I'm sure you have seen that headline on some science-fiction movie when you were a kid, or something similar. It was usually a story about some big creature that was brought to life, and at first was good to all mankind, then turned evil.The movie dealt with that, and in the end, the creature was either reformed or destroyed.
We have such a creature stalking the earth today. It came to life in the early '80s, and was adored by all mankind. Within a short period of time its creators made it into a monster, and now only time will tell what its ultimate demise will be. Will it die, never to stalk the earth again, or will it go through a metamorphosis and regain mankind's love and respect? We will know the outcome before the turn of the century.
What creature, you ask, am I referring to? No, it's not hula-hoops or the telephone answering machines. It's much more insidious than that. It has crept into our homes and now threatens to rob us of hundreds of thousands of dollars. Give up? Okay, I'll tell you, it is universal life insurance. I know, you knew it all the time!
Back in 1987, I wrote an article for an insurance publication on universal life insurance. My article was about the pending problem of contracts being sold based on interest rates that were totally unrealistic and doomed for failure.
Did you honestly and realistically expect insurance companies to pay 12 percent plus over the next 40 or so years? Do you know of anything that can keep that promise? By the way, the companies never promised or guaranteed those rates. If you bothered to read the verbiage on the bottom of the last page, they went to great lengths to make sure you did not infer that a guarantee was issued with each new policy. I'm sure you never read the last page, and maybe never even saw the last page, if the truth be known. Many a last page never got any further than the agent's trash can.
If you bought one of these policies, what do you want it to do for you now? Do you want it to be a source of aggravation, or do you want to salvage what you have and make it a viable policy again? If you want that ugly monster, fear not, because you don't have to read another word. Just sit back, relax, and do nothing except get upset and worked up over all the money you've lost. The die is cast and your wish will now become a living nightmare. Enjoy! If you want to make the most of your policy and make it a "kinder and gentler policy," read on, help is just paragraphs away.
Let's start at the beginning. Get out that policy along with the original proposal, and any year-end statements you have received from the company. Take a look at the proposal and see what the original interest rate was when you bought the policy. On the proposal will be at least two rates: the guaranteed rate, usually four to five percent, and the "assumed or projected" rate. You might even have a third rate for the "current" rate. That's the one you want. If this rate is over nine percent, then you need to get a new updated proposal run at eight percent, to see if your policy will survive at that rate.
You can call your agent, if you are still on speaking terms, or write to the home office to run these numbers for you. I'm sure either will be happy to help you with this. When you purchased this policy was it with the idea that you would only pay premiums for a "few" years, and then have the premiums "vanish" with no future premiums payable? While you are having these upgraded proposals run, you might request an upgraded proposal based on the vanish concept as well, also at the eight percent rate. If your policy will support itself at the eight percent rate, you are in good shape. If it won't, a little additional work may be in order; but fear not, we can get this monster turned around.
Solving the problem may involve only a little additional premium being paid, or paying a few additional years before vanishing or eliminating future premium payments. That's a much better alternative to canceling the policy and losing the insurance and all the money you have paid in. Remember, you bought this policy for a reason, and I'm sure the reason still exists. You still have the need and the policy is still a good way to have the coverage and accumulate money on a tax deferred basis. I'm not saying the eight percent is all you will ever earn on your policy. What I am saying is be realistic -- if they pay you more, fine. If they don't, at least you won't disappointed, and you won't lose the coverage and your money.
If you are paying premiums other than on an annual basis, consider changing to an annual mode. Paying annually instead of monthly can increase your cash reserve value by as much as 20 percent by age 65. For example, assume a nine percent interest rate, with an annual premium of $780, instead of a monthly deposit of $65.
By age 65, the cash value on the monthly mode would yield $9,921. While annual payments would produce $11,906, a difference of $1,985. Not a bad return for no additional outlay.
While you have your policies out, it is a good idea to check them over to see if they are still set up properly, and the beneficiaries are still correct. Also check to see if you have any "riders" that are not cost effective, and may be draining dollars with no return. You need to "slim down" your policy so it will preform properly. Eliminate all the "bells and whistles."
I wish I could tell you that all policies can be transformed from monsters into beautiful creatures, but that is not the case. Some will always have some "bad blood," but at least they can be improved without too much effort. At least you won't lose any coverage, and will maintain a decent policy.
In my original article, I coined a phrase that I referred to as my "5-100 Rule." Simply stated, this rule says that any interest rate projected or assumed beyond five years stands a 100 percent chance of being incorrect. I suggest that you commit that rule to memory. It's a good rule to remember in dealing with universal life policies. I further suggest that you write that rule on your checkbook, and remember the "5-100 Rule" the next time someone approaches you with a sure-fire investment that you can make a bundle on.
Click here for previous articles by Stanley Greenfield, RHU.