Trouble with Universal Life Insurance Policy

[gregwils]

My mother purchased a universal life insurance policy on her life in 1995 from Manulife, which was later purchased by John Hancock. She rolled over a whole life policy with a cash surrender value of $38,000. Additionally, she paid a $2,400 annual premium since 1995. I think in total she paid approximately $92,000 since 1995. The death benefit is $130,000 and the policy owner is an Irrevocable Trust established for my brother who has learning disabilities. The policy had a guaranteed rate of return of 4%. The broker was a friend of the family and am comfortable he would have not intentionally deceived my mother for personal gain, he is now out of the business.

Here is the problem. My mother was 74 when she purchased the policy and she is still alive (97 in Nov). It's an awful policy. It's like a term policy with a cash component. The cost of the insurance increases every year, and by the time you are in your mid to late 90's it's unaffordable. I received a potential lapse notice from Hancock requiring payment of $11,000 by Sepember 12 or the policy will lapse. I have read through the policy and it appears that they are in contractual compliance. The one thing that really bothers me is that in reference to the interest rate applied, it simply says that they determine the interest rate - no formula, no description, no benchmarks.

Initially, Hancock refused to provide an illustration on a policy with the potential of lapsing. I wasn't certain if I should laugh or cry when I read it. They want $11,000 right now, $70,000 in each of the next two years, then $30,000 in her 99th year. It defies logic and certainly defies any type of sound investment strategy.

My mother is not alone, lots of people are in this same boat. There are numerous articles written about these issues (https://www.nytimes.com/2016/05/21/your ... utiny.html). I will likely contact an attorney to see if there is any hope of recovering anything. She did receive some benefit in the form of insurance coverage for all those years, but I know that she believed she was purchasing permanent insurance. She would have never accepted any risk associated with the trust and my brothers needs.

If anyone has any thoughts or suggestions for proceeding, I would appreciate you sharing them.

[pshonore]

WSJ article had an article on this a few weeks ago.

https://www.wsj.com/articles/happy-100t ... 1500548402.

Its a difficult problem for the industry and the consumer.

[mhalley]

Sounds like she might have a case of some kind for being sold an inapprpriate policy, i.e. Financial exploitation of the elderly.
She had a need for permanent life insurance and was changed from it to an inappropriate type of insurance. You might contact the local state insurance commission or APS, MAYBE EVEN A LAWYER.

[gregwils]

The policy will have a cash value of $0 in less than 45 days. In essence, there is no cash value right now. $92,000+ in premiums and previous policy's cash value and absolutely nothing to show for it. Seems like attorney may be the best option, but not high probability.

[NotWhoYouThink]

Why an attorney? She bought the policy at age 74. If she had died the next week, would you have declined to accept the money from the insurance company?

I understand she meant to provide for her son and her gamble did not work out. That is unfortunate, but I don't see how involving attorneys can help. Spend your time and money caring for your mother and brother

[Avo]

What is the cash value of the policy? I don't see how it can be zero at this point.

Whatever it is, taking it would seem to be the best option. I doubt very much that a lawsuit would succeed, or be cost effective even if successful.

[pshonore]

What is the cash value of the policy? I don't see how it can be zero at this point.

Whatever it is, taking it would seem to be the best option. I doubt very much that a lawsuit would succeed, or be cost effective even if successful.

Have any idea of what the annual premiums are for a 97 year old for 130K of coverage? I have a UL policy (in my early 70s) for which the cost this year is approx. $25/$1000 coverage. I'm trying to decide what to do with that. For a 97 year old, the cost has to be well over $100/$1000 coverage.

I agree that a lawsuit would probably not get anything. And even permanent life insurance is not immune from this problem as the WSJ article points out

[gregwils]

I completely understand all the mechanics and costs of the policy, it just makes me sick to think that nearly $100,000 yields nothing but profit for Hancock. It was NOT intended to be a gamble, it was intended to be a permanent fund - giving up some long-term upside of an investment for short term protection. This is a big, big problem for the industry and they will likely suffer a black eye that will take decades to fix.

I agree an attorney most likely yield nothing.

[Nate79]

This is one of the many reasons that these are horrible products. Most policies lapse for the exact reasons in this thread.

[pshonore]

I completely understand all the mechanics and costs of the policy, it just makes me sick to think that nearly $100,000 yields nothing but profit for Hancock. It was NOT intended to be a gamble, it was intended to be a permanent fund - giving up some long-term upside of an investment for short term protection. This is a big, big problem for the industry and they will likely suffer a black eye that will take decades to fix.

I agree an attorney most likely yield nothing.

They may have made 100K on your policy, but they lost 100K on the policy they sold on the same day to someone else who died a year after they bought it. Thats what pooling of risk is all about.

[afan]

I must be missing something here. Unless I completely misunderstood the OP, the problem is NOT that the insured has reached the age at which the policy matures. The problem is that the policy is about to lapse due to the cash value shrinking to zero.

That can only happen if the premiums being paid were not enough to keep the policy in force. A traditional whole life policy would have a premium that would not permit lapse provided it was paid and there were no policy loans.

Universal life policies are often sold by showing the option of paying a lower premium and 'probably' or 'maybe' keeping the policy in force- if everything works out OK. One can avoid this risk by paying the amount required to guarantee the policy will remain in force. The insurance company will tell you what that premium is.

So, again unless I misunderstood the OP, mom converted a whole life policy to universal life, either paid premiums that were too small or took money out of the cash value (via surrender, loan, or used to make up the difference in premiums), and now there is not enough left. The alternative would have been to have paid higher premiums over the years. The policy can be kept in force by paying enough to make up for those underpayments in years gone by. It seems unlikely it would worthwhile to do this, but that is the only comparison to make.

None of the above is to dispute the notion that it was a bad idea to buy the policy in the first place. Water long under the bridge, but I don't get the logic in holding life insurance on someone who, I assume, has long since retired. The alternative would have been simply saving the money and passing it on to the heir at death, or during life if needed.

[BL]

I don't think there is any doubt that she was convinced to sell her whole life (which may have been suitable) and buy universal life which was not suitable since she wanted to guarantee providing for her son. It is certainly worth contacting you state insurance regulators to see if there is any recourse at this late date, since she has had coverage for many years and would have benefited from it had she died within normal life expectancy.

The age when she bought it and the fact that the agent may have been churning, surrendering one to get commissions on the new policy, would seem to favor her. I have no idea if it would be worth spending lots on a lawyer to litigate.

[munemaker]

Its a difficult problem for the industry and the consumer.

I understand the consumer, but why for the industry? They are either receiving big payments or getting out from under liabilities. Seems like they are the winners.

[ThePrune]

Additionally, she paid a $2,400 annual premium since 1995. I think in total she paid approximately $92,000 since 1995. The death benefit is $130,000 and the policy owner is an Irrevocable Trust established for my brother who has learning disabilities. The policy had a guaranteed rate of return of 4%.

Your posting inspired me to do some reading on the topic. There is currently an epidemic of lapsing UL policies, apparently because the selling agents 2 decades ago tended to calculate low premium payments to make the policy exchange look attractive. In fact, they made the premiums just high enough for them to earn their full commission, but only high enough to maintain the policy for about 20 years.

I was puzzled by the combination of large premium payments (approx. $92,000) relative to the stated policy face value of $130,000 for a policy that is ready to lapse! But the articles I read stated that most of the UL policies issued 20 years ago were not constant payout policies (Option 1 or A), but instead were Option B (or Option 2) policies where the policy payout would be the sum of the face value plus the total premium paid in. Such a policy has much higher internal Cost of Insurance (COI) because the policy cash value doesn't quickly approach the payout value as the annuitant ages.

If you mother's policy is an Option B type, it would go a long way to explain why the lapse is occurring. Of course, the selling agent's motivation for selling such a policy type is questionable.

[navyitaly]

If its not a modified endowment contract (MEC) and no loans against it..let it lapse, pay taxes on the gains (from proceeds) and keep rest and move on...pretty simple.

[pintail07]

Surprised the policy hadn't crashed prior to now. At the time it was issued projected rates were 6-7% or more. If rates had stayed the way as projected but alas they nosedived and are staying there. Few folks overfunded the policies and now the mess is showing up and has been for several years. The same thing happened to blended whole life policies. It has taught many agents to never, if possible, sell any policy without guaranteed premiums.

[pshonore]

Additionally, she paid a $2,400 annual premium since 1995. I think in total she paid approximately $92,000 since 1995. The death benefit is $130,000 and the policy owner is an Irrevocable Trust established for my brother who has learning disabilities. The policy had a guaranteed rate of return of 4%.

Your posting inspired me to do some reading on the topic. There is currently an epidemic of lapsing UL policies, apparently because the selling agents 2 decades ago tended to calculate low premium payments to make the policy exchange look attractive. In fact, they made the premiums just high enough for them to earn their full commission, but only high enough to maintain the policy for about 20 years.

I was puzzled by the combination of large premium payments (approx. $92,000) relative to the stated policy face value of $130,000 for a policy that is ready to lapse! But the articles I read stated that most of the UL policies issued 20 years ago were not constant payout policies (Option 1 or A), but instead were Option B (or Option 2) policies where the policy payout would be the sum of the face value plus the total premium paid in. Such a policy has much higher internal Cost of Insurance (COI) because the policy cash value doesn't quickly approach the payout value as the annuitant ages.

If you mother's policy is an Option B type, it would go a long way to explain why the lapse is occurring. Of course, the selling agent's motivation for selling such a policy type is questionable.

That sounds like a "refund of premium" policy. I believe with most UL policies, you have a death benefit choice of the stated amount of insurance (sometime with a COLA adjustment at your option) or the stated amount plus the cash value (if any). I don't know how you could price or structure a policy to provide the stated amount plus a refund of all premium.

I've had a UL Policy for some years. Every year I get an annual statement showing me where the policy stands in terms of cash value and most importantly how long the policy will stay in force if paying the current premium (with both current and guaranteed rates). Unfortunately the average consumer has no idea how to read the statement and probably throws it in a drawer.

And I would wager the average UL Cost of insurance for a person in their 90s for a 130K stated amount is in the five figures. Thats where the cash value went. The policy probably should have been cashed in 10 years ago.

[afan]

Considering what the cost of insurance may have been, mom may have ended up better off underpaying the premium and letting it lapse rather than paying the much higher premiums needed to keep it in force.

[BruDude]

I don't think there is any doubt that she was convinced to sell her whole life (which may have been suitable) and buy universal life which was not suitable since she wanted to guarantee providing for her son. It is certainly worth contacting you state insurance regulators to see if there is any recourse at this late date, since she has had coverage for many years and would have benefited from it had she died within normal life expectancy.

The age when she bought it and the fact that the agent may have been churning, surrendering one to get commissions on the new policy, would seem to favor her. I have no idea if it would be worth spending lots on a lawyer to litigate.

It's pretty hard to say what the purpose of this policy replacement was based on OP's post. For all we know, the whole life policy had a $40k death benefit with $38k in cash value and the woman wanted to provide a larger death benefit instead. Before going on a witch hunt about an unsuitable sale, it would be prudent to get all of the facts first. Now if the WL policy had the same death benefit, that would be a different story. I have a feeling that is not the case.

In reading OP's post, it appears that the policy was effectively lifetime coverage as she is now 97 years old. It is entirely possible that it was designed at the time to last through age 90, 95, etc, and not designed to last through age 100+.

What does the original sales illustration show? She would've had to sign a copy of that to purchase the policy. At this point, OP doesn't really have any options other than to let it go or pay the outrageous premiums.

[gregwils]

Thanks for all the responses. Many of you are spot on. I have not discussed this with my mother, she's nearly 97 and would be sick to think the policy is gone and it's well beyond her today to comprehend the detailed mechanics of UL policies. I believe her motivation was likely to provide the maximum death benefit for my brother should she pass. He lived with her until age 95, so she was able to provide for his basic needs during that time. If she had passed at an earlier age, she did not want him to be a financial burden on myself of my sister.

The original illustrations all showed her passing between her early 80's and early 90's, though the contract does show the COI through 99. The COI has a steep ramp during one's 90th decade. The cash value was wiped out in the last three or four years as the insurance has a nearly exponential ramp. The combination of her advanced age and the low interest rate environment created a perfect storm.

I take responsibility for digging into this five or ten years ago to understand it, but I always assumed it was a whole life policy and didn't think there was need. I am by no means an expert in UL, but have learned a lot in the last two weeks. There may be applications for them, but I am a firm believer in separating risk and savings.