Personal Finance

Is My Life Insurance Guaranteed?

| by Ed Hinerman

Anyone who has health insurance has already, or will soon find out the frustration of having insurance that doesn't have all of it's features guaranteed. At any point the dreaded letter can come and your copay can change, your premium can change or your deductible can change.

It's not because you've done anything wrong. In fact the most infuriating thing is to have your premium raised on a policy that you've never even used, but it happens. It's also, like it or not, not because the health insurance companies are inherently evil or greedy. From their end with skyrocketing health care costs and drug costs, it simply comes down to things have changed and in order to stay in business, which is in your best interest, everyone has to chip in more money.

Life insurance isn't subject to similar forces and therefore has the ability to guarantee all the provisions in a policy. They can guarantee that your death benefit and the premium will remain level for whatever period you choose. The question occasionally, especially lately, comes up about what happens if a company goes out of business? In a nutshell, the block of business is purchased by another company and by law the new company has to guarantee that the guarantees remain guaranteed. Just an FYI. The reason I can confidently state that the block of business will be purchased by another company is that, when it comes up for sale, it is a bargain. A new company can pick up that business without the cost of underwriting. Pennies on the dollar for an ongoing revenue stream.

Now lest someone jump all over me and point out that not all life insurance is guaranteed, let me be open about that. Agents can choose to sell and clients can choose to buy non guaranteed policies. Traditional universal life and variable universal life are the biggest culprits in this area although you will occasionally find term and whole life policies that aren't guaranteed as well.

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A non guaranteed policy is generally sold in a competitive situation when an agent wants to win a sale by presenting a lower price. Since there is usually a higher cost to guarantee than not guarantee, if an agent can convince a client that there is little or no danger in a lack of guarantee, the lower price can win the day.....for the agent. So, what is a non guaranteed policy and why would someone buy it?

All universal life policies have an accompanying illustration with two sides to it. One side shows the guaranteed values, what the policy will do even if the bottom drops out of everything. These guarantees are based primarily on mortality experience, company performance and interest rates that the company earns on it's money. This is a worst case assumption. The other side of the illustration is called the non guaranteed or current side. If it is a non guaranteed assumption they are making a wild guess assumption about future performance in the same areas described above. If it is a current assumption they are assuming that those values that are true today will remain true in the future. A non guaranteed policy is generally sold by making the client focus on the assumptions and saying things like "AIG has met its' assumptions for the past 15 years. They're huge and there is no reason to believe things will change". The guaranteed side might show that a worst case scenario has the policy lasting just a few years if things don't go right. "But trust me, AIG is a wonderful company......".

Buyer beware! The truth is that most universal life policies in the hands of policy owners today are not guaranteed and it is rocky financial times like this that will bring the house down. It comes in a letter stating something like, "Your $3500.00 annual premium is no longer sufficient to support the assumptions of your policy. In order to continue your policy at its' current death benefit your premium for 2009 will be $5600.00". And guess what, once a policy turns south like that, it's just like geese migrating. It's going to happen every year.

Bottom line. Life insurance can and should be guaranteed and you, as a consumer, should insist on your agent showing you the guarantees in writing. If you have an agent that wants you to believe in anything other than guarantees, find another agent.

Another FYI. While I suspect AIG's non guaranteed product clients are in for a rude awakening, their guaranteed products will remain intact whether they are kept with AIG or sold to another company.

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