Life insurance lures: be sure of what coverage you really need
It's 6 p.m. You're just sitting down to dinner, Junior has already spilled his milk, and the TV news is about to announce the verdict in the six-month-long political corruption trial. Then the phone rings. ``Hi, I'm from Guaranty Guaranty Life Insurance Company,'' the caller says happily. If you don't hang up instantly, the salesman may get a chance to tell you about the company's new high-yield, cash-value life insurance policy.Skip to next paragraph
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Even with falling interest rates, many companies are still pushing life insurance products with high rates that either can't be sustained beyond the first few months or, if they are kept up, will put the company out of business. At a time when the more conservative and respected companies are offering yields of 9.5 to a little more than 10 percent on the investment part of their policies, some are touting rates in the 11 or 12 percent range.
The most common variety of all these policies is ``universal life.'' It was invented when people were rushing to cash in high-cost, low-interest, whole-life policies for cheaper term coverage so they could invest the difference elsewhere. ``Buy term, invest the rest,'' it was called. Universal life captured nearly 40 percent of individual life insurance sales last year, up from 2 percent in 1981.
It has also captured the respect of some early skeptics.
``I've been a term [insurance] advocate for 20 years,'' says Gary Pittsford, a financial planner in Indianapolis. ``But some of these new universal-life policies do have some aspects that interest me. . . . They used to be terrible. Now they're getting pretty good. For people who need a forced way to save, they help you set money aside.''
Part of the universal-life premium pays for insurance protection, while the rest is invested and the policyholder gets a yield, or interest rate, based on current interest rates and the investment ability of the insurance company.
In it's simplest form, this would be like spending $150 a year for $100,000 of term insurance and putting $350 in a high-yielding money market mutual fund. Instead, you put the whole $500 in a universal-life policy.
But competition stepped in and complicated matters. The advertisements, sales literature, and salespeople themselves sometimes overstate the return on the savings part of the policy by not including sales charges, administrative costs, or redemption fees. Also, the portfolio behind that rate may be heavily loaded with bonds and other securities that could be maturing very soon, which will bring down your yield very soon, too.
This advertised rate is known as the gross rate. ``The gross rate is meaningless,'' says Joseph M. Belth, professor of insurance at Indiana University. ``You don't want to hear about the gross rate. It's the net rate that matters.''
Some states have recognized the gross-rate, net-rate problem and have started making insurance companies explain their products more fully. In Wisconsin, for example, any company advertising a gross rate, sometimes also called the current rate, has to give equal prominence to the guaranteed rate and tell how long it is guaranteed for, says Lou Zellner, a member of the Wisconsin insurance commissioner's staff.
``But we still get a lot of complaints, especially as we see more interest-sensitive products,'' she says. It is possible, she adds, that more complaints may come up as companies try to compete in a declining-interest-rate environment by advertising artificially high yields.