Home > Employee Benefits > Policyholders and charities hit hard by falling rates on universal life policies

Policyholders and charities hit hard by falling rates on universal life policies

piggyMillions of Americans, including families, retirees and small business owners, who took out universal life insurance policies back in the 1980’s and 1990’s are facing significant losses as policy values have fallen sharply over the past two decades. Years of low-interest rates have strapped many policies of their cash value, forcing policyholders to either add additional funds to the policy to maintain the existing face value, or reduce the amount of the death benefit. When individuals name charitable groups as beneficiaries of the policies, the impact is twofold; policyholders end up losing money and so do the organizations they had intended to support. Some families have had to cut their policies by over $1 million, leaving the charities set to receive those funds at a major loss. Financial advisors say that many people are unaware of how big the problem has become, especially if they do not fully understand how the contracts work.

A typical universal life insurance policy consists of a cash value account (made up of tax-deferred, interest payments) and a death benefit. Owners put money into the account, while insurers pay the interest. Unlike whole life insurance, universal life insurance policies allow policyholders to use the built-up interest from the cash value account to pay the premiums on the death benefit, which tend to increase as the policyholder ages. Interest rates can vary from year to year and is determined by the insurer, but generally have a guaranteed minimum rate of 2%.

Those who purchased policies twenty years ago may have been drawn to the idea from sales pitches forecasting future years of high-interest rates. Unfortunately, that has not been the case. Interest rates have fallen from 15% in the 1980’s to less than 3% today. Policyholders claim were mis-lead about the way the contracts worked, while insurers blame factors that are beyond their control. Following several class-action settlements in the 1990’s, state insurance regulators established new sales materials that warn about potential interest-rate risks. Insurers are also encouraging buyers to consider alternative options to cover policy costs other than relying on interest buildup for income.

Individuals with universal life insurance policies should act now to review their contracts, check current interest rates, and work with their insurers to avoid potential losses in policy value. It’s also critical that any business as a recipient of life insurance funds review to determine whether or not their expected beneficiary amount has been affected by the low rates.

About the Author

Christine Vogan is the Key & Individual Insurance Representative at William Gallagher Associates in Employee Benefits with a core focus on WGA’s Private Client Group. Her responsibilities consist of working with both individual clients and executives at corporate companies and assisting them with the Life, Disability and Long Term Care insurance planning.

617.646.0366 | CVogan@wgains.com | Connect with Christine on LinkedIn

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