Universal Life Fraud

Over just the last two years, tens of thousands of universal life policyholders have been hit with double-digit premium increases from companies such as Axa Equitable, Voya Financial VOYA, +0.77% and Transamerica. More premium hikes, especially to longtime policyholders, are expected.

Universal life was invented in the 1970s and comprised 25% of life insurance policies purchased in the 1980s and 1990s. So the number of people who may eventually be impacted by steep premium hikes could number in the tens of millions.

What universal life insurance is

To understand why this is happening, and whether you should be concerned, it’s probably best to start from the beginning.

For those unfamiliar with universal life, it’s a permanent (as long as you pay the premiums on time) and somewhat flexible hybrid life insurance policy that combines the reasonably affordable aspects of term insurance with a savings element similar to whole life.

Universal life insurance typically offers policyholders a “cash value” savings account that earns tax-exempt interest along with the flexibility to adjust premiums and to increase or decrease death benefits. The policy’s investment account accumulates cash when interest rates are high but can drain it when rates are low, as they are now. In the 1980s and ’90s, the most common guaranteed rate in universal life contracts was 4%; some insurers guaranteed more, according to Consumer Federation of America’s James Hunt.

Premium increases of over 200%

Over the past couple of years, thousands of universal life policyholders have been informed that their insurers are using the fine print of their contracts to significantly increase their long-static monthly premiums. Some customers have been hit with increases of over 200%.

That means some people now in their 60s, 70s and 80s, many on fixed incomes, are being told they need to pony up anywhere from a few hundred dollars to thousands of extra dollars each month for policies they purchased decades ago. Otherwise, the policy will eventually lapse or they’ll need to surrender it and take out whatever cash value is left (and probably owe taxes on that money). Either way, there would be no death-benefit payout.

Nicholas Vertullo, an 82-year-old Long-Island retiree interviewed by The Wall Street Journal last August, reported that his premiums for three universal life policies had more than doubled to an almost unimaginable $30,000 a year (for a $500,000 death benefit). He’d paid into the policies, on time, he said, for almost 30 years.

Why some universal life premiums are soaring

Naturally, policyholders want to know how this could happen. But why this is happening might be just as important.

Life insurers blame the economy. Interest rates began to slowly decline in the 1980s, but then plummeted during the 2008 recession as the Federal Reserve tried to improve economic conditions by making money cheap to borrow. But low interest rates are bad for most investors, including life insurers. Because insurers invest their money a lot like you and I, the low interest rates have meant lower profits.

In response, life insurers have begun to do something that was once unthinkable: Raise premiums on older universal life policies. (Many new policies are tied to the stock market and don’t guarantee returns of 4% or more).

How policyholders and insurers are reacting

Understandably, universal life policyholders — many who had been assured by salespeople that their premiums would never increase — are not taking this well. There are now a dozen lawsuits against insurers who sold those policies, according to the New York Times.

While some companies, perhaps fearing bad press, have reportedly partially reimbursed persistent clients who’d complained after being forced to drop their policies, I’m sorry to say that I wouldn’t bet on any warmhearted insurance industry trends sweeping the nation any time soon.

Protecting universal life policyholders

Some regulators and consumer advocates have been pushing to protect universal life policyholders, though.

The New York Department of Financial Services just proposed a rule that would require insurers to notify the agency at least 120 days before an “adverse change” in “non-guaranteed elements of an in-force life insurance or annuity policy.” This rule would also force insurers to notify consumers at least 60 days before the change. The regulation could be used as a precedent for other state insurance departments.

And the Consumer Federation of America last year sent a letter to all state insurance commissioners asking them to study and prohibit any unfair price increases being imposed on consumers owning universal life policies.

If you have a universal life policy, especially an older policy, and have yet to get hit with higher premiums, they’re probably coming. If you’re proactive, however, you might have time to make a move before getting hit with an increase you can’t afford.

Advice for longtime universal life customers

Get ahead of the curve by:

• Contacting your insurer to find out just how much your policy’s cash reserves are worth. Depending on the amount you have accrued over the years, you might be able to afford future premium hikes.
• Alternatively, consider working with your insurer to lower the policy’s death benefit, and by extension, your costs.
• You could also inquire about changing policies. What else does your insurer have to offer you? Fair warning: It can be hard to get approved for a life insurance policy when you’re in your 60s or older.
• If all else fails, you could look for a life insurance agent or company who would buy the policy from you now in exchange for receiving the death benefit later.