Background: Clients with Universal Life (basic chassis) don’t often realize it, but there is a “time to die” that is best “financially speaking” for them.
Our Case: We recently had a long-time client die. It was no surprise as he was in his late 70’s and had experienced failing health for some time. Financially speaking, this was the year that was best to die.
The Question: Is there a way to get an insurance company to pay more and have you pay less for the life insurance policy that you may own. Our client had purchased a $150,000 Universal Life policy way back in the late 80’s. Remember the 80’s when interest rates were high? With high interest rates projected, the $2,000 per year premium he was paying illustrated the policy lasting until he would be age 100. But, as we all know, rates have come down a long ways from their highs of the 80’s, and even though we had urged our client to make larger premium deposits he just did not want to make them or didn’t understand why we were coaching him to do so. Last year his annual statement stated $10,000 in Cash Value and this year it stated $5,000, which means the Universal Life policy was charging mortality costs far in excess of the annual interest earned and was actually using principal to maintain the protection. We were not looking forward to the letter our client would receive from the insurance company in about a year stating that his policy would lapse with no value unless he started paying $6,000-$7,000 next year and increasing each year thereafter. Would he be mad at us, although we had urged him for years to pay more premiums, or would he accept the blame for not listening?
The Results: As we stated at the beginning of “A Time to Die,” what actually happened is the client’s family came out ahead. Let us explain! Had our client died one year ago it would have cost the insurance company $140,000 and the client $10,000, as $10,000 of the $150,000 was his Cash Value which was his “dead or alive.” By paying a smaller-than-suggested premium and using up part of that Cash Value, it actually cost the insurance company $145,000 instead of $140,000 ($150,000 minus his $5,000 of Cash Value at the time of death). So, this particular client died at almost the perfect time “financially speaking.” Note: This is not the case with Whole Life or Term Life policies, only for Universal Life style policies.
Bottom Line: If you or someone you know owns a Universal Life style policy, managing the Death Benefit when one is in bad health can provide more for one’s family than simply paying the premium. Most people with bad health tend to pay life insurance premiums when the notices arrive, not wanting the policy to lapse, but with a Universal Life policy one should work with a knowledgeable financial adviser as to how to maximize benefits when the end is predictable, as it was in our client’s case.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from ValMark Securities.