This is a guest post by Chris Smude. Chris is the President and Founder of Smude & Associates – an entrepreneurial intellectual capital organization with a specialization in the financial services industry. You can also find more posts on his blog.
A lady (not a client) called me last week about a notice that she received from her current insurance provider: she needed to pay about 50% more in annual premium or her policy was going to crash-n-burn (read: canceled death benefit).
Unfortunately, she is not alone. Many people (too many) will be getting the same news in the near future.
Here’s the issue: most people think they have purchased permanent insurance (universal life, hybrid whole life, etc.) with a guaranteed (not to increase) premium and death benefit guaranteed for life – and unfortunately they are in for a shock when their policies fail to deliver on their projections and begin to collapse. Put simply, if insurance companies earn less than their projections, something has to give.
And it isn’t just something seniors have to worry about. I have a 44 year old client who brought his insurance statement to me for review. He set his policy up five years ago (with another advisor) and he has already experienced an increase in annual premiums. We ran an analysis for him which showed his policy may expire…before he does.
Kind of puts you between a rock and a hard place, eh?
Hmmm, let’s see, I can pay the (significant) increase in premium or let the policy crash.
And I thought it was last night’s chili giving me heartburn.
One of the main reasons this happens (and will continue to happen at an alarming rate) is because too many insurance companies assume/project unachievable rates they can earn on their own portfolios – and then don’t achieve them.
Enter your increased premium notice…and suddenly…it is your problem.
What are you going to do Lucy?
Permanent life insurance policy holders need to take immediate action to avoid unexpected premium increases, lost cash value, and even canceled death benefits. Most of the life insurance policies sold during the past 25 years were not permanent, whole life policies. So there is a good chance that your mom, dad, aunt, uncle – even you – may have one of these.
The failure of insurance companies to achieve their projections means most life insurance policies sold in the last 25 years will require dramatic injections of premium (read: your cash) to keep the insurance going.
Some good news, however. It may not be too late. Here’s what to do: get your policy reviewed by an impartial expert who does not have a vested interest in the findings. And then you can deal with the facts head on. But be careful. Most insurance agents will volunteer to review your policy, but they may be simply trying to sell you a new insurance policy to replace it.
But you’ll be much better armed for this as well, won’t you?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
First, I'll say that everyone needs zero life insurance. Just like everyone needs zero auto insurance and zero home insurance. But why do we buy it? It's because we want it. We want to insure against lost value and production. Insurance shouldn't be viewed as "needs" based, it's really a "wants" based product.
Second, before we say that whole life policies are a total waste, let's look at term life insurance. Want to know when you get your greatest return from a term policy? Day one, right after you sign the policy. If you die on your way home from signing it, you've realized your greatest return. Any day after that, the policy is a pure expense with no way of recapturing those premiums.
Whole life policies can be used as a tool for production. Banks invest heavily in them. They have their own departments (BOLI - Bank Owned Life Insurance). I think we could learn something from the banks.
Our whole life policies are the swiss army knife in our toolbox. One tool that can do many things.
30 year term life insurance with a fixed premium is the only product that you will ever need. Universal and whole life products are a huge waste of money. Period. You buy insurance to protect against a catastrophe such as an untimely death of an income earning family member, NOT to give your children an inheritance when you die after retirement age. Life insurance is also NOT intended to pay for certain expenses such as burial or "invest" for retirement. You should save your premiums and invest instead.