Universal Life...Is an Insurance Audit Timely?

You might remember that we have stated that we are not comfortable with any form of Universal Life insurance.

Now there is growing concern in the insurance industry that the effects of exceedingly low interest rates and high volatility in the securities markets have negatively influenced the dynamics of Indexed Universal Life (IUL). The problem is affecting the IUL issuer-company’s costs in supporting (“hedging”) these policies. That will be reflected in internal charges to the policy and resultant policy performance. An IUL’s performance and existence largely hinges on the stock markets.

The policies are designed with some changeable attributes, such as internal cost and “participation cap”. To be clear, the insurance issuer can increase charges and lower the participation rate. Why does that matter? First, regardless of market performance, these policies have an ever-increasing (annual) internal cost, and charges to the policy. And, the company can additionally increase those charges above the original schedule.

Premiums, as they are paid, provide a share of those dollars to pay policy costs/charges, with the balance going to cash accumulation. As the policy (and the owner) ages, the portion going to charges increases, and the portion to cash decreases.

“Losses due to stock market downturns are prevented” is a big selling point, but when internal charges exceed the premium level, the company reserves the right to invade the cash values to ensure that its costs are covered. That, of course, will erode the policy’s cash growth. Increasing the charges from original charges simply worsens that situation.

The lowering of the “participation cap” adds danger. If the markets drop in any year, and the policy shows no market-related loss, well, the costs (and internal charges) continue. To make up for that year’s lack of cash growth, the next year has to show better performance. However, the lowered cap will limit the ability of the policy to overcome the previous year’s lack of growth.

For example, a cap of 12%, lowered to 10%, simply limits the rate of cash growth, even assuming a strong stock market performance.

Singularly, either the increasing internal charges or a lowered cap will increase the potential for failure of the policy, or “lapse”.  Together, the possibility of that negative outcome increases dramatically.  It should not be a shock to receive a request from the insurance company asking for a cash infusion to maintain the policy’s existence.

Will all of this affect your policy? We can’t say definitively. If you own an IUL policy, or any Universal Life policy, we recommend an “insurance audit”. Have an insurance professional, familiar with Universal Life policy pitfalls, analyze the status and health of the policy. Even if the policy seems healthy today, consideration should be given to “will it be healthy for life?”