How Universal Life Insurance Premium Increases Are Affecting Some Retirees
As steep increases on certain universal life insurance policy premiums continue to attract nationwide attention, one segment of the population in particular is feeling the impact of these fast-rising costs.
Some retirees or soon-to-be retirees, many of whom purchased their universal life insurance policies in the 1980s, are now facing increases on their premiums in the double-digit percentages. In some instances, this amounts to thousands of dollars a year—just to keep the death benefit from lapsing, while the “nest egg” cash value component of the policy is nearly exhausted.
Why the trouble? Universal life policies were designed to take advantage of the soaring interest rates of the 1980s. As a Wall Street Journal article explains, “These policies accounted for more than 25 percent of all individual life-insurance sales for much of the 1980s, when the 10-year Treasury yield peaked at 15 percent. While the 10-year Treasury is off its mid-2012 low of 1.404%, any big increase will come too late for many who bought policies in the 1980s, financial advisers say.”
Under a universal life contract, the buyer generally deposits money—in the form of a monthly, quarterly, or annual premium—into the policy, tax deferred. The insurer then takes a regular deduction for administrative fees and expenses, including the cost of the death benefit (called the “cost of insurance”), and the rest of the money remains in a cash-value account. That money is supposed to earn interest to help pay some, or all, of the future costs of the policy.
As long as there is a positive balance in the cash account, the policy stays in force. But the annual cost of the death benefit typically rises as the holder ages, to reflect higher chances of death. If the cash-value account isn’t earning enough interest to cover the rising cost of insurance, the insurer may increase the premium payment required by the policyholder to keep the policy in good standing.
This is exactly what has been happening to many policyholders over the past decade. According to a Forbes article, “If the projected investment returns fail to materialize, the insurance company can make up the difference by reducing the cash value—taking money out of your cash value savings account—right down to zero, if necessary. And when that’s exhausted, they can require the policyholder to make up the difference in the death benefit premiums, or risk the policy expiring worthless.”
These poor-performing policies, combined with the separate cost-of-insurance increases some insurers have imposed on policyholders (read more about Why Some Policyholders Are Suing Their Universal Life Insurers) and past economic downturns, are causing financial hardship for the many retirees who were planning to use their universal life policy as funding for their retirement years.
What Retirees Can Do Now
If you have experienced steep increases in your universal life policy premium, you have do have options. Consult our guide to Taking Action: What Universal Life Policyholders Can Do Now. If you have experienced excessive overcharges and suspect the increase may violate the terms of your contract, you may want to consider taking legal action against your insurer. Consult your trusted legal advisor or an experienced insurance litigation firm to determine whether this course of action is right for you.
Vinas and Deluca is deeply invested in the universal life insurance fraud matter and are available to answer any questions you have about your personal experience with overcharges or potentially fraudulent premium increases.
We are currently working with Rivero Mestre to prosecute cost of insurance increase cases against Principal Life Insurance Company. You can find a copy of the complaint here. If you or someone you love has a policy with Principal and has seen their cost of insurance rates increase dramatically, please give us a call.