By Mark Colbert
Expert Consultant, Life Insurance Company Fraud
Of all types of life insurance, it's Universal Life which provides its policy owners with the highest degree of flexibility. Unfortunately, many of those seemingly loyal, trustworthy agents have found ways to "twist" that flexibility around for their own benefit.
Let's review the Universal Life concept:
One of the products that has developed within the last twenty years in the life insurance industry is Universal Life. Although really just a generic or general name, Universal Life, is used to refer to a number of products which have been developed around certain fundemental insurance principles, but have a different look to the buyer and new flexibilities.
Universal life is a continuation of the same insurance principles, only the packaging is truly different. But remember, it's still life insurance.
Universal Life is a flexible premium product. Except for the first year, (in some cases two) no minimum annual premium must be paid by the policyowner to keep the policy in force. The premium is the amount paid by the insured for that year. Different amounts can be paid into this policy each year. However, there are certain rules and restrictions for large premiums as well as for the cash value needed for the policy to stay in force.
Except in year one, the premiums for a universal life policy can be zero, level or change each and every year.
Universal Life is an adjustable type of insurance policy. The death benefit coverage of a universal life policy can usually be changed without having to issue a new policy. The original face value, called the specified amount, can be increased with evidence of insurability. The death benefit can be decreased simply by a partial surrender. Premium changes only impact the cash value accumulations and thus need not be dated back to inception of the policy.
That cash value growth is based upon current interest assumptions which can be changed periodically as long as the policy remains in force. The U/L policy is designed to allow and accommodate change.
When a Universal Life policy
is issued, the insurer frequently quotes a "target" premium, a recommended
level annual premium amount that, if paid by the policyowner, may be sufficient
to keep the policy in force throughout its lifetime. However, the amount is not
guaranteed by insurer, so that the target premium may or may not be adequate to
actually accomplish this.
Some companies to offer secondary guarantees related to the target premiums they quote. Under these guarantees, the insurer will agree to keep the policy in force for a specified period of time, such as 15 or 20 years, as long as the insured pays that target premium during the recommended period of time.
Think of a U/L policy's cash
value or accumulation fund as a place to put the extra money when the insured is
over-charged for his/her policy each and every month. It's basically a savings
account strapped onto an increasing term policy. The money in this account earns
interest and is made available to the policy owner at any time. When/if future
premiums are not sufficiently paid, the policy literally "borrows" from itself
to make that unpaid premium payment.
If the higher or "target" premium is paid for some time, the accumulation fund will increase and this money can be used to pay future premiums. But in a few years when the term costs escalate, there won't be enough money in the accumulation fund to supplement your payment and the policy will lapse with no value. I've heard these called "Power Term" policies because they are usually less expensive than Yearly Renewable or Level Term plans. This is usually a bad idea for someone who wants to have insurance later in life. Furthermore, agents are paid commissions on the higher or "first year" amount and will have usually left the company (or been promoted) by the time you find out the truth.
"My agent told me that I could use the money from another policy to pay-up my policy."
Let's assume that your agent took $20,000 from an old policy and front-loaded it directly into your new U/L policy's accumulation fund. Let's further assume that he/she "forgot" to mention that your annually increasing cost of insurance is really $2000. Sure, the accumulation fund is earning interest, but there's no way it can keep up and your policy will lapse in just a few years with absolutely no value.
"My agent told me that I could lower my U/L premium payment so that I could afford to buy coverage for my spouse. In a few years, their policy will be paid-up and I can once again apply the extra money to my policy."
Yes, this actually happens and can be
both Vanishing Premium and Premium Misdirection Fraud.
"I want to have a life insurance policy until I die - whenever that may be. How can I tell if I'm paying enough money into my policy to accomplish this?"
Great question. Life Insurance companies are supposed to send their U/L policyowners an Annual Statement or Summary of Value each and every year the policy remains in force. If they don't, there could be a problem. Nevertheless, the policyowner should become familiar with these documents and review them carefully. In the past, some people have just put these away and forgotten about them until a problem arose and they were forced to dig them out again. By then, any hope of recovery had usually passed.
If you suspect you have a problem with a policy, it may very well be in your best interest to contact someone OTHER than the agent who sold you the policy. When I contact agents directly for help on issues relating to one of their policyowners, I am astounded when they deny ever having written such a "horrible" policy and try to place the blame on another agent. Even though their signature is on the documents at the back of the policy and they have been formally named as the agent of record, they know nothing about it.
"I have a wonderful agent who is a pillar in the community or has come highly recommended by my friends."
That's great! It sounds like you found one of the good ones. Remember this though: In the last 5 years, experts (including myself) have identified well over 23 million potential victims of Life Insurance Fraud in the United States. If you are counting on a policy for your family's security after you're gone, "rolling the dice" may not be in their best interest.
"My agent told me that I could borrow money from my cash value at any time and that it wouldn't hurt my policy."
It usually won't - right away. Did the
agent also tell you that you were borrowing the money out at an 8% interest
rate? Or that if you died before the money was replaced, the amount of the loan
- plus interest would be deducted from the death benefit?
"The cash value in my life insurance is tied up in mutual funds or the stock market and my agent tells me that's where it'll make us the most money."
LIFE INSURANCE IS AT BEST, A POOR INVESTMENT VEHICLE AND SHOULDN'T BE CONFUSED WITH REAL INVESTMENT PRODUCTS. IN MY OPINION, A LIFE INSURANCE POLICY HAS BUT ONE PURPOSE; THAT IS TO PROVIDE YOUR BENEFICIARY WITH A CHECK WHEN YOUR HEART STOPS BEATING - THAT'S IT.
Somebody mark my words, "Variable
Insurance Fraud is the very next time bomb waiting to go off." Within the last
two years I have had intelligent policyowners tell me, "My agent told me that
our money is somehow tied into the Stock Market and if nothing changes for the
next 30 years, we'll be millionaires." Does anyone realize how hard it is to
respond to a statement like that with a straight face? When is the very last
time the Stock Market remained unchanged for 30 minutes - much less 30 years?
Granted, there are those who can use the laws of averages to show a stable
market or even one with a steady incline, but these are the very same people who
will profit by your decision to spend money long before you do.