Universal Life Insurance Policies Under Fire

Of all the insurance policies people are advised to have, life insurance is one of the most important. Because it protects a person’s dependents financially after that person dies, it is strongly advised that everyone with a family have some sort of life insurance policy.
Unfortunately, according to multiple consumer advocates, universal life insurance policies that were initially purchased 20 or 30 years ago have recently attracted attention for potentially fraudulent practices leading to a steep increase in premiums.

Unfortunately, according to multiple consumer advocates, universal life insurance policies that were initially purchased 20 or 30 years ago have recently attracted attention for potentially fraudulent practices leading to a steep increase in premiums.

Universal Life Insurance

A universal life insurance policy is not the same as basic, or term, life insurance, which only pays a so-called “death benefit” (the amount that is paid out when the policyholder dies, provided death occurs during the timeframe of the policy). Instead, Universal life insurance is a policy in which the policyholder not only gets the death benefit but also gets whatever accrued value the policy has built up over time, in essence making it an investment as well as an insurance policy. Written for a specific span of time—for example, from the age at which one purchases it until that person reaches 85 years old— it’s a type of flexible premium adjustable life insurance because the policyholder can make certain decisions about the premium payment and the death benefit within the policy. The policy’s cash value earns interest over the life of the policy, and the policyholder can borrow against or even withdraw that total value.
Policyholders with universal life insurance pay their premiums into an accumulation account, and then insurance companies remove from that account whatever monthly cost is needed to cover the policy. This monthly payment is determined by policy fees, the death benefit, and how much money is in the accumulation account to draw from.

Insurance companies are supposed to set premiums based upon not only the cost of the benefits but also things like a commission for the person who sold the policy, administrative fees, and, of course, profit to the company. They are supposed to make all of these calculations using standard accounting practices. However, in the past year or so, certain universal life insurance companies have premiums that have spiked significantly for tens of thousands of policyholders. There is growing suspicion that these companies are increasing the premiums so that they don’t have to make their payouts at the agreed-upon interest rate when the policies end. Policyholders are even starting to wonder whether the premium increases are intended to terminate their policies early, a move that would benefit the insurance companies while leaving the policyholders with little to show for their years of contribution to these funds.

Increasing Rates

Several companies have come under scrutiny for increasing their rates between 40 and 70 percent. In some cases and states, class-action lawsuits have been filed against them, and the Consumer Federation of America has asked the National Association of Insurance Commissioners to look into their behavior.
Insurance companies have made a variety of statements about these increases, most of which allege that it is within their rights to make these changes, that the changes still fit within the parameters of each policy, and that the rate increase is due to the companies being unable to plan for the future in terms of when and at what rate death claims would begin and how successful their investments would be, among other factors.

Policyholder’s Stake

Many policyholders are likely to lose their policies altogether if their premiums skyrocket because they won’t be financially able to continue to contribute. They may still be eligible for the death benefit but would likely lose all other benefits. They may be able to cash out their policies and walk away with the cash value, but that constitutes a loss compared to what they were promised they would receive. Additionally, if they do lose their policies, it will likely be more difficult to get term life insurance policies now as many of these policyholders are older and therefore in poorer health, making it harder to get a new policy.