The low interest rates we’ve been seeing for the past decade have been a double-edged sword—good for financial moves like mortgages—but bad for returns on bonds and other interest-dependent investments. As you assess your investments in this climate, there’s one important scenario that’s easy to overlook: Low interest rates on life policies.
Universal life policies especially feel the effects of lower interest rates since life insurance companies are one of the largest buyers of bonds and mortgages in the U.S.. The companies repackage these investments into annuities and life insurance products, which then carry the associated yields of these investments. So, lower interest rates directly equate to lower returns.
Many universal life policyowners without secondary guarantees may have purchased these policies when rates were more fruitful, and they now find themselves in a tough spot, as the lower returns force their premium payments to increase dramatically.
If you’re in this situation, you don’t need to panic. There are some easy ways to avoid unaffordable premiums and still reap the benefits from the life insurance asset that you purchased.
Let’s take a brief peak at the mechanics behind universal life policies.
What Are Universal Life Policies?
These policies are a subset of permanent life insurance, which covers your entire life period if you are the insured. There are certain requirements you must meet to maintain a policy like this. You need to keep your premium payments current and also possibly adhere to other requirements. You also designate the beneficiaries who will receive the death benefit sum when you pass away.
What Are the Features of a Universal Life Policy?
Growing Cash Value: One great benefit of a universal life policy is the savings portion, or “cash value.” Each month, your premium is split among two accounts: a portion of your premium is earmarked for the death benefit and another portion is deposited into an investment account that builds up the cash value. This “cash value” asset can sometimes be tapped or used as a loan.
Earned Interest: The cash value account earns a fluctuating interest, which might be tied to a market index’s performance or to your own direct investments, depending on how your universal life policy is set up. If the interest decreases, many policies protect you with a floor amount of interest, thereby absorbing the lower return.
Flexibility with Premiums and the Death Benefit: The beauty of universal life insurance policies is that the premiums can be flexible, even providing you with a payment grace period if needed—or letting you use the cash value to make premium payments. You also have the ability to change the death benefit and make the amount higher or lower.
How Do Low Interest Rates Affect Universal Life Policy Owners?
You are probably seeing now why low interest rates are an issue for universal life policies. Since universal life policies rely on an interest generating cash value asset, the low interest rates are generating less money for these accounts, and the original projections that were made when the policy was purchased potentially may not be met. Additionally, many insurance companies have increased their cost-of-insurance charges in an effort to recoup losses from crediting policies with their interest rate guarantee. So you may face increased premiums to keep your policy active.
Consumers that are unable to pay higher premiums often fall into the pitfalls of lapsing life policies. Many stop paying altogether and begin to withdraw from the account. Since the cash value can’t cover the insurance cost to keep the policy in force, the policy becomes “underfunded” and is headed for a lapse, where they would hand the policy back over to the insurer and lose the money they’ve invested previously.
Are the Benefits of a Life Settlement Better Than Surrendering a Policy or Letting it Lapse?
There is good news! You can avoid this financial misstep. Instead of allowing a policy to lapse, you can sell this tremendous asset and leverage its value. For those who are 75 or older and have health issues, a life settlement is an ideal option. Here’s where we can help. For over twenty years, LISA has been the premier association for the life settlement industry, bringing together brokers, providers, investment firms, law firms, medical underwriters, consultants, actuaries, trustees and escrow agents as invaluable resources to help guide you through the life settlement process.
The earlier you address an underfunded policy, the better your chances at getting a positive outcome. If you own more than one policy, the proceeds from one can be used to pay the increased premiums on the other and you can keep some of your insurance in force. If not, you can sell a life policy that is not already lapsed or in the grace period.
The Society of Actuaries and LIMRA found in 2019 that 4% of life insurance policies, which are worth billions of dollars, lapse each year. With a lapse, you end up with nothing to show for years of payments. With a surrender, you might receive a small amount (if any) of the cash value, depending upon what the insurer offers. With a life settlement, you can recoup a sizable piece of your investment.
A life settlement is a lucrative way to avoid the detrimental effects of low interest rates while also providing you with the cash you can use to fund investments not tied to these low rates. Win and win.
Reach out to a LISA life settlement company or broker today to find out how much you could make.