The acting Superintendent of the New York State Department of Financial Services, reacting to almost “1,400” complaints from in-state consumers, recently issued an alert about universal life policies that provided insight for any trustee managing universal life policies. The alert focused on flexible premium universal life policies without secondary death benefit guarantees.
As pointed out in the publication, universal life is meant to be a “permanent” product, designed to “provide coverage for the policyholder’s entire life.” The alert highlighted the features of universal life that every trust-owned life insurance (TOLI) trustee should understand and some steps that should be followed by any policy owner, including trustees:
- “Premium payments, the policy’s existing cash value and ongoing interest credits (or, investment performance in the case of variable universal life insurance) are all used to cover the policy’s internal charges.”
- Those internal charges “increase each year as the insured gets older and can be very high in later years.”
- Most universal life policies (the major exception is guaranteed universal life (GUL)) “do not provide long-term guarantees of premium payments, cash value or benefits.”
- Since the policies do not have premium or death benefit guarantees, the policy will lapse when the cash value goes to zero. We have endured a decade of low interest rates and the original sales illustration often sets premium payments “based on assumptions about future interest rates or market performance” that did not occur.
- Since the “actual earnings of the policy are lower than originally assumed, you may have to make additional payments to keep your policy in effect.”
- Trustees “should be extra cautious with universal life insurance policies whose premiums and cash value projections are based on assumptions of future stock market performance, such as variable universal life insurance and indexed universal life insurance, as these policies will be more volatile.”
- “Owners of universal life insurance policies must check their policies often because changes in interest rates, policy expenses and the timing of premium payments will impact” how long the policy will stay in force.
Universal life is a very flexible policy, but that flexibility comes with a reduction in policy guarantees. These policies must be monitored every year to make sure that they stay on track and if off track, must be dealt with sooner rather than later. Life insurance policy issues do not resolve themselves, and over time the problems grow larger. Policy cash value allowed to dissipate will lead to ballooning future carrying costs because as the alert points out – the charges in the policy increase as the insured ages. This is why a prudent trustee tracks policies yearly and deals with policy issues well out in the future – alerting the grantor (and beneficiaries, if need be) to any problems well before they occur.
The TOLI trustee who does not follow this guidance may wind up with angry clients, or worse, potential litigation for policy mismanagement.