Here’s a quick breakdown on why Universal Life Policies may terminate or have increased premiums and how Cost of Insurance is different between policy types.
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Universal life insurance along with Variable and Indexed Universal life are popular products on the market and have been since they were added to the market in the mid to late 80’s. I would say I am seeing new clients with as many of these new permanent products as the term.
Even though there are a lot of these policies out there, it does not mean they are the safest or best place to put your money or even rely on them for the death benefit for that matter.
So, you’re probably asking, “Why do you think that, Mary Jo?”
My answer: All of the above-named policies, have numerous charges and fees and one of those charges is Cost of Insurance (COI). COI covers the cost of the death benefit on the policy. What you typically see in these policies is the COI charge will be minimal while you are young but as you get older and closer to death this fee increases quickly and becomes very expensive.
ITM twentyfirst recently wrote an article about the cost increase in the COI charge. Companies like TransAmerica, AXA, Phoenix, and Nationwide have increased the cost of this charge anywhere from 40% – 100%! Policy owners are getting a letter stating their premium has doubled from the previous year due to the cost of insurance charge going up. Can you imagine getting your premium notice and having to come up with double the premium and if you can’t come up with it, you risk losing your death benefit?
It wouldn’t be fair if I didn’t point out that COI charges are found in all policies, even whole life, but the difference lies in how those charges are accounted for.
In a whole life policy with a mutual company, any charges or fees are paid for through the dividend you get as a policyholder. For example, if the mutual company declares a 6% dividend they will take fees and charges out of that and they will give you the remaining 2% and the policy will remain in force and premiums will never increase and your cash value will not go down.
Universal life charges and fees are taken through your premium payment or in some cases your cash value if your premium is not enough to covers all the fees and charges. For example, if your fees become larger than your premium payment they will start grabbing cash value to supplement the difference, and you start seeing a decrease in available cash value. If you don’t have enough cash value to cover any of the fees, charges, or cost of insurance you will receive a letter stating your premium payments MUST increase in order to keep the policy in force. Hence, you have to come up with money to cover this additional cost.
As you can see, with a policy that is not whole life you must be careful that you are paying in enough to sustain the policy as well as be aware that charges can be increased at any time.