By Arden Dale
The market downturn of 2008 is still sending shock waves to investors who had counted on insurance policies to cover estate taxes.
Many are receiving unwelcome surprises. Some of these variable life insurance policies are now failing. They began to unravel during the recession because they invest in baskets of mutual funds known as separate accounts. The damage is only now starting to surface for policy holders and the outcome can be startling - and expensive.
Volatile markets can undermine a variable life insurance policy and did just that to many of them after 2008, according to John Resnick, whose Harrisburg, Pa., firm provides life insurance to high-net worth clients.
Many policy holders are only feeling the effects now because the plans’ design can create a delayed reaction. A drop in cash value, together with rising mortality fees and expenses, will drain funds designed to sustain the death benefit.
Once the cash value goes to zero, “the policy will implode without value unless a much higher premium is paid,” says Resnick. Problems get worse as the insured gets older because mortality charges go up annually.
Someone who paid, say, $2 million into a policy may suddenly learn he has lost the cash value and won’t get a death benefit. The insurance company may send a notice requiring more money, and fast – within just 30 or 60 days – to keep the policy alive. Tax attorneys and insurance consultants say this has been happening for a while, but they are now seeing more failures.
Michael A. Mingolelli, Jr., chief executive of Pinnacle Financial Group, in Southborough, Mass., says annual reviews of these policies can help catch problems before they become disasters. But often this isn’t done. Salvaging a policy with a modest account value may be possible, but if enough time has passed that a lot of cash has built up, it is very hard to come up with the amount of money to keep the policy.
Readers, do you own a variable life insurance policy? Are you aware of any problems with the policy?