Policy Management Mistakes: A Guaranteed Headache
Mistake No. 4
Believing that a Death Benefit Guarantee provision on a Universal Life Policy means the policy is guaranteed.…
The saying goes, “The only two guarantees in life are death and taxes”. Life insurers would like us all to believe that a guaranteed universal life policy is right up there with them. Unfortunately, there is significant room for error in these products too.
A guaranteed death benefit can be incredibly useful in an Estate Plan. The guaranteed life insurance policy is designed to assure that the policy will be there when it is needed.
Over the last 10 years or so, most of the Universal Life policies that were sold included a Death Benefit Guarantee Provision. But, each policy has specific performance parameters that must be met to keep the guarantee and they differ greatly from policy to policy. These can vary by policy series even within the same company. A small mistake can cause the loss of the coverage. We believe as many as 50% of the existing policies with this provision are already flawed!
A Real Life Scenario
We recently had a case brought to us by the trustee of an existing ILIT. Two years earlier they had purchased a new Universal Life policy with a Death Benefit Guarantee. We completed our Investment Policy Statement with a Preliminary Review and discovered that the policy had already lost its Death Benefit Guarantee Provision.
Upon further research, we found that the reason for the loss was that the second year’s premium had been credited 7 days before the policy anniversary. The policy had a higher cost-structure in year one than year two, and since the payment was credited during the first policy year, this additional cost was “captured”. This resulted in there not being sufficient premium allocated to the second policy year to satisfy the guarantee. This small difference destroyed the Death Benefit Guarantee Provision and highlights the problem that each Guarantee Provision is unique and must be carefully complied with in order to keep the guarantee in force.
The Correct Solution
While guarantees are extremely useful, it is prudent to monitor them and make sure they are maintained. Our Objectiview system is an independent, fee only service that provides an objective assessment of the performance of existing permanent life insurance or the purchase of such insurance. It is designed to handle complex issues like these and provide advisors and their clients with the information needed to make important decisions.
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