Variable Life Insurance
Variable life insurance is unique for many reasons. It can have fluctuating value, a fluctuating death benefit, a flexible premium, multiple fees embedded in the policy, it’s a security, and because the cash value can fluctuate in both upward or downward directions one day the cash value may be below the lapse-trigger level and the next day it can be above the lapse-trigger level.
This is not intended to be a complete discussion of variable life insurance, but a guide for anyone who is at risk of their variable life insurance policy lapsing.
What is Variable life insurance and how does it work?
Variable life insurance policies have subaccounts. A subaccount is very much like a mutual fund. Just like a mutual fund a subaccount can invest in a group of stocks and the policyowner can benefit from the upward growth of the account or suffer from the downward loss of the account.
In variable life insurance when these subaccount values increase the value can be used to pay policy fees and charges.
In opposite, when these subaccount values decrease the policy fees and charges may be more than the subaccount value and the policy can lapse.
Surrender charges in variable life insurance
Most variable life insurance policies have a surrender charge that lasts 10 to 15 years. A surrender charge is the amount of money the policyholder has at risk to the insurer if they fail to maintain the policy in good standing.
The amount of the charge slowly decreases over the 10 to 15 years. During this time, the policy surrender value must be more than the surrender charge or the policy may lapse.
As stated above, because the subaccount values change both upward and downward, the policy can be at risk of lapse one day and in good standing the next.
Insurers have computer systems which monitor their variable life insurance policy subaccounts against fees and charges – including surrender charges. When the system identifies a policy in which the surrender value is less than $0.00 (zero), it will generate a pre-lapse notification to the owner.
Many people are confused to receive a pre-lapse notice while their policy shows a significant cash value. During the surrender charge period, some portion of the cash value is collateral to the insurer.
What to do if your Variable Life Insurance is Going to Lapse
When a surrender charge is greater than the surrender value the policy will lapse. There are three ways to maintain the policy and protect the policies collateral value: get positive returns in the subaccounts, pay more premium, or lower the death benefit.
The first option is out of the control of the policy owner. You can invest aggressively in the subaccounts, but you cannot control their performance.
You can however control how much premium you pay and how much death benefit you have. Variable universal life insurance allows for a wide range of premium amounts and this is what the insurer will instruct you to do if the policy is at risk of lapse.
Lowering the death benefit likewise lowers the policy’s fees and charges, and should also be considered as a first option.
What to do After your Variable Life Insurance Has Lapsed
Many people will simply accept their losses and walk away from a lapsed life insurance policy. We suggest that you should have a professional review the policy language and the history of charges for the policy. We’ve found that some policies should not have lapsed and that it was the insurer’s accounting, rather than a lack of money, that accounted for the lapse. In fact, we recently recovered nearly $1 million in death benefits for a client whose father’s life insurance policy lapsed shortly before his death.
Contact The Center for Life Insurance Disputes
Call us: 888-428-4868
What’s the Difference between Variable Life Insurance and Variable Universal Life Insurance?
While both terms are used commonly their is a difference. Variable life insurance refers generally to either a universal life structure or a whole life structure for a life insurance policy that offers subaccount investments for the cash value. The whole life structure has become less and less popular, but policies do exist under this structure.
Variable universal life insurance, or VUL, specifically refers to a policy using a universal life structure. A VUL tends to have a flexible premium and a flexible death benefit for those policyowners who want to make changes to either during the life of the policy.
Can you take a Loan Against a Variable Life Insurance Policy?
Yes you can take a loan against the surrender value of a variable life insurance policy. There are implications for taking loans and generally, if you’re trying to preserve your policy against a lapse, a loan is not recommended.
In most cases the policy death benefit will be reduced by the amount of the loan.
Policy loans are not free. There is an interest charge that accumulates against the policy cash value, not the policy death benefit, that must be repaid or it will cause the policy to lapse. There’s a general misunderstanding among some agents that loans don’t have to be repaid. This is false.
If you borrow against your life insurance policy you should review the status of your policy with an agent at least once per year so you don’t lose your coverage.
What is Guaranteed in a Variable Life Policy?
Generally, if the policy structure is universal life insurance or whole life, very few guarantees are offered. The death benefit will not be guaranteed, the cash value will not be guaranteed and the premium payments you’re making may not be enough to pay the policy fees.
There are other types of life insurance that offer guaranteed death benefits, and these should be considered if your primary objective is long-term coverage.
The primary differentiating feature of variable life insurance is the ability to invest the cash value into various subaccounts of the policyowners chosing. If the investments are successful the policy values can grow significantly and in turn pay the fees of the policy so that no out-of-pocket payments are required.
On the other side of the same coin, if the subaccount performance is not successful, the policy will require additional premium payments or be subject to lapsing.
Monitor your variable life insurance policy with an agent, often.
Because this type of policy has so many fluctuating features, it should be reviewed frequently by a licensed professional. If your policy goes into a state of pre-lapse, you’ll only have 60 days notification. That isn’t a lot of time to make adjustments or extra premium payments if needed. Call your agent, gather your statements, and review your policy often.
Contact The Center for Life Insurance Disputes
If you have a dispute about a variable life insurance policy contact us. We represent policy owners who want to recover their premiums or who are owed death benefits.