How many blog posts and articles have I written about the catastrophic meltdown of traditional universal life insurance policies? I have sought industry assistance in nailing down approximately what percentage of the total number of UL’s are in danger of imploding.
I was dumbfounded, sort of! None of the companies I spoke with said they had any idea, not even a wild guess, at the industry percentage of policies that were based on assumptions rather than guarantees. In fact they indicated that they didn’t believe that they could even come up with those kind of figures for the business on their own company books. That was their disclaimer anyway….right before they acknowledged that it was likely a huge problem.
Furthermore, not one company had a plan or program in place to try to determine the extent of the problem in order to give policy owners more of a heads up. The normal practice is to send annual reviews that mean nothing to the average policy owner. Then when things really go sour they send them a premium notice saying that it will take a lot more money than they’ve been paying in order to keep the policy in force. Most companies said it was the job of the agent who should be doing annual reviews and keeping the client abreast of the health of their policy.
Well, that’s a real problem since a very small percentage of agents ever last more than a year in the business. And for those that last long enough to actually stay around and service their clients, do you really think they, the agents that sold under funded, doomed to fail, UL’s are really going to call their clients and tell them that “you’ve just blown tens of thousands of dollars on my last idea, but I have a new plan you should try?”
That is about as likely to happen as having a company write a letter to all of its’ UL customers saying that there is an inherent problem with the majority of their UL policies and they highly recommend that you get your policy evaluated soon. Morally and ethically that is exactly what should happen.
Bottom line. It’s an industry wide problem. It’s an insidious problem in that policies, because of low mortality charges in the first years, can hang together for a long time before the disintegration begins. It’s enormously harmful to those that lose everything they’ve put into a policy, but even more so if they lose the policy at a point where they are no longer insurable.
If you have a cash value policy, whether universal life, variable universal life or whole life. have a reputable independent agent review that policy with you soon.
Dear Ed:
I’ve followed with interest your blog, particularly your coverage of outdated ULs doomed to blow up. It brings to mind the deeper issue that is common to all ULs: that they are interest rate sensitive. A rise in interest rates should reward UL policyholders just as decline in interest rates hurt the said policies. My question has always been: to what index is the UL rate of a given policy tied to, and exactly how? I’ve never gotten a straight answer on that. Ofcourse a guarantee on the bottom end has become the standard for the UL industry in recent years. But what limit has that put on the top end? From all I can see the interest rates on ULs are set and adjusted arbitrarily by the companies these days. I wonder what you know about this subject.
Straight answers are hard to come by, especially when you are asking about a product that is in real trouble. The guarantee on the bottom side has been there forever. My issue with that has been that in far too many cases the bottom side guarantee isn’t enough to keep the policy viable for life as many people are led to believe. The top end rates are capped in different ways depending on the product and the company. One of the most recent products, the indexed UL, gives you the choice of how to index from several different options. The problem I see is that the agents are not qualified to recommend which index to use and all of the choices are capped in favor of the company. If I understand what you’re asking, the answer is that the chance of having an “over performing” UL is slim to none.
Yeah, and I think Slim just left town. I think many of these new No Lapse Guaranteed products will play out like pseudo-whole life policies that look more like lifetime term policies…if we’re lucky. Regardless of interest rates.
Personally I think those who jumped on the no lapse guarantees made a smart move. A lot of companies have already pulled their competitive no lapse products out of the conversion option and I believe we will see rate increases or products pulled in the next few years as the companies come to grips with the size of reserves they have to carry. What’s in force will be contractually guaranteed. There are some awesome deals out there and for those who really believe they need permanent coverage (estate protection mostly) I highly recommend they look at moving to a no lapse product.