Every month Billions of dollars in life insurance death benefits lapse due to declining interest rates on interest sensitive life insurance products. The product I am talking about goes by a few different names: 1. Universal Life 2. Flexible Premium Life 3. Adjustable Premium Life.
One would think, that as long as I pay the premium, the policy will stay in-force. Unfortunately, that is not how it works for these type of policies. The premium due, is calculated and based on the credited interest rate. If the interest rate credited to your policy is lower than the interest rate illustrated when you bought the policy, the premium should be increased.
Universal Life is a combination of traditional whole life and term life. Best of both worlds. You have the ability for the policy to build cash value and not have to pay the high premium costs of whole life.
Universal Life is different from Traditional Whole Life. Instead of crediting a dividend to the policy, universal life credits an interest rate to the policy. If interest rates were at 8% when you bought your life insurance policy and rates are at 4% today, you would have to pay a much higher premium to make up for the lost interest gain on you cash value, otherwise your cash value will dwindle and one day cause your life insurance policy to lapse.
The best way to find out if your policy is going to lapse unexpectedly, is to order an in-force illustration from your insurer.
OK, so you order an in-force illustration, now what? First thing you should do is contact the agent that sold you the policy in first place, and ask them to explain it. I would also ask this agent why they didn’t do an annual review with you to keep your policy in good standing. Secondly, you should seek out an unbiased “Third-Party” to review the report with you.
When requesting an in-force illustration, it is best to always ask for two illustrations. The first would be using your current premium and current cost of insurance and current interest rates. The second illustration would be to ask the insurance company to solve for premium extending coverage to age 100.
With these two in-force illustrations, we can determine if it is in your best financial interest to keep your current policy, or dump it and buy a new policy.