In January, there was a story in Investment News about a very large insurance company that wanted to raise premiums because they were facing insolvency. The company didn’t want to declare bankruptcy, so they looked for a way to survive. They needed to find a way to slash $175 million in future liabilities. In other words, they needed to get rid of some of their policies. The only way they could do that was to get some of the policyholders to cancel their insurance. The question was, how?
The brainstorm they came up with? Jack up the life insurance premiums on some universal insurance policies.
By jacking up the cost of the insurance, it would eat up the cash value of the policy until there would be none. Once the cash value was gone, the policy holders would have to cough up lots more premium. The company figured that many of those policy holders would simply walk away and cancel their policies. When they did, the insurance liability would disappear too. So the company wanted to triple the cost of insurance to drive away the business.
Fortunately, insurance companies can’t just do that whenever they feel like it. They must get their state insurance commissioner to approve rate increases. And even if the state approves, policy holders can always sue to stop the increase. That’s exactly what happened in this instance, and the court ruled against the insurance company.
Insurance is a valuable financial tool. But whole life is not one of the best investments you can make. It’s very profitable for insurance companies in the first few years, and less so as the policies get older. Since many people allow their insurance to lapse before they die, this works out really well for insurance companies. But when people hold on to the policy, it can cost the companies a great deal. That’s why they wanted to hike the insurance costs.
What can you do to safeguard yourself against this problem?
Only buy term life insurance.
When you buy term life insurance, the company can’t increase the rates during the term. In other words, if you buy a 20-year term policy, your premiums are fixed for 20 years. You have them over a barrel and they can’t do anything about it. Sweet. It’s one reason I love term life and dislike whole life.
But if you are tricked into buying whole or universal life, you could become a victim of this. If your carrier tries this little trick, call the insurance commissioner and complain. Consider cancelling your insurance policy and forming a class action suit if push comes to shove. There will be plenty of attorneys lined up to take the case.
Have you ever received a letter informing you of an increase in your life insurance cost? What did you do about it?