Over-funding Universal Life Policy - Part 3

In the year 2001, twenty years after this policy was put in force, it is not renewing at 11.9 percent but at 6 percent or less. Our insured is now age 65, has paid $7160 into this policy for each of those twenty years, and observes the account value to be approximately $100,000 but decreasing in value each year. When we put that information into the software, it shows us that we should expect the policy to terminate without value in about ten years, the insured's age 75, well before our insured's life expectancy. We then ask the software to show us how we can get back on track for an endowment of $1 million at age 100, assuming the current 6 percent interest. The software suggests that we should now pay $30,000 per year into the policy.

If, at policy inception in 1980, our advisor had suggested that the funding level of the policy be determined based upon a more conservative interest rate assumption of 6 percent, this software would have suggested that we pay about $15,000 per year into the policy instead of $7160. Had that been done at inception, this policy at the insured's age 65 would have a value of over $300,000. If funding of the policy is continued at $15,000 per year and interest rates continue at 6 percent, the account value of the policy should pass through an account value of $1 million by age 95, and be about $1.3 million by age 100. This demonstrates that the most important thing we can do to assure a successful policy is to fund it adequately. The more we put in, the more successful it will be.

However, suppose this policy owner arrived at age 65 with the under-funded original policy and could not afford to pay $30,000 per year to salvage it. What alternative does he have to keep the policy from disappearing without value at age 75? The software suggests that if he reduces the death benefit of the policy from $1 million to about $400,000, if he continues the premium payment of $7160, and if interest rates remain at 6 percent, the policy should mature when the insured reaches age 100 for $400,000. The two alternatives for turning an unhealthy policy into a healthy policy are to increase funding or reduce the amount of life insurance.

When you consider the fact that many universal life policies are not properly funded because the illustration assumed such high long-term interest rate earnings, and add to that the following factors, you can understand the problems that policy owners may encounter if they do not actively manage their policies.

1. The insurance company can, at its discretion, increase the mortality charges up to the maximum guaranteed within the contract, e.g., from the lower current rates to 1980 Commissioners Standard Ordinary mortality rates.

2. The insurance company can increase expense charges up to the maximum guaranteed within the contract, e.g., from $6 to $8.

3. Mortality charges will inevitably continue to rise as a result of the policy owner's advancing age.