In 1990, “John” bought a $1 million life insurance policy.
At the time, the insurance company projected that it would be paid in full to age 100 with 10 payments of $15,000 each based on the interest rate at the time of eight percent.
But now, at age 73, John has been advised by the insurance company that the projection is no longer viable and that it will fall vastly short.
This is not a case of the insurance company trying to deceive someone. On the contrary, since the policy was written, interest rates have fallen to historical lows resulting in a lower return on investment than the insurance company had initially projected.
Now, instead of the policy lasting to age 100, it will now only last until John is 87.
The ramifications of this are straightforward:
A) John may die before age 87 in which case none of this will matter;
B) He may let his policy lapse, but then he will lose all of the $150,000 he has invested in it;
C) Interest rates may rise again and “extend” the coverage past age 87, but it’s unlikely that
it would extend much past age 90;
D) He could resume paying premiums again to extend the death ben¬efit back to age 100;
– OR –
E) John may find a new policy exists in the market, one with better mortality rates and better guarantees. He could then roll over the cash value he has in his existing policy via a 1035 tax free exchange, possibly reducing or eliminating future premiums while keeping or increasing his $1 million coverage.
John is like many insureds who have not kept in regular contact with their life insurance agent. Indeed, some have not seen or heard from their agent in years. Often, they have no idea that they are on a trajectory to outlive their policy and since the insurance company has no way of knowing their game plan, the burden falls on them, the policy holder (or their agent), to keep abreast of the policy’s projected coverage.
Fortunately, life insurance premium costs have fallen steadily for the last 20+ years as Americans continue to live longer. However, older policies most often do not get the benefit of these reduced mortality costs without some homework. The process is simple; here is what you should do:
1) Write the insurance compa¬ny and asked for an “in-force illustra¬tion reflecting the current premium being paid” and a second il¬lustration “projecting what premium is needed to carry it to maturity.”
2) These illustrations will determine whether you are outliving your policy. A competent life insurance professional could take these illustrations and tell you whether it is possible to get a better deal with the current company (by asking to move penalty-free to their new series with lower costs) or from another. Of course your health will factor into whether this is possible or not. Be sure the person assisting you has access to all the major carriers in the marketplace. There is a vast difference in costs depending on your age and health.
It’s never too late to have your policy reviewed. Even people age 80 and older still have plenty of options when it comes to making sure you have the best policy for your situation.