Can Life Insurance Disappear?

I recently had to inform someone that his policy would most likely disappear in 12 to 24 years.  This is a permanent life policy that he took out in 1995 from a very well respected insurance company.  He has been faithfully paying the original planned premium on time every month since then.  Yet it is not performing as he or the original selling agent expected for a seemingly secret reason.

The most surprising thing to him was that no one in the insurance company could tell him when exactly his policy would disappear.  It could lapse by age 72 on a guaranteed basis and by 84 on the current basis.  Both the guaranteed and current sides of his in force illustration showed the exact same crediting interest rate of 4.00% and both assumed his payments were all made on time.  So if the interest rate doesn't fluctuate, why is the range so large between the guaranteed and current?

To answer that question, let’s look at the difference between these statements taken from his policy:

“Current values – reflect the current cost of insurance rates and the current interest rate.  These values are not guaranteed and are subject to change by the company.” 

“Guaranteed values – reflect the guaranteed maximum cost of insurance rates and the guaranteed minimum interest rate of 4.00%.”

Remember, the current interest rate is the same as the guaranteed interest rate.  The only other variable is the cost of insurance. 

So, who does that statement say controls the cost of insurance?  The insurance company.  This is a contract that has been in force for over 12 years from a very well respected life insurance company. 

This life insurance company has, if anything, increased in both overall size and reputation of financial strength.  I have heard some agents describe the difference between the guaranteed and current columns as being a function of interest rate and the financial stability of the company.  This is not entirely true.  The cost of insurance may fluctuate because the company is in financial trouble, but that is not the only reason.  The insurance company can increase costs for any reason it sees fit.

That appears to be a lot of risk coming from only one company.  When people take out a permanent life insurance policy, they don’t expect one company to have such a large impact on their family’s financial future.  Interest rate risk is easy to understand and is usually acceptable, but the type of risk that the insurance company poses seems almost like a secret hand taking an unknown amount out of their life policy. 

Of course, not all life insurance policies are designed this way.  There are ways to design greater certainty in your family’s protection.  That’s why reviewing your coverage on a regular basis is prudent, even if you bought it from a reputable company and have had it for years without any problems.  You want to discover problems now, not years down the road when it may be too late.