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Henry Montag, CFP, CLTC, is a guest author for the Russo Law Group P.C. blog.
If you purchased your Life Insurance anytime from the mid 80’s through 2005 there’s a 45% chance that the type of life Insurance you purchased was a Flexible Premium Life Insurance contract that unlike their more expensive predecessor Whole Life Insurance was not guaranteed to last for the rest of your life.
HOW DID THAT HAPPEN?
In the mid 80’s when Interest rates were in the 17-18% range, many people withdrew their cash value accumulations in their life insurance contracts that were earning 3-4% and transferred them into banks and CD’s. In order to stop this tremendous outflow of money from the cash value accounts of life insurance policies to the banks, the Insurance Industry came out with a new line of products called Flexible Premium life Insurance. One of the most common types of life Insurance within this category was Universal Life Ins, which paid a higher interest rate but the rate was not fixed nor guaranteed as the performance was tied into the performance of the current interest rate. So while everyone was concentrating on the interest rate no one spoke about the fact that the contract was Not guaranteed and that the Insd assumed 100% of the performance risk of the life Insurance policy.
HOW DID RATES AFFECT THE PERFORMANCE OF THE CONTRACTS?
Since interest rates were substantially higher when these contracts were first taken out in the mid 1980’s and early 1990’s people assumed that their contracts would earn significantly higher interest rates. However when the interest rates began declining neither the Insured’s nor the owners of the life Insurance policies adjusted their assumptions downward nor did they pay a higher premium to the life Insurance company as they should have to make up for the reduced earnings.
So after years of reduced interest rates and years of neglect on the part of the owners or trustees many of their contracts began expiring prematurely. The problem stemmed from the fact that the owners of these contracts weren’t aware that their life Insurance should have been treated as a “Buy and Manage” asset just like any of their other stock and bond investment portfolios. Instead they treated it as a “Buy and Hold” asset that they put in the proverbial bottom left hand drawer not to be looked at. And since their policy wasn’t evaluated, they weren’t aware that they should have paid a higher annual premium to the Insurance Company to make up for the shortfall in earnings. As a result of reduced interest rates and neglect approximately 23% of Individuals life Insurance contracts are now expiring prematurely while the Insured’s are in their late 80’s.
ISN’T THE INS COMPANY/AGENT MONITORING SITUATION TO PREVENT THIS?
Many people are under that same misimpression however the agent is contracted with and obligated to the Insurance Company Not to the Insured. It’s the agent’s/broker’s job to merely distribute the Insurance policy to its customers. It’s the Insurance Company’s job to send the owner an annual statement. It’s the Insureds’/trustees’ job to manage the Life Insurance contract and make certain that there’s enough premium being paid to keep the Insurance in force until well past a person’s life expectancy. The Insurance Company is actually in a better financial situation when an Insured after paying 20-25 years of premium realizes that it wasn’t sufficient and he/she now has to pay a significantly higher premium to keep their life Insurance coverage in force, and they decide they won’t or can’t afford to do so.
HOW CAN THIS HAPPEN SINCE I PAID MY PREMIUM IN FULL AND ON TIME?
As long as the Insurance Company does what it is legally required to do, which is to deliver the annual statements to the Insured’s at their annual anniversary date their obligation is complete. The Insurance Company is actually quite happy when an Insured that’s been paying their premium for all those years, realizes that it’s too expensive to keep their contract in force as they now have to make up for all those years of insufficient have to now pay a significantly allow their life Insurance policy to expire early as the Insurance Company will Not have to pay a death benefit.
WHAT CAN I DO TO LEARN MORE?
You can click on the attached links to read more about this situation. Most important is to become aware of your particular situation to see if your life Insurance contract may be one of the 45% affected. You or your trustee can’t fix a situation unless you’re first made aware that there’s a problem.
WHAT CAN I DO TO PREVENT MY CONTRACT FROM EXPIRING PREMATURELY?
It’s important that you obtain an independent performance evaluation regarding your particular life Insurance policy to determine whether you’re affected and if so how much longer you’re current contract will last based on the current premium you’re paying. The sooner you find out what your situation the more options you’ll have available to you.
WHAT TYPES OF OPTIONS WILL I HAVE AVAILABLE?
You may have to pay a higher premium to keep the same death benefit you thought you had in force to your mid 90’s
You may be able to reduce the death benefit to keep the reduced coverage in force until your mid 90’s
You may depending on your health, be able to purchase a new life Insurance contract with guarantees that last until your mid 90’s for a similar cost even though you’re older as a result of reduced costs for new contracts
You may be able to sell your life Insurance contract which is known as a life settlement where you may receive more money than if you just returned the Insurance Company back to the Insurance Company.
Link for more information NYSSCPA Tax Stringer Aug 2017
Link to NYSSCPA NYSSCPA Tax Stringer Aug 2017
Henry Montag is an independent Certified Financial Planner in practice since 1976. He is a principal of the TOLI Center East, which provides independent fee-based performance evaluation for trust owned life insurance for private trustees and their advisers. He has had articles published by the New York State Bar Association and the New York State Society of CPAs. He has lectured extensively on the proper utilization of financial products to protect and preserve assets to the NYSBA, the NYSSCPA, the American Institute of CPAs and the National Conference of CPA Practitioners. He has been a source for The Wall Street Journal, Investor’s Business Daily, Investment News, and Newsday, and has recently co-authored a book for the American Bar Association, “The Life Insurance Policy Crisis.”