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Old Life Insurance Policies: Life or Death

By Roger Bair
By Roger Bair
You may have purchased a life insurance policy 5, 10, 20, even 30 years ago under the impression that you purchased a “whole life” insurance policy. The life insurance industry unfortunately has become so complex that it is highly unlikely that you actually bought a whole life policy. “Whole life” may have been your thinking when you purchased the policy, but in reality all the fine print can come back to haunt you.

When you are seeking a life insurance policy, and the agent tells you that “this is a policy that you can keep for a lifetime,” the agent might actually be referring to universal life or variable life policies, or he or she might possibly be referring to a whole life policy that may not pay dividends. Each of these types of contracts come with many nuances, and knowing what all of those columns and numbers in the illustration mean can be the life or death of your policy.

Universal or variable life contracts have current and guaranteed projections (the operative word here is projections). If everything remains within the current projections, then the policy works fine; however, if any variable moves negatively outside of the current projections, then the policy will lapse at some point. The unknowns that are projected in universal and variable life policies are the rate of return on the cash value, that is, the expense to administer the policy and the mortality expenses. Insurance agents sometimes make very generous return projections to give the appearance of long-term success.

Whole life is sold either by a stock company or a mutual insurance company, and the difference between the two can be immense. In a mutual insurance company, the policyholders own the company, and therefore if the company is run well, the excess each year is returned to the insurance policyholders as a dividend. This sounds wonderful—and it is—but it comes with a substantial amount of excess premium payments after which the dividends may begin. The word may is emphasized because dividends are not guaranteed, merely expected. Since the 2008 downturn, many companies that had bragged about increasing dividends for decades had to begin reducing dividends because of the new low-interest rate environment. Many a life insurance buyer of a mutual insurance company policy in the years between 2000 and 2008 got a quick taste of reality when the projections were no longer lining up with reality.

Rarely does one see a true whole life policy that says “if you pay this premium, then the policy will pay out the face amount at some time in the future, no matter what.” The reason for this is that it requires absolute guarantees, which will be the worst-case scenario and not likely to happen. Therefore, most companies feel that offering an absolute guarantee would be undesirable to most buyers.

If you have an old policy, then ask the insurance company for a new in-service illustration with new projections for the current policy dynamics. To avoid sales pressure, have the in-service illustration reviewed with an independent fee-only advisor who has experience in life insurance analysis. Most important, do not just assume that your policy is going to last a lifetime.

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