Currently, we are in a period of low interest rates that is unprecedented in our nation’s economic history. That is, I think it’s unprecedented. I’m a lawyer, not an economist, so I don’t possess that type of financial knowledge and don’t know if that statement is really true.
I suppose I could fact-check it on google. Yeah, I could do that. But it’s Sunday night, the Patriots-Broncos game just started, Boardwalk Empire is on in a half hour, and my first priority is to complete this post, interest rate history be damned.
Anyway, let’s agree–interest rates are really, really low.
Consequently, cash-value life insurance policies are not performing well. Many that were sold in the back in the 80′s, 90′s, and early 2000′s are in danger of lapsing. This is because the cash value is earning a low interest rate. When the policies were sold years earlier, rates were high (remember that?) and so were the performance projections given at the time, since no one imagined rates would ever be so low.
I previously wrote a post entitled “The Exploding Universal Life Policy” that addresses this same issue of how low rates have impacted the performance of life insurance policies. Why am I doing it again, you might ask? My first response is that I don’t mind repeating myself. I don’t mind it in the least.
My second is that it is covered in an article I recently came across in Investment News, which discusses how these cash value or universal life insurance policies (for the purpose of this blog post, the two are basically the same) were used by estate planning attorneys to fund irrevocable life insurance trusts to help alleviate estate tax obligations.
According to the article, years ago “[e]ven the most conservative agents and brokers were projecting 7% to 10% long-term interest rates.” See the problem? Policyholders were told they could pay “x” each year to keep $”y” in coverage in effect. But then they found out that they needed to pay twice the amount of “x” to keep that same $”y” in coverage.
Unfortunately, I’ve seen more than my share of these cases…