Sudden rise in premiums possible with universal life

Difficult decisions can await policyholder

Your Money

February 15, 2004|By Julie Jason

Fourteen years ago, when he was 60, a reader from Stamford, Conn., bought a $100,000 universal life insurance policy designating his wife as sole beneficiary.

Since then, he has been paying premiums of $356 per quarter.

But a few weeks ago, the insurance company told the policyholder that the premium would more than triple, to $1,090 a quarter. He was shaken by the letter and uncertain of his options.

The kind of policy he bought, universal life, was invented about 25 years ago as a lower-cost and more flexible alternative to whole life. Byron Udell of AccuQuote.com said both are forms of permanent life insurance and generally are designed to insure someone for life. That's opposed to term insurance, which you typically buy if you want insurance for a certain period of time.

When the reader bought the policy, he received a written illustration containing two types of information: guarantees and projections. The illustration showed his $100,000 death benefit guaranteed to remain in force for only the first year of the policy. The projections showed the policy lasting for 14 years, with a buildup of cash value.

Sooner or later, the cost of insurance might exceed the policy's cash value. When that happens, the policy lapses.

At age 74, the cost of insuring my reader is higher than his scheduled total annual premiums of $1,424. Without any cash value in the policy, it will lapse unless he pays the increased premium.

This reader has a difficult decision to make. He can keep the policy in force by paying the increased premium, but that will not keep the cost of the policy, and his premiums, from rising further: Udell said the premium would be expected to rise after five years and keep on going.

If he is healthy, the reader can consider buying a policy to replace the current one. A 10-year term policy might be a cheaper alternative. At his age, he might be able to qualify for such a policy with a highly rated insurer for about $2,000 a year, according to AccuQuote.com.

That means that our reader would be assured of having a death benefit of $100,000 at a premium guaranteed not to increase for 10 years.

After that, however, he would have no more coverage. And mortality tables indicate that he has a good chance of outliving the policy.

A better alternative might be a guaranteed universal life policy. Again, assuming that the reader is healthy, he can buy one at the same price that his existing carrier would charge to continue his coverage, said Jeffrey A. Wright, a chartered life underwriter from Connecticut.

The new policy would be issued with a "no-lapse rider" and guaranteed in two ways: no increase in premium during his lifetime and a $100,000 death benefit guaranteed to age 105. Guarantees of this sort had not been invented when he bought his policy in 1990.

With a no-lapse rider, you can be assured that you will not get a nasty letter increasing your premiums for as long as you live. Neither this option nor the term policy is available to our reader if his health isn't good enough, in which case he'll have to stick with his existing policy.

Attorney Julie Jason is a money manager and retirement finance author who writes for The Advocate in Stamford, Conn., a Tribune Publishing newspaper. E-mail her at yourmoney@tribune.com.

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