The low interest rate environment we've been living in for the last eight years doesn't just hurt savers. It's been taking a bite out of the pocketbooks of life insurers too.
That's led some insurers to push through premium hikes that are reportedly as much as 200%!
According to the Wall Street Journal, some policyholders are firing back with a series of lawsuits that seek class-action status.
What's this all about?
There are two words Clark hates when it comes to insurance: Universal life!
The consumer champ has long said anything that has the word "universal" in it is radioactive. First, these plans have huge commissions for the agents that sell them. But the worst part is these policies have enormous fees and often run out of money.
If you can't meet what's called a "capital call," where you have to come up with extra money, your account that you poured all this money into gets wiped out and then you have a giant tax liability on your hands.
With variable or indexed universal life, chances are you were promised — with mind-numbing language going on for page after page — that you were in a magic policy that was a savings account, an investment account and an insurance account all in one.
The policy illustrations you saw probably showed you that you'd pay premiums for some time and then magically the policy would take care of itself. It was a magic carpet policy that after a while would fly on its own but you'd have the benefits of the policy.
In practice, it's hasn't worked out that way. In one case, The Los Angeles Times reported a man named Philip was paying $25 a month for life insurance over the course of 23 years. He then got a notice that his premium was going from $25 to $510 each month! If he didn't pay, he would lose everything he'd paid over the years and there would be no death benefit for his wife when he died.
How does it apply to this situation?
You may not have ever stopped to think about it, but many life insurers take the money from premiums you pay and pour it into the bond market. Then they let it grow until they have to pay out benefits.
In years past, it was common that insurers might earn 10% on the money doing it this way. Those kind of once-reliable returns allowed them to write policies that guaranteed annual interest rates of 4% to 5% to universal life policyholders.
But returns like that are hard to come by in today's environment! So insurers who pushed universal life policies with those kinds of guaranteed returns are upset because paying 4% or 5% to policyholders would basically eat away at all their profit.
That's why they're attempting to push through big premium hikes. In the New York Times article, there's one man profiled with an $11 million policy. He's now facing an increase he says will cost him nearly $300,000 a year.
Hence the lawsuits!
What's a better alternative to universal life insurance?
Four words: Level term life insurance.
It only pays a death benefit and doesn't pretend to be an investment like universal life. Term life insurance offers income replacement for your survivors in the event of your death.
Want to know more about term life insurance? Here are answers to the six most common questions about this affordable, straight forward and simple product that Clark loves.