Confronting Underfunded Universal Life

The current extended period of historically low interest rates has left many universal life policies in deep trouble. No one foresaw the current low interest rate environment and so universal life policies without secondary guarantees, that were funded based on prevailing interest rates at the time of purchase, are now drastically underfunded.

Further compounding the problem is that a number of insurance companies have increased cost-of-insurance charges to make up for the losses they are taking on having to credit policies with their interest rate guarantee.

Many producers are wary, and perhaps even a little scared, of contacting clients with this bad news. This makes matters even worse as early detection of an underfunding problem can help to minimize the damage and reduce the size of the premium increase required to maintain the policy going forward.

It’s a difficult conversation to have with a client when you have to notify them that a substantial increase in premium is required to keep their policy going. The client is often faced with only unpleasant options: pay a higher premium, reduce the face amount, or surrender or lapse the policy. In some cases, a healthy insured may be able to qualify for new, more favorable coverage. For others, however, the only affordable option might be lapse or surrender.

Older insureds, especially those with some health issues, may have a more favorable alternative than lapse or surrender — a life settlement. While having an underperforming policy is still, undoubtedly, a painful experience for both producer and client, a life settlement may partially ameliorate the situation.

If lapse or surrender is the only viable option, a life settlement can help maximize the salvage value for the policy. While a life settlement isn’t a panacea for these unfortunate situations, it can certainly ease some of the pain.