A big selling point to universal policies are the investment side. A traditional universal policy has a set interest rate attached to it, I have heard of some at 4-5%. These rates are usually guaranteed.. for the first year. The part that most will miss is the line in the paragraph that states the insurer has the right to adjust the rates to the market condition. Some insurance companies hold the right to do so every quarter if they want. So in the event of markets and interest rates falling, they can keep their profit margin by adjusting down your rates. During good times they may increase your rate... but why would they when they can keep the extra spread between your rate and the current going rate.
An option to the rate adjusting is having an Index added to your policy. What this means is that you are given the option to choose from a few different funds or markets that will give you a chance to keep up with the market during good years. One that is popular is an S&P 500 Index that is suppose to mirror the up/down of the S&P. On face value it sounds like a good thing till you read some of the fine point print of some policies. For example, if the Index raises that year by whatever % your cash value should grow. Thats great, sounds like you're getting the best of an investment account and life insurance. Then you come across a line of text reading... There are yearly caps placed on index funds, what this means is lets say that the S&P is rocking and does a 15% or even a 20% return or lets take 2013... a monstrous 32% return. Your pumped because the policy you have is indexed to the S&P 500, the growth should be great right?! Well the cap in your policy states that you may have only gotten a max return of 12-14% depending on the index chosen. Then what happens to the other 20% growth that you should have received? The insurer pockets the difference. To make things more difficult... the cap itself is also adjustable year to year... Hopefully there is a minimum guaranteed growth somewhere in the policy for bad years.
Do you remember me stating that some policies had options of if you got both the cash value and death benefit if something happens to the insured? Unlike a whole life policy, this type of policy gives you the choice of as many as 3 options to choose from when it comes to getting both. The first option is basic, your beneficiary gets either or. They get the death benefit or the cash value (if any) that has been saved/grown. Second option (for an increase in premium) is you receive both the death benefit and cash value. The third (also for an increase in premium) is a return of all your premium paid upon death with the death benefit. Mind you each option you go up increases the price... and just like cars... the nicer the option the costlier the price.
A universal policy will also have a surrender charge added to it, as a way to incentivize you to stay around for at least 10 years. These surrender charges can get out of control. Especially if you are making a big upfront payment, WHICH I RECOMMEND STRONGLY AGAINST!! I have seen... just recently.. a surrender charge well in the $20,000 mark. The agent/insurance company knew exactly what he was doing by getting adding such a huge charge. They protected the commission and their profit from that sell. Its hard to tell someone that that years worth of income for the average person is all but gone because of an agents ignorance and inability to explain things correctly. Truth be told, shame on the company that set up that product the way it did. Thats another story that I do not have authorization to share so, just know we are doing what we can to fix the matter for the client.
I have seen a lot of recent clients become confused on what their previous agent told them. A big selling point to higher net worth people is that this can be used as a Tax Shelter. This is semi true, see many a high net worth person has dropped in a big initial payment and told that in the future they take a loan out on it. Then they just not pay it back and they won't have to worry about taxes. What they fail to tell them is that with this type of cash value policy the cost of insurance goes up as most do with age. By removing money from the cash value, you are taking away your cushion agents that increase. If you are not adding enough and the cash value is depleted you have the option of paying a big per/month increase in the policy which you may not be able to afford; or the more common the policy lapses. At that point tax on all that growth (if any with some of these funds) will become due. Can you imagine the surprise of families who used this for college funds or retirement. They may have removed maybe $100,000 over the years never repaying and now face a tax bill to the tune of $15,000-$30,000 depending on their tax bracket?!
The last point I would make about a universal policy is one that most are guilty of doing, selling on the non-guaranteed side of the policy. These policies come with a projection of what if.. which isn't a bad thing on its own. In investments we do this all the time, what becomes a problem is when you sell it as a guarantee. I would say 8/10 people that I meet with and have this policy always tell me the same thing.. "My agent told me i would be getting this side" referring to the non-guaranteed side of the form. That is the most convincing side of the policy there is. The truth of it though, your only guaranteed what the company guarantees. So if you look at the guaranteed section it will tell you what you are guaranteed to have if you stay to the plan. The other is best case scenario. Like I said though.. projections are fine.. as long as you explain both sides of the table, not just the the perfect plan.
This type and variations of this policy has to be the hardest to follow and easily the most expensive type out there. I mean even for someone who is schooled in reading them I still ask the client to give me a day to review and see what exactly they have. Never be afraid of getting a second opinion on this type of policy. You usually have a 20-30 day free look period. You could use that to get it reviewed and see if its something you still want after knowing the good and bad. Just remember though, the third party was just the messenger. A last bit of advice.... in the event that an agent sells you something that is bad for your finances and you bring it to his/her attention. Don't continue to do business with them just because they sell you on another policy. I mean he/she is the professional, they should have done it right the first time... right? Would you use a doctor again if instead of making you feel better, made you sicker the first time you visited them? Maybe/maybe not... but you would at least get a second opinion.
Its been complicated web world... Next time we will touch on Return of Premium Term Insurance...a new kid on the block.
Wishing you financial health,
AXI C.
No comments:
Post a Comment