Why Is My Life Insurance Coverage Expiring Earlier than I Expected?

The following article on universal life insurance is the first of a two-part series by Henry Montag, CFP, CLTC.

As a real estate property owner, you know that, when interest rates go up, your properties have a tendency to decline in value. Life insurance, however, is perceived to increase in value when rates increase, but that increase is short-lived if it is not guaranteed.

For example, if you purchased a permanent life insurance policy from the mid-1980s through 2003, there’s a 60% chance that you purchased a universal life insurance policy, which—unlike whole life insurance and term insurance—was not guaranteed to last for any length of time. As a result of lower sustained interest rates and neglect, approximately 25% of those non-guaranteed universal life insurance policies are beginning to expire prematurely.

How could this happen?

In the mid-1980s, when interest rates were in the 17-18% range, many insureds withdrew their accumulated cash values from their life insurance contracts, which were earning 3%, and transferred them into higher-yielding bank accounts and CDs, which were earning upwards of 15-16%. In order to stop this tremendous outflow of funds from the cash value accounts of life insurance policies, the insurance industry (E.F. Hutton 1982) developed a new product known as “universal life insurance.” While it paid a competitive interest rate, that rate was not guaranteed beyond the current calendar year. However, that fact was neither clearly communicated nor understood by the private owners and trustees when they purchased their life insurance policies.

How did subsequent interest rates affect the performance of policies?

Individuals incorrectly assumed that their life insurance policies would continue to earn the current higher interest rates each and every year. They didn’t realize that they should have been actively managing their policies and should have increased their premiums as interest rates began to decline over the years.

This combination of years of neglect and reduced interest rates have adversely impacted the performance and, therefore, the duration of their universal life insurance coverage.

Isn’t the insurance company/agent/broker monitoring the situation and supposed to prevent this from occurring?

No. The insurance company is merely required to issue the policy and to send out an annual statement containing all of the required information, which it does. The agent or broker is contracted with the insurance company. His or her sole responsibility is to market the insurance coverage and to distribute the insurance policy to the trustee/owner.

How can this happen when I paid my life insurance premium in full and on time?

Merely paying the scheduled premium was not enough. It’s the trustee’s or owner’s responsibility to manage the contract and to pay a sufficient premium to keep the contract in force for the balance of an insured’s lifetime.

The problem is that neither the private owner or trustee nor their advisors realized that, in a non-guaranteed universal life policy, the owner assumed 100% of the performance risk and the responsibility to manage their own policy.

Part 2 of this article will offer suggestions to prevent and correct this situation.

Author’s Note. You should gather your life insurance policies and, with the help of an independent broker, begin to better understand how long each policy you own will actually last, and at what cost. If you’d like to discuss, feel free to email me or call 516-695-4662.

Henry Montag is a Certified Financial Planner who has been in practice since 1976, with offices in Long Island, N.Y. He is a co-author of American Bar Association flagship book The Life Insurance Policy Crisis.