|Don't let a bear market threaten your life
Everyone watching Wall Street is worrying about their
investments. They ought to worry about their life insurance policies
If your life insurance contains an investment component,
as is the case with universal and variable policies, market fluctuations
could affect your policy and your premiums.
"The economy does affect all types of insurance,"
says Jack Rittenhouse, vice president of the National Association
of Estate Planners and Councils. "A policy like a universal
or variable policy is very tied to market results."
With variable and universal policies, the investments
are meant to grow as the policy ages, offsetting premiums. When
you buy the policy, your agent will give you a projection of what
your policy will be worth years down the line. But if the investments
don't grow or if they just don't do as well as originally predicted,
you may have to make up the difference, reduce the face value of
your policy or risk losing your coverage.
"People typically rely on cash value to pay the
premiums," says Jack Dolan, spokesman for the American Council
of Life Insurers, an industry group. "And if the policy is
not performing as well as you had hoped due to a market that has
declined, then the individual obviously has to pay the premiums."
But there are a couple of things you can do to guard
against that scenario, according to industry experts. First, make
sure you buy the right policy. If you have a low tolerance for risk,
stay away from variable policies.
"If you can't afford to increase your premiums
later on when there is a downturn in the stock market, you should
not use a variable product," says Paul S. Graham III, chief
actuary for the ACLI. But Graham, who has his own variable policy,
says the products have a financial upside too. "What I'm banking
on is that over time the cash value will grow to the amount that
I don't have to pay premiums at all."
Tend your money
Unlike term or even whole life, a policy with an investment component
needs some care now and then.
"You have to pay attention in down years to make
sure the growth of the reserve fund is sufficient to maintain the
death benefit set up by the policy," says Rittenhouse, also
an agent for New York Life Insurance Co.
Your insuring company will send you statements, at
least annually, that sum up how the investments are doing. Many
companies also have Web sites that will let you check on the progress
of your account as often as you like.
"Spend a couple of hours a month following the
market, so you know what the market is doing," Graham says.
Find out what the dangers are for your particular
policy. For example, regular universal life is seen as a pretty
stable product, says Graham. "But if the actual interest rate
you earn is less than the interest rate it was assumed you'd make"
your account might need some fine-tuning.
If you have an established account, "The money
you've put in the policy already [should be] locked up at the [assumed]
rate," he says. The real danger would be "if there was
a prolonged recession with interest rates below 3 percent,"
Graham says. Read carefully, ask questions. And don't be afraid
to ask "what happens if ...?" he says.
Diversify -- and ask for help
Usually, the same conditions that boost stock prices are less advantageous
to bonds, and vice versa. Just as with retirement and investment
accounts, it pays to spread your money throughout a variety of different
options -- stock funds, bond funds, etc. -- and hedge your bets.
"[An investment-based insurance policy] should
not have been purchased for the short-term perspective," says
Ed Graves, chair of life insurance for the American College in Bryn
Mawr, Pa. "It's designed to take care of savings in a marketplace
that's up or down."
"It doesn't hurt to spend a small amount
of money to help make this decision," says Dennis Kroner, president
and CEO of Pitt, Ryan & Linnear Ltd., a Chicago CPA and financial
planning firm "It's always a good thing for someone making
investment decisions to go to an investment professional."
When the going gets rough
If you already have a policy and want to scale back your risk, you
have several options. Most companies will let you change your investment
strategies within your existing policy fairly regularly. You can
opt for a less aggressive strategy or simply diversify your selections.
Many companies will also let you roll your variable
or universal variable policy into a whole life or regular universal
policy. Done properly, there shouldn't be any tax consequences,
says Graves, who advises consumers to investigate rolling the policy
within their current company first.
There will likely be some costs, and you may have
to qualify all over again, says Rittenhouse. "To my knowledge
no company lets you [replace policy types] without furnishing evidence
of insurability at the time of the switch," he says.
But Graves disagrees. If the insurance company sees
that the move is decreasing their risk -- for instance the face
value of the new policy is less than the cash value of the old --
there would not likely be a recertification requirement, he says.
And before you think of dumping your policy, remember
why you bought the coverage in the first place, Graves says. "If
the reason is still valid, you still need coverage. And it's very
expensive to drop it. You should stand in good stead if you're managing
your portfolio properly."
"I would never agree that a life insurance policy
should be looked at as an investment," Rittenhouse says. "It's
a life insurance policy."
Dana Dratch is a freelance writer
based in Atlanta.
-- Posted: Sept. 17, 2002