Owners of policies sold in the ‘80s and ‘90s face steeper-than-expected premiums
Many older Americans are facing retirement in the worst shape in decades, in part due to universal life insurance products they bought in the ‘80s and ‘90s that have not performed as expected.
“Universal life was a sensation when it premiered,” said a piece written in the Wall Street Journal. “It included both insurance and a savings account that earns income to help pay future costs and keep the premium the same.”
The policies were offered when the Fed was working to curb inflation by pegging interest rates at high single digits or double digits. At the time, some financial advisors advised clients to forgo whole life insurance in favour of less expensive term-life policies, and invest the difference in mutual funds and money-market funds that were mushrooming.
“With universal life, the customer buys a one-year term-insurance policy and renews it annually,” the Journal explained. “In the early years, the premium the customer pays is a good deal more than the actual cost of the insurance. The excess goes into a tax-deferred savings account.”
The gains in the savings account, which depended heavily on interest rates, were supposed to mitigate the cost of renewing the term insurance each year. Insurers often pitched policies to prospective customers with illustrated scenarios of continuous 10% to 13% rates; with high rates prevailing back in the day, worst-case scenarios were typically shown but glossed over.
By the mid-‘90s and after the 2008 financial crisis, the optimistic interest-rate projections were proving unrealistic. While many policies specified a floor of 4% or 5% on savings-account returns, that was cold comfort for early customers for whom one-year term insurance premiums rose as they reached their late ‘70s.
The problem was even worse for policyholders who exercised options to pay less than their planned premium or skip a payment when they’re strapped for cash, as well as borrow against their savings account. “It is widely accepted that not all customers—or even all insurance agents—fully understood years ago how borrowing or skipping payments could undermine a universal-life policy,” the Journal noted. Angry customers, many of whom were locked into paying much steeper costs than expected, filed lawsuits alleging that the insurers engaged in deceptive sales practices.
In defense of their sales, insurers pointed to more than US$150 billion in payouts that have been made on universal-life policies, as well as the value some owners derived from the loans against their policies. They also stressed that only a minimum interest rate is guaranteed in materials given to customers, while higher rates in sales pitchers were only hypothetical. To provide additional caution, some companies work to identify problematic older policies and inform customers using communications aside from their annual statements.
Seeing their current and future profits being hit by low interest rates, some insurers have also invoked policy provisions that they say let them raise rates used to calculate premiums on customers’ term insurance. “As a result, even some customers who kept their policies well funded are being hit with unexpectedly higher costs,” the Journal said.
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