Interest rates on Universal Life policies have been dropping for the last two decades. In fact, back in the 1980’s when some policies were introduced, the rate was almost 12%, considerably higher than it is now. In addition, equity markets perform dynamic returns, not static compounded returns as the illustration suggests, thus impacting policy performance for Variable Life policies. If you purchased a policy based on non-guaranteed projected premiums, poor performance could cause a lapse in coverage unless you pay higher premiums.
When Variable Universal Life hit the market in the late 1980’s, it shifted additional risk to the policyholder. People were eager to obtain these policies because they offered flexibility with premiums and payments, and because they could determine where the policy cash values were invested. While this certainly gave consumers greater upside potential, there was also greater downside potential. When the market was performing well in the 1990’s, illustrations of the expected performance of variable life, universal life, and whole life policies showed much higher rates of return than what is typically seen today. Because of these flawed assumptions, many policies sold in the late 1990’s and early 2000’s are in serious danger of lapsing much earlier than originally projected.
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