A September 20, 2018, Wall Street Journal article highlights
“A popular insurance product of the 1980s and 1990s has come back to bite many older Americans. Millions purchased these policies.
Universal Life was a sensation when it premiered, and for some years it worked as advertised.
Click on this link to see the WSJ article.
The 1980s History
With the universal life of the 1980s and 1990s, the customer bought a one-year term insurance policy and renewed it annually. One year renewable term insurance automatically goes up in price every year, but for a young person it starts off with a very low premium. In the early years, the premium the customer paid was a good deal more than the actual cost of the insurance. The excess went into cash value in the policy that acted like a tax deferred savings account. The interest rate credited to the cash value account was designed to keep the policy growing and pay for the ever increasing price of the term insurance.
Interest rates were high resulting in high cash value growth in the policy. I have an illustration for a $150,000 universal life policy from January 1986. The policy was illustrated with 10.25% interest for the first 20 years and 10.75% thereafter. Off in the far corner was the fact that guaranteed interest was 4%. With $1,620 per year premiums for a 39 year old, the cash value would grow to $168,300 by age 70 and $378,531 by age 80.
What We All Knew
In 1986 we all “knew” that interest rates were high and would “always” be high. We’d seen them get over 20%. In December 1980 the prime interest rate reached a high of 21.5%. The illustration at 10.25% looked conservative. The insurance company was highly reputable and the agent was very sincere.
But interest rates did not go up and did not stay high for too many years. Starting in February of 1989 they were at 11.5% and declined steadily in the years that followed. In December of 2008 the prime interest rate reached a low of 3.25%. The structure of these policies was busted. The premiums kept on going up and ate up the cash value. Policyholders who paid massive extra premiums to keep the policy in force found that a few years later their cash value was declining again.
Save Your Policy Value
For some the policies have already expired. But if you still have cash value in one of these policies, contact Dave Gillespie of GTED LLC and plan together how to salvage value and meet your goals.
Don’t Be Busted
Whether you like the Ray Charles version or the Johnny Cash version, don’t be like the song. Contact us and let’s plot together.
Lessons To Learn
As the old fables tell us, all worldly truth and wisdom can be boiled down to one sentence:
"And this too shall change"
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