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Life Policyholders Unaware of Impending Lapse

Consumers are feeling the impact of the poor market and low interest rates in numerous ways, but one way many people are not yet aware of is the adverse impact on their insurance policies.

Did you know that your life policy could lapse even when you continue to pay your premiums timely?  Yes, this can and does happen regularly due to poor policy performance.  The performance of each of your insurance policies should be scrutinized with the same care as your investment portfolio.  If you lack the necessary skills, a life insurance professional should be consulted.

Two popular types of life insurance sold during the 1990s were universal life and variable universal life.  Universal life policies became popular in the over 44-age group because investment returns paid to the policy account, could be applied to help pay the premiums instead of accumulating cash value.  The policyholder knowingly sacrificed the savings component of the policy to instead make the premium payments affordable and level, and still have the policy face amount remain constant.

However, the ability of a premium to remain constant depends on the investment returns of the policy doing as well as what was projected when you first bought the policy.  The investment strategy of these policies heavily dependent upon a continuing bull market and/or high interest rates.  With the advent of the bear market and the federal funds interest rate plummeting to a 46-year low of one percent, many universal life policies are badly underperforming.

Consider the solvency actions necessary when a stock or mutual fund purchased on margin, takes a nose dive from the purchase price.  If you want to keep the stock or fund, you must continuously add money to the account.  So too with these insurance policies—unless you increase your premiums, the policy will lapse well short of the planned in-force period.

Policy Statements May Contain Alerts of Impending Lapse

Many consumers are now receiving statements, which notify them that their policies will lapse much earlier than expected.  These financial predictions have been made using the prevailing market conditions and interest rates, assuming no increase in premium payments.  Unfortunately, numerous people fail to understand these warnings or do not notice them because they are placed lower on the statement or in footnotes.

Request an In-Force Illustration

If you own a life insurance policy, do not delay in reviewing the policy’s financial performance.   Immediately ask your insurance company for a current in-force illustration.  We will be happy to assist you in obtaining an in-force illustration and explain the results.  This will show how the policy is expected to perform in the future under current market and/or interest-rate conditions.  This, in turn, will let us know if the policy is soon to lapse or if the policy reserves are critically low.

Once it is determined that the policy will lapse prematurely, you have a number of options.

• You may choose to increase the premiums enough to prevent the anticipated lapse and maintain the original face amount.  Before doing so, you would need to request that the carrier send you an in-force illustration projecting what the higher premium payments would be, assuming that the current market conditions and interest rates remain stable.  However, this may not be your best choice because there is no protection against additional premium increases.  Also, insurers now offer better performing insurance products than the original policy, which have guaranteed no-lapse features.

• If policy design permits, you may keep paying the current premiums but reduce the death benefit enough so that the policy will not lapse. The problem here is that you may want to maintain the original face amount (death benefit) because it fits your family's needs.  Therefore, you may need to buy additional life insurance through a second policy and there is no guarantee that you may not be forced to again lower the face amount on the original policy.

• You may elect to buy new life insurance that might be a better deal for you.  There are new universal life products available with guaranteed no-lapse features and shortened, level pay options.  For example, you could purchase a policy designed with the following features:

• Death Benefit guaranteed to 120 years of age.

• Premiums guaranteed to be level and not to increase.

• Pay for only 20 years - after 20 years premiums drop to zero.

Be careful not to surrender the old policy though until the new policy is in place.

Remember, as with your investment portfolio, there are no shortcuts to this evaluation and a professional life insurance broker should be consulted to analyze your life insurance policy performance and make recommendations when necessary.

Schmalberg Associates is a privately held corporation, owned and operated by the husband and wife team Gedalya and Aliza Schmalberg.  Aliza has a Bachelor of Science degree in Mathematics from the University of California, Los Angeles.  She is the president of the corporation and routinely deals with legal, underwriting and policy investment design issues.  Gedalya has a Bachelor of Religious Studies from the Rabbinical College of America, Morristown, New Jersey.  He is the vice-president of the corporation and applies himself to product illustration comparisons, policy performance evaluations and client needs analysis.  Gedalya brings to the table over 25 years of expertise in leveraging computer technology and  the internet to deliver comprehensive solutions to the insurance market place.

We are prepared to help.  Call us today at (718) 467-3860, or use our e-Mail Help Desk.

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