Eastman & Smith Ltd. Alert: Life Insurance Policies in Danger


Many older individuals own life insurance policies that, unbeknownst to them, will likely lapse without value during their lifetimes.

The most popular form of permanent life insurance for the past several decades has been "universal life," which resembles combining a term life insurance policy with a savings account. Universal life is attractive because of the premium flexibility, but guarantees are often minimal in such policies, and a universal life policy lapses without value (unless it has a "no lapse guarantee") when the cash value shrinks to zero. When the policy was purchased, the illustration often used an interest rate that was significantly higher than the current historically low interest rates. As a result, the policy will not last nearly as long as projected in the original illustration.

The starting point for reviewing a potentially underfunded policy is to obtain an "inforce illustration" from the life insurance company in order to determine, assuming the current interest rate and funding level, when the policy will lapse. If the policy is projected to lapse prior to a conservatively-estimated age at death (at least age 90, if not age 100), either the premiums will need to be increased or the face amount reduced. The life insurance company will be able to provide inforce illustrations indicating either (i) the level of premium needed to continue coverage to specified ages, or (ii) the reduction in face amount needed to continue coverage to specified ages at the current funding level.

As the above makes clear, universal life policies cannot simply be purchased, then ignored, without incurring the risk that they will lapse without value during the insured's lifetime. Inforce illustrations should be requested at least every three years to assure that the policies are, and will remain, adequately funded.

Should you have any questions regarding life insurance policies, please contact one of our estate planning attorneys.