Universal Life Policy raises rates
Dear Terry,
I recently received a call from my State Farm insurance agent, telling me that the cash/surrender value of my universal life policy would soon peak and start to decline because State Farm had “raised rates.” I find the timing of this move suspicious and State Farm is simply trying to force me and other long-time policy holders out because now we are older and at greater risk of dying and State Farm having to pay out. I purchased this policy in 1989 and now pay $58 per month for a $85,000 death benefit to my survivors. I can see how my best move is to cash out ($12,000 and total premiums paid is $13,000) as I have other assets and life insurance to take care of my wife and children, but when I bought the policy I was told it would be in effect until I’m 95. I even had the numbers run to see if increasing the premium from $58 to $100 or decreasing the death benefit to $50,000 would offset the loss from raised rates, but only by a few years.
I know cashing out is my best option, but what I’m really upset about is State Farm just up and “raising rates.” Obviously they benefit by reducing the risk I pose. It sounds like had rates stayed the same, the cash value would continue to grow. Am I wrong in thinking State Farm is being unscrupolous? I really feel cheated. Any recourse I can take?
Terry Says
I think there is a better explanation and your State Farm agent didn’t really understand the problem inherent in Universal Life Policies. The simple fact is that when you purchased the policy the “illustrated” returns were supposed to be enough to keep the policy in force for the rest of your life — creating a pool of money that would subsidize your annual premiums.
The problem arises that these “Illustrations” were not promises. And with rates so low in recent years, the pool of money designed to help pay the premiums was not enough. Now insurers are asking policy holders to increase their payments or lose the insurance.
Here’s a link to a column I wrote FOUR YEARS AGO — explaining the problem and predicting this would happen to many policyholders! Given the fact that you no longer need the insurance benefits, I agree that you might want to take the cash value. But before you do that, ask your agent to give you a written explanation of what portion is tax-free “return of premium” and what portion of that check might be taxed as ordinary income!!
(That’s another trap for those who take the remaining money and run!)
And you might want to show this post — and the link inside it — to your agent so he will understand what’s happening — and how to explain it to his clients!!
