Universal Life - It Sucks As You Age

Retired high-school teacher Nicholas Vertullo long felt confident that his wife, Grace, wouldn’t have to pinch pennies after he died. Nearly three decades ago, he bought a $238,000 life-insurance policy, and later bought three more policies, pushing the death benefit to about $500,000.

But he didn’t anticipate the policies’ annual costs would rise as much as they did, jumping to about $30,000 combined.

“Laying out this kind of money is a hell of a thing for a fellow living on a pension and Social Security,” says the 82-year-old Airmont, N.Y., resident, who aims to keep the policies in force.

It is one of the most damaging but least-understood ramifications of years of low interest rates: Mr. Vertullo is among millions stung by the intricacies of a type of life insurance that combines tax-deferred savings with a death benefit.

Known as “universal life,” these policies accounted for more than 25% of all individual life-insurance sales for much of the 1980s, when the 10-year Treasury yield peaked at 15%. While the 10-year Treasury is off its mid-2012 low of 1.404%, any big increase will come too late for many who bought policies in the 1980s, financial advisers say.

Universal life works like this: The buyer deposits money into the policy. The insurer deducts for expenses, including the cost of the death benefit, and the rest of the money stays in the policy earning interest to help pay some, or all, of the future costs. The annual cost of the death benefit typically rises as the holder ages, to reflect higher chances of death.

During the sales process, agents typically work up “illustrations” to show how the savings build. But the 8%-10% rates highlighted by many agents in years past weren’t guaranteed—which buyers like Mr. Vertullo say they didn’t fully understand.