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A Universal Life Insurance Can Hold a Dire Problem

· Business

If you are involved at present in a tussle with your life insurer over the escalating costs of their universal life premiums, you may need this article like a shot in the arm.

Within the past couple of years, scores of universal life insurance policyholders have been adversely affected by the double-digit premium increases from firms such as Axa Equitable, Transamerica and Voya Financial. And more premium increases, particularly to long-time policyholders, are still coming.

Universal life was developed in the 1970s and accounted for one-fourth of all of life insurance policies bought from the ‘80s to the ‘90s. This development will affect tens of millions of people who will have to eventually deal with huge premium increases.

What is Universal Life Insurance?

What is happening? To fully understand, let us start from the beginning.

If you are not familiar with universal life, it is a permanent (for as long as you pay the premiums promptly) and rather flexible, crossbreed life insurance policy that mixes the sensibly affordable properties of term insurance with a savings component similar to whole life insurance.

A universal life insurance policy provides holders a “cash value” savings account that brings them tax-free interest, including the flexibility to modify premiums and to raise or reduce death benefits. The policy’s investment account earns cash when interest rates rise but can also deplete it when rates dip low, as in the present. During the ‘80s and the '90s, the most accepted guaranteed rate in universal life policies was 4%; although some insurers offered more, says James Hunt of Consumer Federation of America.

Premium Increases of More than 200%

In the past two years, numerous universal life policyholders have been warned that their insurers are hiding in the fine print of their contracts their option to substantially raise their long-steady monthly premiums. And so, more than a few customers have suffered hikes of more than 200%.

It means that some people who are aged from 60 to 80 or more, many of whom receive fixed salaries, are being told to pay up amounts ranging from a few hundred dollars to thousands of additional dollars monthly for policies they bought many, many years back. The consequence of not doing so will be the lapse of their policy or the surrender of the policy and withdrawing any cash value remaining (with some possible taxes on that value). In any case, no death-benefit will be in sight.

An 82-year-old retiree, Nicholas Vertullo of Long-Island, told The Wall Street Journal last August that his premiums for 3 universal life policies more than 200% hikes, reaching a staggering $30,000 yearly premiums (for a death-benefit of $500,000). And he had promptly paid premiums for about 3 decades. We wonder where all the goodwill in return for all the years of loyalty shown went.

Why the Unimaginable Rise of Universal Life Premiums?

How could this thing happen -- and why is it happening at all?

It is because of the economy, according to life insurers. In the 1980s, interest rates gradually declined and suddenly plunged during the 2008 recession as the Federal Reserve took some measures to enhance the economic situation by providing easy access to borrowed money. However, low interest rates adversely affected majority of investors, life insurers included. This led to minimal returns for insurers who invested their money heavily.

As a result, life insurers started protecting their investments and hiked premiums on policies bought in the not-so-recent past. (Many of the policies offered in recent years are tied to the stock market and offer no guaranteed returns of a minimum of 4%.)

How Policyholders and Insurers Respond

Justifiably, many universal life policyholders who got assurance that their premiums would remain fixed are not happy about all this development. According to The New York Times, a dozen lawsuits have been filed against insurers who had sold such policies.

Feeling some pressure from public opinion, some insurers are said to have reimbursed, in part, some determined holders who had complained after they were being required to drop their policies. From the looks of it, there seems to be no positive outcome to this trend in the insurance sector.

Safeguarding the Rights of Universal Life Policyholders

Steps are being made by several regulators and consumer advocates to seek protection for universal life policyholders.

A recent by the New York Department of Financial Services seeks to require insurers to inform the agency not more than 120 days before instituting any “adverse change” in “non-guaranteed elements of an in-force life insurance or annuity policy.” The rule likewise requires insurers to inform policyholders not more than 60 days before any change. The regulation may serve as a precedent regulation for other state insurance agencies.

Moreover, in 2016, the Consumer Federation of America sent a letter to all state insurance commissioners requiring them to evaluate and prevent any unjust price hikes being implemented on holders of universal life policies.

In case you are one of those who has an older universal life policy and have not experienced any premium hike, expect it to come soon. The better approach is to become proactive and find out ways to avoid being hit by an adverse increase.

Recommendations for Longtime Universal Life Customers

Be prepared by taking the following steps:

  • Get in touch with your insurer and ask the exact value of your policy’s cash reserves. Based on the amount you have accumulated from the start, you might be in a position to weather any premium hikes in the future.
  • As an alternative, try asking your insurer to reduce the policy’s death benefit, and subsequently, your premiums.
  • Ask if you can change your policies. Perhaps, they have other policies they can offer you. If you are in your 60s or more, however, it might be quite difficult to get approval for a life insurance policy.
  • Failing all else, find a life insurance firm or agent who could purchase your policy in exchange for getting the death benefit in the future.
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