27, Nov, 2020

Universal Life Insurance | Problems With Lapsing Policies

Universal Life Insurance

It is uncommon that a month goes with the aid of in which I don’t listen from a person approximately a problem, they’re having with their life insurance. Problems usually get up with universal existence rules, that had been bought 10 or more years in the past. However these days we have seen a surprisingly new sort of everyday existence called “indexed time-honored lifestyles” rules being sold. If designed improperly, those rules may additionally doubtlessly be putting in for future troubles. Universal life is a type of insurance coverage that, if designed and controlled properly, can be the most strategic lifestyles coverage coverage that you can personal. However this kind of policy may want to grow to be a monetary nightmare if now not treated efficaciously.

Universal Life Insurance

In our experience a universal life Insurance policy is sometimes more appropriate for clients than the typical Term life or Whole Life policies. The strategies we use and situations, we deal with may provide you with a better understanding of the universal life policies and how to make them work for you. If you currently own a universal life policy also known as “ULs” or are contemplating the purchase of this type of life insurance, there are certain concepts you must consider. You need to make sure that is working for you.

Is it still meeting the objectives, you wanted when it was originally purchased and have those objectives changed? For instance, when we run into existing universal life policies, the conversation usually begins with a client asking questions similar to these: Why are my life insurance premiums going up? This life insurance policy of health is becoming so expensive why? I thought this policy would be self-funding after 20 years, but that doesn’t seem to be the case. why not? I bought a whole life policy, but it says universal life on the statement, how come?

Types of life insurance policies

The next step is to address the problem. Like we would with a client, let me first give you a very brief and general explanation of the three types of life insurance policies as it relates to premiums. Term, Whole life and Universal Life. Please understand that this is the most simplistic review of life insurance types, that we could make and for the sake of brevity; we’ve really simplified it. Term life insurance payments are the same each year for a set period of time usually 10, 20, or 30 years and then it goes away. Whole life payments are the same each year for the entire life of the policy. Finally, Universal Life payments are flexible and can be adjusted each year. It is this flexibility of the universal life policies that can lead to poorly constructed or poorly managed policies and have them implode. Of course, not every universal life policy we encounter is problematic.

In fact, a properly designed universal life policy can be the most appropriate solution. However, for now I’m going to focus on the policies that aren’t working. The most common problem is that in order to keep the policy in force the client is being asked to make increasingly higher payments each year. If they don’t make the higher payments the policy is going to lapse or go away.

Why Universal Life Insurance A Bad Idea?

In other words the policy is imploding and the premiums are exploding. The main reasons we find universal life policies are failing people:

The first one is poor original design. When creating universal life policies, premiums are determined by a variety of factors, one of which is the interest rate that is provided on the cash value within the policy. Most of the universal life policies we come across were issued in the 1980s or 1990s. At that time, interest rates on many things including life insurance policies were high relative to today. Universal Life Insurance

The second problem is payments adjustment. When the original policy was issued, the insured was comfortable with the premium payments. However, things change. The ability to lower payments in a cash-flow tight time is a great feature of a universal life policy, but it can also cause the policy to unravel. If your payments are lowered, they are expected to increase back in the future when the policy owners are back on track. Unfortunately many owners don’t adjust or wait too long to adjust and find themselves in a situation, where the premiums or the cost to keep the policy in force are much higher than they wanted. Often owners underfunded the policy from day one and never knew it.

Number three loans taken against the policy: Similar to lowering payments in tight times, the policy can easily implode if someone takes a loan against it. A loan against the cash value decreases the amount of interest gained. A loan can actually instantly put the premiums just to maintain the policy in force much higher than ever expected. Is your universal life insurance at risk of imploding?  The first thing we do is get the most up to date status of the account.

What is the net cash value

What is the net cash value including any loan? Assuming the premiums stay the current rate, when will the policy lapse or go away? What is the required minimum premium needed to guarantee this policy remains in force to age 100, 120, or age 105? Based on these answers, you should know if your policy is doing what you needed to do.

For instance, if my client is 65 and the answer to the question is: “This policy will lapse in six years.” That is usually a problem. So the required premium number or the payment needed to keep the policy going becomes
the main focal point. The problem is that required premium is not always easy to determine, even from the insurance company. You must stress the word guarantee, when getting an answer. You certainly don’t want an answer based on hypothetical interest rates and insurance costs again. Most insurance companies will give that premium number right over the phone. Some will hold out and provide it only in writing through the mail. Regardless, you’ll get the answer and it most likely be a premium number that you’re not pleased with otherwise your universal life policy would not be imploding in the first place!


What are your options? A lot depends on the unique policy and your current health situation. In the least you can now work to maintain your existing policy while you explore alternatives. Now would be a perfect time to discuss with an independent insurance agent at Dolphin Financial Group. We’ll be able to help you figure out all your options and determine whether or not your universal life policy is at risk of imploding. .

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