Universal Life Insurance, a 1980s Sensation, Has Backfired
September 25, 2018 by Leslie Scism
A popular insurance product of the 1980s and 1990s has come back to bite many older Americans.
Universal life was a sensation when it premiered, and for some years it worked as advertised. It included both insurance and a savings account that earns income to help pay future costs and keep the premium the same.
That was when interest rates were in the high single digits or above. Today, rates are completing a decade at historically low levels, crimping the savings accounts. Meanwhile, the aging of the earliest customers into their 70s, 80s and even 90s has driven the yearly cost of insuring their lives much higher.
The result is a flood of unexpectedly steep life-insurance bills that is fraying a vital safety net. Some find they owe thousands of dollars a year to keep modest policies in effect. People with million-dollar policies can owe tens of thousands annually. Some retirees are dropping policies on which they paid premiums for decades.
“I’m very scared that everything will go down the drain,” said Bernice Sack, a 94-year-old former hospital billing clerk in North Carolina.
A $56 monthly premium Mrs. Sack paid when she bought the policy 35 years ago has climbed to $285, despite her efforts to keep the cost down by reducing her death benefit. Living with a daughter and getting by on Social Security, she skimps on medications to pay the insurance bill, sometimes runs late on her share of household costs and considers ice cream a splurge.
John Resnick, co-author of an American Bar Association book on life insurance, said of hundreds of older policies he has reviewed over a decade, “easily 90% or more actually were in trouble or soon to be in trouble.” Many people “are sitting on a ticking time bomb, and most probably aren’t aware of it,” he said.
Universal life is among the reasons Americans are approaching retirement in the worst shape in decades. The insurance policy type emerged in an era nearly four decades ago when the Federal Reserve was fighting inflation with high interest rates. Some financial advisers suggested people forgo traditional “whole life” insurance and buy less-expensive policies that covered just a limited term, investing what they saved in the mutual funds and money-market funds then proliferating. Insurance companies embraced this mantra of “buy term and invest the difference” by inventing a new product.
With universal life, the customer buys a one-year term-insurance policy and renews it annually. In the early years, the premium the customer pays is a good deal more than the actual cost of the insurance. The excess goes into a tax-deferred savings account.