Why does my universal life policy have no value after 10 years?
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We have paid over $14,000 a year for the last 9 years. We borrowed from it just under $30,000 over the last 9 years. The company is telling me my policy will have no value on the 10th year anniversry because of the rise in the cost of insurance”. They have not been able to explain this to me in understandable language. One of their reps. has told me it would be best to cash it out now and not pay any more premiums. Can you help?””
Asked September 6, 2016
Universal life, you have the face amount or Death Benefit" and a cash value amount or "Savings Amount". These policies have two critical components. The first is the cost of the insurance. This cost is based on your age, health, and the death benefit amount picked when you got the coverage. The second is the rate of return on the "Savings Amount".
The cost of the insurance always increases with your age. The way these policies are normally sold is that the agent initially shows you a printout based on the present values of all the factors that affect the policy. This includes the current rate of return on the "Savings Amount" of the policy. The problem with this is that things always change, including rates of return. If the "Savings Amount" rate of return declines because of the market or even a loan on the cash value then the returns projected on the original printout will be wrong.
Why are they telling you the policy will have no value on the 10th year anniversary? It's because the investment the money is in is doing poorly. If that continues, the cost of the insurance will shortly exceed your policies "Savings Amount". In addition, you have "Borrowed" $30,000.00. This "Borrowed" money puts an additional drag on the "Savings Amount" returns.
All Universal life insurance companies invest the "Savings Amount" portion of your insurance premium into generally "Safe" investments. Although there are exceptions to this rule, this is standard practice. How are "Safe" investments doing today? Poorly, would be a generous answer. Money market rates (which are heavily used by many life companies) are hovering at around 1 to 1.5%. What is happening is the "Savings Amount" part of your premium is not doing well enough to pay for the cost of the insurance when it was first projected. This is why they are telling you that your policy will have no value on the 10th year anniversary. There will be no money to pay for the cost of the coverage. You can fix this but the fix would include you paying back the money you borrowed.""
Answered September 12, 2016 by tim