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Other Articles
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Life Insurance
What Will Happen To Your Life Insurance When You Are 91?
By William Kaufman
Branch Manager, Raymond James Financial Services, Inc.
Many life insurance policies that were purchased within the last ten years have been severely affected by interest rate declines, putting their viability into question. Most insurance owners are not aware that, in view of recent events and trends, they are likely to outlive their life insurance policies.
Medical technology is successfully keeping us alive a lot longer, and while the trend is very positive for the future, it may mean that your life span will outlast the financial resources of the insurance policy originally sold to you on the basis of higher intererest rates and/or higher portfolio returns that have since diminished.
The winners: the insurance companies, the losers: you, the policy owner.
Many insurance agents assumed death would occur at younger ages in structuring life insurance policies, and they also assumed higher interest rates. What we mean is, it was assumed that policies would “carry” themselves with a level premium that assumed that than current interest rate returns of say 7 or 8% would continue forward, for example, until a person reached 95. At that time, assuming whatever the aggregate deposits toward the policy were, this fund would be be sufficient to carry the policy to age 100 at the “agreed upon” past premium level.
But this calculation was done at 8%. Suppose that the general interest rate being earned by the cash value dropped (as indeed it has) to 6% or 5% or lower. In that case, more money has to be put into the policy to assure that it can “last” until the insured dies- perhaps in his 90’s.
What most insurance owners don’t understand is that the additional sums required by these policies to stay in force past an age of say 90 or 95 may be horrific. For example, an owner of a million dollar policy which runs out of money at the insured’s age of 91 (due to lower interest rates than originally projected) may have to put in more (much more) than $100,000 a year just to keep the policy in force. Many people will have little choice but to “walk away” from their insurance policies at the discovery. And it is even possible that all the cash values would have “vanished” at around the time of “discovery.”
The simple reason: two original assumptions in structuring these policies were in many cases far off the mark. Interest rates and portfolio returns have declined precipitously, and we are moving logorithymically toward increased longevity.
Everyone who has purchased a life insurance policy in the last ten years, and wants to hold onto it, really needs to study this issue.
One of our standard approaches is to revisit these older policies and bring current our interest rate and mortality assumptions. The results should than be compared to the original projections that were furnished to the insured when the policy was purchased. There are basically several things to weigh. 1. What are the projected expenses going forward in each policy. 2. What interest rate is needed to meet, at the least, those projected internal costs, so that the policy can be kept in force until age 95 or 100.
The big question is, as in many cases, what if the interest rate required to keep the policy to age 95 or 100, is much higher than current rates, so that without additional (and often, substantial deposits) the policy “implodes” prior to death? What do you do than? And more importantly, what do you do now to mitigate this problem?
The answers to these questions are very specific to one’s personal situation. The facts needed to understand the gravity of the situation (which many insurance owners don’t even know about) are not too difficult to attain. They lie in carefully analyzing available ledgers and rate tables.
The consequences of leaving this undone will lead to many disappointments and heartaches for families and potential beneficiaries.
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