Over-funding Universal Life Policy - Part 4

All factors occurring together can result in the rapid decline of an account value to zero. If, as this point approaches, your health has deteriorated to such an extent that you can no longer obtain life insurance, you have no alternative but to meet the call for more money. In a worst-case scenario, if your resources also have decreased, you might find it difficult or impossible to meet the call and could lose your insurance coverage altogether.

Life insurance companies, insurance agents, and financial planners will have a great deal of difficulty explaining this situation to these policy owners. Policy owners should be encouraged to maintain at least adequate funding levels, and to over-fund their contracts during good times when they have excess resources and the policy is a reasonable investment alternative.

The risks in universal life are as follows:

1. The interest earnings on the policy account will move up and down as market rates fluctuate.

2. The insurance companies can and will change mortality rates.

3. The insurance companies can and will change expense charges.

4. The policy requires policy owner management and continued vigilance.

5. Interest rates have moved from a cyclical high in December 1980 and have been moving lower ever since. You probably won't like your policy very much if it is paying no more than the minimum guaranteed interest rate, which may be 3 or 4 percent. If the insurance company is maintaining a high interest rate, but paying out more than it is earning to do so, you won't like the policy for long either because that could cause company failure.

If you aren't aware of the risks in universal life or don't intend to deal with them, you probably would be better off with retail term life insurance. If you look at the risks associated with universal life, you might conclude that this type of policy requires an inordinate amount of confidence in a company. The account from which you earn your interest is a part of the general account of the insurance company and could be frozen by the state insurance commissioner if the company has problems. This points out the importance of dealing with an investment-grade insurance company that is rated well by the various services.