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Costs of Universal Life Coverage Going Up

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Confronted with low interest rates, major insurers are exercising their contractual rights by raising rates on “universal life” insurance policies they sold to consumers years ago. Universal-life policies combine a death benefit with a tax-advantaged savings account. Owners deposit money into the policy’s “cash-value account,” where tax-deferred interest accrues. From this account, the insurer deducts for expenses, including the annual cost of the death benefit. According to The Wall Street Journal, since the 1980s they have accounted for at least a quarter of all new individual life insurance sales and more than a third over the past decade.

The fallout from this is that people in their 70s and 80s are facing higher annual charges for life insurance they may have bought 30 years ago. In addition, this may just by the first domino to fall. According to the article, industry consultants expect other insurers to follow suit, which could mean higher annual costs for potentially millions of Americans holding various types of insurance.

The extra annual charges will depend on the insurer and the amount of coverage, but the article says it could range from about $150 for people with $250,000 policies to six-figure sums for those whose coverage tops $10 million.

The rate increases come as insurers are under pressure to improve results as years of low interest rates have pressured investment income. Life insurers rely heavily on interest from bonds bought with premium payments, and dollars they invest today yield less than anticipated when insurers sold the policies.

Industry insiders say the right to increase rates is clearly disclosed to customers. Cost increases are permissible under many policies, though the circumstances under which this is allowed varies by contract.

Life insurance is a key component of any financial plan. AAII has written numerous articles on the topic to assist our members in navigating the types of policies that exist and finding the one that best meets their needs and circumstances. They include:

These articles are only a few examples of the many benefits of AAII membership. To learn more, consider a risk-free 30-day Trial AAII Membership to start becoming an effective manager of your own assets.

 

 

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