Why Widows are Left Destitute, The Loss of Their Spouses' Life Insurance Benefits, According to 25 Year Insurance Professional
By Thomas W. Young, CLU, RFC, CSA
Your spouse's financial security may be in jeopardy! Let me explain, you may be have been misinformed for the sake of making a big sale. This is the picture I see more and more when meeting with folks to review their financial plans and goals. One of the most frequent problems I see is someone retires and chooses the single option on their pension plan. That simply means that when they die there is nothing for the spouse. They then purchase a large life insurance policy to replace the lost capital. In theory this sounds like it would work and it would provided it's done with the proper types of life insurance and the correct amount of benefit. In many cases it would actually allow the couple to live a little better since they get more money monthly under the single option than they would get under the joint and life option.
The secret lies in the product you use to fund the life insurance. The common product I see used is a product commonly called Universal Life Insurance or Flexible Life Insurance. The easiest way to determine if this is the kind you have is in the annual statement. If you receive a statement that breaks down and shows the payment you pay, the interest you earn, the insurance or mortality cost, and any administration cost, you probably have universal life. Understanding this product and how it works is an absolute must for the safe operation of this product. Many of the major life insurance companies have been attacked with class action law suits because of nondisclosure of the non-guarantees. Let me show you an example that will help you understand. It starts with a bucket. Twenty years ago this is the way we explained the concept to potential buyers. SEE UNIVERSAL LIFE EXPLAINED
1. First you pay premiums to the insurance company, either one sum or ongoing payments.
2. The insurance company pays you interest at either a guaranteed minimum or the current crediting rate on the money accumulated in the bucket.
3. The value in the bucket represents the savings portion of your account. These are the dollars that earn interest stated in 2 above.
4. The insurance company has a minimum rate of interest they will pay you, and a current rate that fluctuates as the market dictates. Earning more than the guaranteed minimum may also be a result of the amount of money in your bucket. Below a certain amount you may only earn the minimum.
5. The payments you make are flexible and can be increased, decreased or even stopped. The secret is in the "Hole in the bottom of the bucket." Yes, this bucket has a hole in the bottom. The hole allows the insurance company to drain the pond so to speak. This gives the insurance company the ability to take the amounts needed to pay for administration, term or mortality, and commissions costs associated with the policy. These costs increase significantly as we get older. Even to the point where the bucket runs out of money. If your policy runs out of money you have only a couple of options available to you. First, you can increase the amount of premiums you pay. Who wants to do that? Especially since they will most likely be quite large. You can add a lump sum of capital to replenish you funds. However, if you've waited till the cash runs out you may be in for a big surprise as to how much will be needed. The cost most likely will be prohibitive. When this happens the policy terminates for lack of premiums. You lose all the money you paid and the death benefit is no longer payable.
Some of the newer types of policies offer a guaranteed death benefit provided you keep paying the stated premium called the target premium. And have paid the target premium since the beginning. Again the worst-case scenario is that you lose all the money and the insurance. This seems like the best deal for the insurance company. They get all the money and never pay out the benefits. WOW! What a deal.
There is help and sometimes a solution. First, this type of insurance requires constant monitoring. You must request an illustration of future benefits each years to help you know if there is adequate funding. This is called an in-force illustration. You must be specific to ask for the projection to be to at least age 95 and based on current factors such as your current premium payments you are actually making and plan to make. Use the current interest crediting rate as well as the guaranteed rate. Another negative to this is if you add money the face amount of insurance doesn't increase usually, if it does it eats the cash faster.
The insurance industry is fully aware of the problem. Most have been involved in some form of law suit and their remedy has usually been some temporary insurance for a year or two and the only ones that get any real money are the lawyers. A recent lawsuit resulted because of non-disclosure of the non-guarantees in these types contracts. People have been misinformed and under informed. This type of insurance can work for most people if it is funded at a proper level and the projections are realistic.
Thomas W. Young, CLU, RFC, CSA
