The article by John E. Girouard, is tittled “Retirement disaster looms for universal life policyholders” and I want to share to you so you´ll be informed.
The problem is buried in the fine print of universal life insurance policies, widely promoted since the 1980s as a new and improved version of the old-fashioned whole life insurance product our grandparents relied on as the surest way to save for retirement.
Based on my experience as a financial advisor, most people have no idea about what they’ve already lost and will discover in time that there was no “sure” in their insurance. Instead, the insurance companies shifted their risk on to to their policyholders.
The new and improved universal whole life policies were designed to take advantage of high interest rates and growth in stock prices to reduce premiums and boost cash values—the term for the built-in savings component of a life policy.
That was the same argument the financial industry used to kill off the defined-benefit pension plans our grandparents relied on in order to sell a new generation of savers on the idea that 401-Ks had the potential for higher returns. Those higher returns might have come true had the assumptions panned out, but instead they failed in the biggest possible way.
Universal policies became attractive because they offered a higher rate of return (the dividend) on the savings component than one could get from old-fashioned whole life. The trade-off was that, unlike old-fashioned whole life, the effective premiums for the universal policy death benefit rise as the policyholder ages.
The insurance companies set a minimum premium payment based on a policyholder’s age at the time, and then used prevailing returns on stocks and bonds to argue that there would be enough profit on investments to cover both the rising premiums and the guaranteed dividend on the cash value.
In theory, the stock market would pay the added premium costs and the dividends. Millions bought universal life policies on the basis of those projections.
But most skipped the fine print, signed the papers, and squirreled them away in their safe deposit boxes where they’ve been for decades.
And when that’s exhausted, they can require the policyholder to make up the difference in the death benefit premiums, or risk the policy expiring worthless.
Unlike the 1980s and 1990s when many universal policies were sold, today’s interest rates languish at historic lows. In the past 12 years the stock markets have suffered two historic collapses. For those reaching retirement age now—coupled with the housing bust and a crippled economy—this is a recipe for failure, and it’s starting to hit home.
Universal life policyholders who faithfully paid all the minimum premium payments all those years are discovering that the cash values that were to be their retirement nest eggs are nearly exhausted, and many are having to cough up huge payments just to keep the death benefit from lapsing.
Read the full article about universal life insurance clicking this link.