By Leslie Scism
A popular insurance product of the 1980s and 1990s has come back
to bite many older Americans.
Universal life was a sensation when it premiered, and for some
years it worked as advertised. It included both insurance and a
savings account that earns income to help pay future costs and keep
the premium the same.
That was when interest rates were in the high single digits or
above. Today, rates are completing a decade at historically low
levels, crimping the savings accounts. Meanwhile, the aging of the
earliest customers into their 70s, 80s and even 90s has driven the
yearly cost of insuring their lives much higher.
The result is a flood of unexpectedly steep life-insurance bills
that is fraying a vital safety net. Some find they owe thousands of
dollars a year to keep modest policies in effect. People with
million-dollar policies can owe tens of thousands annually. Some
retirees are dropping policies on which they paid premiums for
decades.
"I'm very scared that everything will go down the drain," said
Bernice Sack, a 94-year-old former hospital billing clerk in North
Carolina.
A $56 monthly premium Mrs. Sack paid when she bought the policy
35 years ago has climbed to $285, despite her efforts to keep the
cost down by reducing her death benefit. Living with a daughter and
getting by on Social Security, she skimps on medications to pay the
insurance bill, sometimes runs late on her share of household costs
and considers ice cream a splurge.
John Resnick, co-author of an American Bar Association book on
life insurance, said of hundreds of older policies he has reviewed
over a decade, "easily 90% or more actually were in trouble or soon
to be in trouble." Many people "are sitting on a ticking time bomb,
and most probably aren't aware of it," he said.
Universal life is among the reasons Americans are approaching
retirement in the worst shape in decades. The insurance policy type
emerged in an era nearly four decades ago when the Federal Reserve
was fighting inflation with high interest rates. Some financial
advisers suggested people forgo traditional "whole life" insurance
and buy less-expensive policies that covered just a limited term,
investing what they saved in the mutual funds and money-market
funds then proliferating. Insurance companies embraced this mantra
of "buy term and invest the difference" by inventing a new
product.
With universal life, the customer buys a one-year term-insurance
policy and renews it annually. In the early years, the premium the
customer pays is a good deal more than the actual cost of the
insurance. The excess goes into a tax-deferred savings account.
The policies are designed so the gains in the savings account,
which the industry typically calls a "cash-value" account, offset
part of the cost of renewing the term insurance each year.
Much depends on what interest rate the account is earning. When
these policies first were sold, U.S. interest rates were unusually
high, and insurers often illustrated the policies to potential
customers using a scenario of continuous 10% to 13% rates.
Companies typically showed worst-case scenarios, too. But with
high rates common, the worst-case scenarios often got short
shrift.
The interest projections were proving unrealistic by the
mid-1990s, and especially so after the 2008 financial crisis
depressed rates. Although many policies didn't allow the
savings-account return to fall below 4% or 5%, that wasn't enough
for early customers. The cost of a year of term insurance soars
once people reach their late 70s.
Compounding the problem, universal life offers flexibility that
is alluring but dangerous. Within reason, customers plan their own
monthly or annual premium payment. They can set it low, counting on
high interest income in their savings account to keep the policy
financially sound.
Customers also can choose to pay less than their planned premium
sometimes if money is tight. Or they can skip a payment altogether.
And they can borrow against their savings account.
Any such move, of course, will spell skimpier earnings in the
account. It is widely accepted that not all customers -- or even
all insurance agents -- fully understood years ago how borrowing or
skipping payments could undermine a universal-life policy.
Defending their sales, insurers say they have paid out more than
$150 billion on universal-life policies, and some owners received
value from their policies by borrowing from them. Insurers stress
that materials given to customers say only a minimum interest rate
is guaranteed; higher rates used in sales pitches are
hypothetical.
Insurers send customers annual statements showing the change in
the value of their savings account and what it has cost to renew
their term insurance. Some companies seek to identify problematic
older policies, sending customers extra communications to be sure
they understand their situation.
"Lincoln annually provides all policyholders with an updated
statement that they and their agent can, and should, use to manage
their policy and assess how various activities including
withdrawals, missed payments and loans may impact its value," said
Scott Sloat, a spokesman for Lincoln National Corp., the company
that sold Mrs. Sack her policy.
He said Lincoln sends additional letters to customers who could
face a large, sudden jump in their premium in 10 years or sooner if
they don't take action, such as by voluntarily increasing premium
payments or reducing the policy's death benefit.
Nicholas Vertullo, an 85-year-old former high-school teacher
outside New York City, has three universal-life policies issued by
a unit of American International Group Inc. One of them initially
earned 9% on its savings account. The policies' accounts today
fetch 4% to 4.5% interest.
"I was abstractly aware that interest rates could vary," Mr.
Vertullo said. After the 2008 financial crisis, "the whole thing
came home in a way that it was no longer an abstraction.... These
life policies were quicksand."
For death benefits totaling about $475,000, Mr. Vertullo is
paying about $30,000 a year, triple the original premiums.
He had planned to replace the income his wife will lose when, on
his death, his teacher's pension and Social Security check stop.
Years ago, he cut the death benefit to repay a loan against the
insurance, and now he is looking into a bigger cut to reduce his
annual cost. Mr. Vertullo said he and his wife have forgone
restaurant meals and travel, living "an austere and Spartan
retirement."
"I hate to confess this: I simply went along," Mr. Vertullo
said. "I don't think I understood completely what the hell I was
doing."
AIG said it doesn't comment on individual situations. It said
universal life is one of a wide range of solutions if offers to
meet families' specific needs.
In the early years of universal life, buyers often were
businesspeople and other professionals who found the tax-deferred
interest feature attractive. The insurance industry's reputation
for conservative products helped allay skepticism. By 1985,
universal life was generating 38% of the industry's premiums for
individual life policies, according to research firm Limra.
Americans bought two to three million universal-life policies a
year in the 1980s and early 1990s.
As interest rates declined, some agents alerted owners that
funding shortfalls were developing. One who did as Pennsylvania
agent Allen Carr, who says he had been "gullible" to believe
universal-life policies could be counted on to work as planned.
When policies he had sold veered from their projected performance,
Mr. Carr said, "it was embarrassing going back [to customers]
saying, 'We have a potential problem.'"
Industrywide, some customers angrily canceled their policies.
Others took a shame-on-me attitude for not having read the details.
Some began voluntarily paying larger premiums to put the policies
on firmer financial footing.
Lawsuits arose, and from the mid-1990s to early 2000s
plaintiffs' lawyers reached settlements over allegedly deceptive
sales practices, such as promising the savings buildup would
eliminate the need to pay premiums at all in a decade or so. State
regulators tightened rules on how insurers could illustrate the
policies, including requiring them to cite interest rates that
could be justified for the long haul.
The industry responded by offering a new wrinkle: guaranteed
universal life, which had a fixed premium designed to ensure
lifetime coverage if paid on time. Many early universal-life
policyholders swapped into this.
The disappointed early buyers of universal life included people
in the industry -- a gauge of how poorly the policies often were
understood. Early this year, MetLife Inc. alerted Ohio couple
Thomas and Rebecca Bell they would need to start paying about $300
a month on a policy for which they had been paying $97 monthly
since they acquired it in 1994. At that time, Mr. Bell was an
insurance agent.
The Bells owned a universal-life version with some added twists
and risk, "variable universal life," which let them invest the
savings in stock and bond funds. After having paid $26,000 in
premiums over the years, the couple let the $25,000 policy lapse.
"There was no way [a $300 monthly premium] would be in our budget,"
said Ms. Bell, 79.
Her 86-year-old husband, who was a tools salesman in addition to
selling insurance, said he didn't remember much about the policy's
particulars, but "It's not what I expected it to be."
A MetLife spokeswoman said, "We understand it can be challenging
to cover the cost of insurance" when a policy contains less
built-up income than envisioned. She said MetLife updates
policyholders annually on their accounts' value and urges them to
contact their agents or the company.
The tumble in interest rates didn't affect just customers -- it
also dinged insurers' profits. As corporate-bond yields fell below
5% in recent years, insurers earned less from investing premiums,
yet still had to pay guaranteed minimums of around 4% on
universal-life savings accounts.
With future profits expected to be hurt by low rates, at least a
half-dozen insurers have invoked policy provisions that they say
allow them to raise the rates used to calculate the annual cost of
customers' term insurance, according to ITM TwentyFirst, which
provides policy-management services.
This means some customers see costs rising not simply because
they are a year older, or because their savings account didn't grow
as planned, but because their insurer has changed its price
formula. As a result, even some customers who kept their policies
well funded are being hit with unexpectedly higher costs.
One is Douglas Bradley, 83, a longtime health-insurance broker
in California, whose premium roughly doubled because of a change
made by insurer Transamerica. "I am absolutely stupefied at this,"
Mr. Bradley said.
Transamerica, a unit of Aegon NV, declined to comment on Mr.
Bradley's situation but said its change was contractually
permitted.
Such increases are "causing more life-insurance policies to
expire even quicker than before" as customers who can't afford them
drop their policies and hand insurers "windfall profits," said
Henry Montag, a principal with The TOLI Center East in Melville,
N.Y., which evaluates policies held in trusts.
Mrs. Sack, the 94-year-old retired hospital billing clerk, was
warned by her insurance agent in 2000 that the universal-life
policy she bought in 1983 was financially off track.
Mrs. Sack had borrowed a little over $4,000 from it and had
skipped some payments. Also, while the policy's savings account
initially earned over 10%, by 2000 this was down to 5.7%. She
lowered the death benefit to $21,000 from $25,000 to repay the loan
but still had to nearly double her premium, to $100 a month.
The premium kept rising. She borrowed a few thousand dollars
more from the policy, and the interest return continued to slide,
to the 4% minimum.
Her experience is detailed in an inch-thick stack of documents,
bills and correspondence, with scribbled names of Lincoln National
representatives she and her daughters have spoken to in their
efforts to figure out the situation.
Mrs. Sack complained last year to North Carolina's insurance
department. It responded that "we understand your frustrations" but
that the company appeared to be in compliance with policy
provisions.
Even though Mrs. Sack has paid more for the insurance --
approximately $39,000 -- than her heirs will ultimately receive,
she doesn't dare stop paying and let it lapse.
"My prime concern is my burial," Mrs. Sack said. "My children
are all so supportive, but I don't want them to pay for mine."
Write to Leslie Scism at leslie.scism@wsj.com
(END) Dow Jones Newswires
September 19, 2018 11:05 ET (15:05 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.