Warning About Lapsing Insurance Policies

June 1, 2009 | Subscribe to our RSS Feed

Life insurance policies are in serious trouble because of low interest rates. An insurance plan issued years ago, when interest rates were higher, may no longer be earning the investment returns it needs to pay premiums. This leaves the owner to cover the shortfall, costs, and a potentially large death tax bill.

The policies in the most danger were those issued in the 1980s and 1990s, when the interest rates used for the projections were much higher. The most troubled policies are universal and variable-life, but whole-life policies are beginning to fail as well.

Problems begin when a policy is set up to make self-pay premiums, based on the assumption that investments will beat the interest rates used. Money builds up and pays the premiums automatically. But with declining interest rates, this doesn’t work, and the policy begins taking out internal loans to keep up with the premium payments. Often, the owner is unaware this is happening, and is left to pay premiums out of pocket longer, or for the entire duration of the policy.

The policy holder’s liability is determined by the structure of the policy, so owners need to know these terms.