Millions of Americans are reaping the benefits of life insurance coverage that comes in all shapes and sizes these days. And while there is a growing number of options available to consumers who are looking for this type of coverage, a certain percentage of older Americans are starting to learn that the policy funding decisions they made years ago might not have been as prudent as they may have hoped at the time. Since the time of purchase of universal life coverage, interest rates may have decreased significantly.
Universal life insurance policies became all the rage some three decades ago - they accounted for about 1 in every 4 life insurance policy sales for the majority of the 1980s as Treasury yields spiked - but are now leaving some seniors with large policy funding requirements to keep their policies in effect, according to a report from the Wall Street Journal. Largely because of the long-term, sustained decline in interest rates related to these products, some of the people who obtained this type of coverage years ago may now pay tens of thousands of dollars per year to maintain it, in some cases outstripping the value of the coverage that would be paid at the time of death or shortly thereafter.
What's the problem?
In the 1980s, the 10-year yields on Treasuries were as high as 15 percent for a period of a few years, and many life insurance agents at that time pointed out that while those highs were unusual, those in the 8 percent to 10 percent range probably would continue many years into the future, the Wall Street Journal report said. The problem, though, is that 10-year yields as recently as 2012 were as low as 1.4 percent or so, meaning that major issues arose.
And this issue has been particularly problematic for those who toiled in the middle class for these last few decades, and have seen their costs increase sharply since then, the report said. One former social worker, who is now 71 years old, currently pays about $6,000 per year for a policy that only carries a payout of $100,000. Prior to that relatively recent increase, he had been paying only about $700 annually for the coverage. The average cost for much of that time was only a little more than $58 per month - not a problem for most middle-class workers - but has since jumped to about $500, which cost is difficult for many to bear, particularly a retiree on a fixed income.
Addressing the issue
As a consequence, many advisors now preach vigilance, the report said. While many may not have been hit with the higher costs yet, that might be on the horizon, so revisiting needs now may be key. Usually universal life policies offer options that could help policy owners make adjustments that should be considered in this re-planning process. One useful tool would be for the policy owner to request a re-projection of policy values from a current date to the end of the policy owner's planning period.
These issues highlight the importance of life insurers and agents working more closely with their clients to determine the best possible course of action given their unique situations, not only in the near future, but in the long-term as well. The more that can be done in this regard over the course of many years - which involves regularly checking in on clients to make sure they're fully satisfied with their coverage situation as-is - the better off both those people and the insurer are likely to be going forward throughout the relationship.