Several insurance companies have announced their intention to raise cost of insurance rates (COI) on specific blocks of universal life insurance policies over the past decade. These rate increases have compounded the challenges faced by trustees managing universal or variable universal life policies.
COI charges are designed to increase each year as the insured ages. As people live longer, policy owners find themselves contending with charges they hadn’t anticipated. If insurance premiums cannot be raised, or worse, are reduced or suspended, this negative compounding effect could have a severe impact on the policy’s cash value. It may even lead to a policy lapse or necessitate a reduction in the death benefit, putting trustees in a liable situation.
The impact of increased COI rates on a policy becomes clear in updated illustrations provided by the insurance company. If the policy faces an accelerated lapse or unattainable maturing premiums, it’s advisable to reassess its suitability for the Trust and the insured’s ability to qualify for new life insurance.
Replacing the current policy may be an option, based on the insured’s health and availability of more cost-efficient alternatives. However, despite the increased COI rates, the current policy might still be more cost-effective than other options. If policy replacement isn’t viable or the best choice, there are various ways to restructure the in-force policy for continued viability, including:
• increasing the premium of the policy to sustain it to the desired point;
• reducing the death benefit within tax compliant constraints, enabling the current (or lesser) premium to maintain the policy, albeit with a smaller death benefit;
• or a combination of the above.
Alternatively, if changes in the estate plan render the policy’s death benefit unnecessary – the consideration of surrendering the policy for its cash value or the investigation of the feasibility of the life settlement could be undertaken.
With their various moving parts, the management of universal or variable universal life insurance policies has been challenging for a long time. Their complexity is such that a change to one part can significantly alter the performance of the policy. With news of a COI rate increase, a thorough review of the affected policies should occur. After the initial policy review and review of the policy’s suitability for the Trust, the picture becomes clearer as to the best plan of action.
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