Many people who purchased universal life insurance policies in the 1980’s and 1990’s have found themselves in a bit of a predicament – their policies are quickly running out of money and will “crash” long before age 95 or 100, as they were originally projected. One of the most common questions we receive is why this has happened, and what can be done to avoid this happening in the future.

To understand why this has happened, we have to take a step back and learn how universal life insurance works. Think of your policy on day one as an empty box. When you pay your premiums, you are putting money into the box. Each year, some of that money is taken out of the box by the life insurance company to pay for administrative costs and the actual cost of insurance (mortality charges). Mortality charges are very low for younger people, and get bigger as the person gets older. So, only a little bit of money is taken out of the box initially compared to how much was put into it, and whatever amount is left over receives an amount of interest. Over time, more and more cash goes into the box, and the interest received accelerates the process.

In the 1980’s and even into the early 1990’s, interest rates were very high and these products were often illustrated with annual interest of 8-12%. The cost of insurance charges were also based on the 1980’s mortality (life expectancy) tables, and people now live longer than they did 30 years ago, so the cost of insurance charges for someone age 80 on a policy from 1984 are much greater than someone buying a policy today, which are based on a set of revised mortality tables. Not only that, but insurance companies also reserved the right to increase those charges, all the way up to the maximum that is guaranteed by the contract. When those charges increase, money is taken out of the box at a faster rate. When interest rates decrease (e.g. you receive 4% instead of 10%), there is even less money kept in the box. When the box is empty, the policy “crashes” and there is no death benefit left and no cash value, unless you pay a much higher price for the same amount of insurance.

Many of today’s universal life insurance policies offer a “no-lapse guarantee” or “secondary guarantee” that says if your policy’s cash value (i.e. the box) is $0 (empty), the death benefit will continue for life as long as premium payments are made in full and on time. This is essentially term insurance that is guaranteed for life, as most of these products do not build much cash value and if any cash value is removed from the policy, the guarantees may change. Whole life insurance will offer great cash value accumulation than universal life insurance, but the universal life policies have a much higher death benefit for the same premium, and are the most effective way to get the largest death benefit possible guaranteed for life.

If you have an older universal life insurance policy that still has some cash value, it may be to your advantage to purchase a new policy that includes the “no-lapse guarantee” and complete a section 1035 exchange (from the IRS code) to transfer the remaining cash value from the old policy to a new one with no taxable consequences. This helps to “buy down” the premium you pay each year to guarantee the benefits for life. Of course, the best option depends on a variety of factors, including your current age, health, and cash value of the older policy.

If you would like to speak with us about your policy and what options you may have, please feel free to give us a call at 1-800-571-2980 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  You can also get instant quotes by clicking the banner at the top or bottom of the page.