A Case For Guarantees And A Real Budget!

I had this comment on a post the other day from Richard. “Just got off the phone with Lincoln and AM Family Insurance. No conversions on universal life policies. Ours are 15-19 years old, while there is no termination fees, if we cashed, they advise we to treat policies as term policies and make no more premium payments (they take payments from built up cash value) ours expire when we are 64 years. Such is life! We are in our 50?s and both unemployed and looking for ways to cut back.”

First let me address what I think is going to be a growing confusion in products starting right now. Before there was term. Term didn’t have cash value but had a guaranteed level premium for a certain period (term) and almost always had a conversion privilege that allowed the insured to convert all or part of the policy to some permanent plan in the future without evidence of insurability.

Then there was universal life that could have a guaranteed level premium and death benefit for life, but could also stake its’ future on assumptions. Assumptions are based on the company, their investments, interest rates and mortality experience being as good as or better than they were when the policy was put in force. There have certainly been periods of time when assumptions worked just fine. The last three years weren’t part of those periods so if your policy was based on assumed values, even if it had been performing better than assumed when it was put in force, it could be headed for a meltdown such as that described by Richard at the beginning of this post. He and his wife assumed they would have coverage for life and they also assumed they could afford to keep their policy in force during bad times. With both unemployed and a policy with values in a downward spiral, both assumptions are wrong.

Richard says the company is now telling them to leave the cash value with the company and let it go until it runs out at age 64. My advice, if their health is good enough would be to switch to a term policy. Yes they would have to apply for it and be approved, but it would be cheap in comparison to what they were pay for their UL. They can then use the cash from the UL to help them through this rough period.

Now comes on the scene the “Term/UL”. It has the same guarantees of a term policy. A level death benefit and level premium for a set period. It doesn’t have a conversion option in the sense that it can be converted at any time, but it does have a very competitive extended term option that is fully guaranteed. The extension may not go out as far as most of us would like it, but it beats needing insurance and not having it.

Bottom line. Think things through before you buy. If it’s not guaranteed, don’t even consider it. If it won’t fit into your budget during hard times, don’t do it. Build a plan that you can count on and make sure the agent you buy it from can show you in the policy exactly why you can count on it.