Marc A. Hebert's Money Sense: Always know where you stand with universal life premiumsBy MARC A. HEBERT
July 28. 2017 7:39PM
Universal life policies have had periods of popularity. You might actually own one. They were popular in the 1990s when the positive investment and interest rate environment was well-reflected in the policy's structure. As we all know, investment results have varied over the years. Given this, do you know where you stand with your universal life premiums?
Let's take a step back and review how a universal life insurance policy works. Universal life is a form of permanent insurance. Universal life provides lifelong protection and the ability to accumulate cash on a tax-deferred basis. These types of policies separate the various components of an insurance contract, including three basic elements: protection, expenses and cash value. It allows you to make changes in the face amount and/or premiums to meet your changing needs.
You decide when and how much premium payment you are going to pay, subject to federal tax law limits. There might be a minimum premium based on insurance company expenses, premium taxes and the cost of pure insurance for your policy. As you pay your premium, the insurance company will deduct those costs from the policy. What is left over is credited to your cash value account.
It should be noted that you have no control over the investments in this account. The insurance company will have a professional money manager handling this aspect of it. However, there is usually a minimum (guaranteed) interest rate that will be credited. This can be found in your policy.
It is from the cash value that the company will deduct its other expenses. If the company's portfolio earns more than the guaranteed interest rate, the company will credit the excess interest to your policy.
The problem comes when your remaining cash value is not sufficient to cover expenses and the cost of pure insurance. If you do not pay in more premiums, the policy amount might then have to be reduced, or your policy might lapse.
How do you tell if your policy is in trouble? First, ask your insurance company for an "in-force illustration." These illustrations show how the policy will perform in the future. They can be prepared in a couple of ways.
According to "Understanding Life Insurance Illustrations" by certified financial planner Neil Alexander: "The 'guaranteed' illustration outlines the policy performance based on the carrier's minimum filed credit rates for the particular policy and the maximum mortality charges. The 'current' illustration is the insurer's representation of the policy performance based on credit rates and mortality chargers currently in effect."
Review the illustrations. Does the policy meet its targets? If the answer is no, then:
. Determine if you still need the life insurance coverage and how much you need.
. If the need is the same, increase premiums until the policy is properly funded.
. Reduce the death benefit if you need less coverage.
If you believe you need additional coverage, you can raise the face amount of the existing policy provided you are insurable. This of course comes with more cost.
If you believe you need to purchase a different policy for some reason to meet your needs, do not cash in your existing policy until the new policy is in place. The reason for this is your health might have changed since purchasing the original policy, causing the new insurance company to charge more or deny coverage.
Finally, it is less expensive to pay additional premiums to support the policy when they are first needed then to wait a few years to make up the difference. You should always know where you stand with your universal life insurance premiums.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.