Life insurance may not last a lifetime


New York -- Urgent memo, to everyone with cash-value life insurance: Your policy, which you expect to last for life, may not -- at least, not if you keep on paying your current premiums. Unless you put up extra money, certain types of contracts will expire before you do, leaving your family without funds.

Some cash-value policies were built to last. But many others are tottering, especially those bought in the 1980s when insurers projected double-digit rates of return on your policy's cash values.

In the cold light of the 1990s, it's clear that the cash in those policies won't grow as fast as was forecast. Unless you bring your cash values up to full strength, your policy will not stay in force, at affordable premiums, into old age.

That fact is so hard for people to accept that I'm going to repeat it: The "permanent insurance" that you believe will last for life might lapse when you're only 60 or 70 or 80 -- leaving you without the coverage that you spent your youth paying for. If you don't discover the awful truth until you near the cutoff age, you're sunk. At that point, you will probably not be able to afford the extra money it will cost to keep the policy in force.

How can you find out if you're at risk? Call your insurance agent, or another agent who works for the same company. Ask for an "in-force ledger statement," showing how long your insurance will last if you keep paying premiums at your present rate. For the policy not to lapse, it has to "endow" -- usually by age 95 or 100. A policy endows when its death benefit equals the cash value.

If the ledger statement shows that your policy won't make it, ask the agent how much extra you should start paying now to keep your insurance coverage in force.

Any time the credited dividend rate on your policy drops, ask the question again.

What has confused so many consumers are the computerized policy illustrations that agents often produce when you buy. Those illustrations look like snapshots of the future. You see -- apparently to the dollar -- how fast your cash values and death benefits will grow if you hold the policy for 30 years.

But complaints are rising that policies aren't working out as the illustrations lead you to believe. Growing numbers of lawsuits, charging deception, are being filed against agents and their companies, reports insurance expert Ronald Horn of Baylor University. Sen. Howard M. Metzenbaum, D-Ohio, recently held hearings on how people lose coverage because they were misled.

The first wave of failures is afflicting people with "vanishing premium" policies. With these policies, you pay extra-high premiums for a few years, after which your insurance is supposed to be paid up for life. Often, people buy vanishing-premium coverage because the illustration "proves" it to be cheaper than low-premium term insurance. But the scheme won't work if interest rates decline. When the year comes that premiums are supposed to stop, they don't -- so the policy grows steadily more expensive.

Because contracts like these miss their "vanish" date, their unsoundness is discovered early. But thousands of other consumers, with policies they won't think about for the next 20 years, are innocently paying premiums that are too small. Good insurance agents don't let this happen.

They explain from the start how insurance works and keep you informed of whether you're building sufficient cash. But agents who are predatory, cowardly or dumb don't tell their clients that their policies may implode and don't keep them up to date on the coverage.

Insurance companies could fill this knowledge gap, says Chicago insurance consultant Ted Bernstein. They could disclose, on your annual policy reports, how long the policy will stay in force if you keep on paying your current premium. But such disclosure is rarely seen. Having looked at all the current proposals to clarify policy illustrations, I've concluded that they aren't worth saving. Any useful information they contain is more than outweighed by the damage they do. Mutual funds aren't allowed to predict what they might be worth in 30 years. Insurance policies shouldn't either.

If you're ever shown a policy illustration, shoot it and then claim self-defense. If you already own a cash-value policy -- please -- find out if it's really the protection that you think it is.

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