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?
I have had a whole life insurance policy for 50 years. It was upgraded 32 years ago to increase the death benefit. I am now 70 years old, and the other day I got a letter from my insurance company saying my premiums would go up 8 fold (from $30 to $420) or else my policy would no longer be in force. Can they do that? That sounds like a scam. I thought that’s why I bought whole life when I was in college so this couldn’t happen. I don’t know what to do now. Please advise.
Neal Frankle, CFP ® says
Tim, although this is not much comfort, this is exactly why I rarely suggest whole life. Please consult your agent and read your policy but it’s likely that they can.
Would be interested in knowing what happen since your post.
I called my insurance company Minnesota life and was told my heirs get both the cash value and the minimum guaranteed death benefit
Ronald Dodge says
UL is with investments while WL isn’t. But even with WL, it still has a cash component, which for the most part is treated as savings, but the problem with it, the insured/beneficiaries can only get either the surrender cash or the face amount, not both. Term life insurance on the other hand has ONLY the face amount, no cash component to it.
Now why would you have a cash savings put onto your life insurance that you can’t pass onto your beneficiaries on your own life insurance should you pass away?
I still can’t understand why you knock down whole life, and then give an example of universal life. The truth is each person, family or business has unique needs. The advisor’s job is to find the best solution, which may or may not include permanent life insurance. But if you are contemplating estate planning, what else would you use?
Ronald Dodge says
I’m with Neal and Ginger on this one. I don’t care for Whole/Universal Life either. Why would you have a savings or an investment tied to your life insurance, which your beneficiaries would not get that money when you pass away? After all, with such insurance policies, the payout can only be either the cash value (surrendering it) or the face amount (either when it endows or when the insured dies). That’s another argument for going with term instead and invest the difference yourself.
Well I already knew I did not like whole life but this adds another reason. Term life sure is the way to go!