Every month billions of dollars in life insurance death benefits expire due to declining interest rates on interest-sensitive life insurance products. The product I’m talking about goes by a few different names: 1. Universal Life Insurance 2. Premium Flexible Life Insurance 3. Premium Adjustable Life Insurance.
One would think that as long as I pay the premium, the policy will remain in force. Unfortunately, that’s not how it works for these types of policies. The premium due is calculated and based on the interest rate credited. If the interest rate credited to your policy is lower than the interest rate illustrated when you purchased the policy, the premium must be increased.
Universal Life is a combination of traditional whole life and term life. The best of both worlds. It has the ability for the policy to build cash value and not have to pay the high costs of lifetime premiums.
Universal Life Insurance is different from Traditional Whole Life Insurance. Instead of crediting a dividend to the policy, Universal Life credits an interest rate to the policy. If interest rates were 8% when you bought your life insurance policy and rates are 4% today, you would have to pay a much higher premium to make up for the lost interest gain on your cash value; otherwise, its cash value will decrease. and one day make your life insurance policy lapse.
The best way to know if your policy is going to lapse unexpectedly is to request a current illustration from your insurer.
Okay, order a live illustration, now what? The first thing you should do is contact the agent who sold you the policy in the first place and ask them to explain it to you. I would also ask this agent why he didn’t do an annual review with you to keep your policy in good standing. Second, you should find an impartial “third party” to review the report with you.
When requesting a current illustration, it is best to always request two illustrations. The first would be to use your current premium and the current cost of insurance and current interest rates. The second illustration would be to ask the insurance company to resolve the extension of the premium coverage up to 100 years.
With these two examples in place, we can determine if it is in your financial best interest to keep your current policy or to get rid of it and purchase a new policy.