Purchasers of Variable Life and Variable Universal Life Insurance Policies often don’t understand that the values of the sub-account investments determine the sustainability of the insurance coverage in the policy. The value of the sub-accounts must remain sufficient to pay the cost of insurance. If the cost of insurance increases and/or the sub-account values drop, the policy can begin to spiral toward a premature demise.
The vast majority of policyholders allocate their premium dollars to sub-accounts invested in stocks, usually at the suggestion of the agent. These sub-accounts are volatile, and when cash value drops because of downward movement in the stock market, the policyholder eventually must add money in order to keep the policy in effect. Premiums which the owner thought had vanished forever might suddenly reappear. And premiums the owner had been paying will increase, sometimes to a shocking degree. The policy can become so expensive that the policyholder simply can’t afford to make the premium payments any longer. To compound the hardship of lost fees and expenses that can’t be recouped, the policyholder may have been persuaded to surrender or borrow against other insurance policies in order to fund the variable universal life policy. Now those original policies will have been lost as well.
You might think that these problems could be avoided by choosing safe fixed-income sub-accounts that may have a low return but no volatility. You would be wrong. When a variable life policy isn’t adequately funded from the outset, a low return on invested premiums will hasten the policy’s failure. The cost of insurance in a variable life policy is so high that inadequate growth of the cash value will result in increased premiums. Consequently, policyholders who choose conservative sub-accounts usually will end up in the same fix as those who choose riskier sub-accounts. There really is no safe ground. For more information, we invite you to visit our companion website, lifeinsurancefailure.com.
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Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.