In my last Blog entry (If The Cost Of Insurance Goes This High, You Are Guaranteed To Have Some Angry Clients), I spoke about the issues with Universal Life (UL) policies in this low interest rate environment.
But UL policies aren’t the only policies affected - Whole Life policies also have been dramatically affected as dividend rates have continued to drop. Our Remediation Team is seeing problems on a frequent basis for Whole Life policies....especially Term Blended Whole Life policies.
Of all Permanent life products, Whole Life has the highest premiums. To lower the premium costs, Whole Life can be blended with a Term Life component, which future dividends convert over time to Paid-Up Whole Life coverage……if things go right
If things go wrong, there can be at least three issues:
- The policy may not mature for the full death benefit if the Term portion is not completely replaced by Paid-Up Insurance.
- The policy becomes cost prohibitive in later years because of the rising costs of the Term component not replaced by Paid-Up coverage. These costs are not guaranteed and increase with age.
- Out-of-Pocket Premiums required for a longer than planned period. These policies were often sold with a “vanishing premium” concept where the policy owner expects to pay a limited number of years and then dividends (not guaranteed) are used to pay the premium. Often, this does not occur as planned.
A recent Term Blend policy that our Remediation Team ran into had all three issues. A history of that policy:
- July of 1996: Policy was issued with a total death benefit of $1,200,000, consisting of a “base WL policy” of $250,000 and a Term component of $950,000. At policy issue, it was projected that the initial premium of just over $5,000 would only have to be paid for the first 10 policy years. Dividend crediting rate at issue was 8.25%.
- 2007: First known review of policy. The premium "vanish" did not to occur. The carrier reported 6 more years of premium (through policy year 16) would be needed until out of pocket contributions could stop. Dividend rate was 7.15%.
- 2011: The carrier projected premium contributions would be needed for 2 more years (through policy year 18.) Dividend rate was 6.75%.
- 2013: ITM took over policy management. A notice was received from carrier stating that premium will have to be paid until policy year 58, a full 40 years longer than projected just two years prior. Aaron Hanson, a Policy Remediation Specialist with ITM, contacted the carrier and confirmed this. Dividend rate currently is 5.05%.
Outcome: The initial projection of 10 years of out of pocket premium contributions turned into 58 years of actual contributions. It should also be noted:
- If full premium is not paid, the policy death benefit will begin to deteriorate, dropping as low as $250,000 in later years.
- Dividends could improve which would change the outcome for the better.
- In addition to a lower dividend rate, the cost of insurance in the Term component went up dramatically. Remember that in a blended policy, the Term costs are not guaranteed. In fact, in this policy the actual Term costs in policy year 17 were 260% higher than what was projected.
Among the options the Trustee has:
- Pay full premium for 40 more years and continue with full death benefit.
- Discontinue premium payment and hope death occurs before the policy deteriorates.
- Surrender the policy for cash value.
- Receive a guaranteed Paid-Up policy for an amount much less than existing death benefit.
- Shop for a new/better policy.
Today, the management of life insurance has challenges never seen before. If you are a Trustee of life insurance policies, now is not the time to take your eyes off of your portfolio.
ITM is sponsoring a free webinar on September 17th that will cover special problems like this in greater detail. Visit our website at www.youritm.com for more information and to register.