A recent article in the business section of the New York Times levels some pretty severe criticism of insurance companies. In particular, it reports on alarming increases in the premiums of some universal life products. It not only details how these high costs are placing many families in financial jeopardy but also highlights the lawsuits that are currently being launched in protest against certain companies. From my point of view, the reporting is, unfortunately, accurate, and the criticism merited.
But it is only half the story. And the other half makes all the difference. First, a little background.
A Product With Two Ledgers
Universal life insurance is a permanent product. It can last as long as you do. Most importantly to know, it is designed with two sets of values: guaranteed and non-guaranteed. Guaranteed values are exactly that: a death benefit, premium, and cash accumulation that are contractually guaranteed. Regardless of the investment performance, cost of doing business, and amount of claims paid, the policy will provide these numbers as long as the insured sticks to the payment schedule.
Non-guaranteed values are also exactly as their name implies: a death benefit, premium, and cash accumulation that are projections based on certain assumptions. Variations in investment performance, cost of doing business, and the amount of claims paid can affect the numbers provided by the policy, even if the insured sticks to the payment schedule.
A Sales Process With Full Disclosure
For decades, life insurance company have taken great pains to make sure that consumers understand the difference between these two ledgers. They are painfully aware of how people can get confused, or simply forget what they bought. They also know that life insurance sales representatives are not always the best at explaining the intricacies of these complicated products. So, they have implemented a number of full-disclosure requirements to ensure that clients know what they are buying. Chief among these is an illustration that portrays the premium-payment schedule to which the client has committed and the values that can be expected to accrue going forward, both guaranteed and non-guaranteed. The client signs off on this illustration when they accept the policy.
What Happens When Company Expectations Are Not Met
Insurance companies, like all businesses, make assumptions about costs and profits going forward. And, like all businesses, they have to adjust to changing circumstances. When a life insurance company experiences unexpected losses or increases in costs, they are compelled to make up the difference somehow. One area they typically target is the non-guaranteed ledger in universal life policies. They can legally, and legitimately, raise the price to restore profitability.
This is exactly what is being reported in the New York Times article. And so we have the shock and dismay of policyholders who forgot this could happen, who never realized it could happen, or who knew it was coming but still don’t like it. But what the paper doesn’t tell you is that those policyholders who have employed a payment strategy based on guarantees are completely unaffected by poor business performance. Companies are required to meet the contractual guarantees, so they do.
Now let’s look at some of the points raised by the article, but also include the other side of the story.
Guaranteed Premiums Remain Unchanged
People who bought universal life policies in the 1980s and 1990s, some of which guaranteed annual returns of 4 percent or more, are seeing their premiums soar.
This is true, but only non-guaranteed premiums are increasing. Guaranteed premiums are staying the same. Due to the increased cost, the policy might not last as long on a guaranteed basis, but, this would only be true if the consumer did not buy a policy with a lifetime guarantee. If the lifetime guarantee is there, then the policy will last a lifetime at the guaranteed premium, regardless of the company’s annual return.
Existing Policyholders are Secure
In the United States, in the hopes of staving off a reckoning, some insurers have stopped selling particular products and have raised the price policyholders must pay for some existing policies.
True. Some companies have stopped selling universal life with guarantees. But those consumers with current policies can keep them, and the contractually-guaranteed premiums are not being raised.
Guaranteed Cash Values are Reliable
Universal policies typically cost more, but the coverage never expires, and the buyer gets both a fixed death benefit and a “cash value” account, designed to earn tax-exempt interest. Money in the account can be used to help pay the policy’s premiums. But there is a risk. If the account gets used up paying those costs, the policy can lapse, and coverage ends.
Universal policies typically cost more than what, term insurance? Sure they do. If you want the company to guarantee the premium for a longer period of time, they’re going to charge you more. But we are not comparing permanent life insurance to term insurance here. The fact of the matter is that universal life typically costs less than whole life insurance, which is one reason why people buy it.
Despite the lower premium, some people will still depend on cash accumulation to offset the cost of coverage. If their non-guaranteed interest assumptions fall short, then they may run out of cash and lapse the policy. However, if they were banking on guaranteed cash accumulation, they will not have the risk of the contract under-performing. Their coverage will not lapse.
What You Can Do
Here is the bottom line: if you bought a universal life policy based on guarantees, you have absolutely nothing to worry about. All the alarms being raised by this New York Times article do not apply to you. If you have a policy designed with interest assumptions that are falling short, then you may have a problem. But you know what? You very well may be eligible for a product from another company that could give you the guarantees you need at a reasonable price. Thankfully, it’s a big marketplace out there, and good values are still available for a great many people. I’d love to hear from you and answer any questions you may have.