And it is even possible that all the cash values would have “vanished” at around the time of “discovery.”

This is simply because two original assumptions in structuring these policies were far off the mark. Interest rates and portfolio returns have declined precipitously, while we are living longer. In funding these policies, agents looked at death occurring generally before age 95. They assumed interest rates might have ranged between 6-8 percent and not 4-6 percent. While one of these factors can adversely affect the premiums required in the original purchase of life insurance, both together can be a real problem.

Wouldn’t living longer lead to higher dividend rates in many of these older policies...or lower insurance costs (mortality cost savings) in older universal or variable policies, making them perform better? One would think so, but it hasn’t materialized that way and probably won’t.

Why? The insurance companies have come out with new policies in response to competitive pressures. These policies cost less than the old ones. And have better contractual guarantees. In other words, many insurance companies have been forced by the competition to create cheaper and better new policies. Instead of passing their mortality savings on to their entire group of insureds who are making their old in-force policies cheaper, they created cheaper, new policies that the old policy holders would have to re-apply for. If these folks learn about this, and can show good “evidence of insurability,” (a clean medical record since purchasing their old policy) they can switch. If not, they are stuck in their older more expensive contracts.

Currently, the savvy, healthiest insureds are switching to the better policies (because they can), while the less than optimal insureds may have little choice but to stay with their old policies. Unfortunately, this means that the mortality costs in the old policies are bound to increase. Dividends will decrease, and earlier projections, which have not held up in the past due to lower interest rates, may break down even further. This everpresent downward spiral will take many policyholders by surprise, especially if their focus on the issue occurs after an adverse health event. At such a time, they may have little choice but to stay with their old inefficient policy.

Everyone who has purchased a life insurance policy in the last fifteen years, and wants to hold on to it, really needs to study this issue. This includes fiduciaries, trustees, heads of families, and business owners—that is everyone who oversees a life insurance portfolio.

One successful approach that is being used is to revisit these older policies and bring current the interest rate and mortality assumptions. The results should then be compared to the original projections that were furnished to the insured when the policy was purchased. There are two real considerations. What are the projected expenses going forward in each policy? Also, what interest rate is needed to meet, at the least, those projected internal costs, so that the policy can be kept in force until age 95 or 100?

The big question is, as in many cases, what if the interest rate required to keep the policy to age 95 or 100 is much higher than current rates so that without additional (and often, substantial) deposits, the policy “implodes” prior to death? What do you do then? And more importantly, what do you do now to mitigate this problem?

The answers to these questions are very specific to one’s personal situation. The facts needed to understand the gravity of the situation (which many insurance owners don’t even know about) are not too difficult to attain. They lay in the careful analysis of available ledgers and rate tables.

The consequences of leaving well enough alone will most likely lead to many disappointments and heartaches for families and potential beneficiaries.

If you have an interest in having one of our educational board members analyze the available ledger and rate tables, please contact us at info@trustmakers.com.

Looks like it's fall house cleaning time...at least where your life insurance is concerned.

Until next time,

John

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