A collection of insightful and informative articles from Myerson Wealth's “Recipes for Success” newsletter
Have you ever opened a bottle of wine you’ve been cellaring and savoring for years, waiting for that perfect occasion to enjoy with friends or family, and as the cork is pulled from the bottle (or perhaps crumbles on attempting to extract it), you know instantly the wine is going to be undrinkable? Not fun, and depending on the circumstances, it can be quite embarrassing. The wine could be undrinkable either because it’s “cooked” or “corked.” It could be that it had been cellared badly, or simply that it was past it’s best “use by” date, in which case it’s cooked, and even the best-storing conditions would not have helped much. Or the wine could, in fact, be “corked,” the term given to a wine that has been tainted by chemicals in the cork creating a smelly compound. Whatever the reason, if you paid good money for the bottle, or it was given to you as a gift to cherish and enjoy, you probably felt cheated.
An expensive bottle of wine that has gone bad is unfortunate, but an expensive life insurance policy that has done the same can be at best alarming, and at worst devastating to the policy-owner. Over the last several months our office has been asked to review a number of policies, several of which fall into the “corked” category, i.e., they smell bad and won’t deliver what was promised. The problem is, much like a corked bottle of wine, you won’t know how bad the policy is until you’ve “opened” it up, which, in the case of a life insurance policy means doing a review including an analysis called an In-force Illustration. Most of the problems with bad life insurance policies occur with permanent life insurance, but we’ve seen serious issues with term life coverage, especially when the insured believed they had an automatic policy conversion privilege, and such privilege was either not included on the policy or had expired, prior to the time they wished to automatically convert the policy.
However, the biggest issue we see is with whole life policies that were originally sold when dividend rates were in excess of 8%, and illustrations were created that showed premiums being “switched off” after 10, 12 or 15 years. What policy-owners sometimes forget, or perhaps (surprise, surprise) may not actually have been told, is that these short-pay scenarios are based entirely on the policy being able to earn continued dividends as originally projected. All the client remembers (or was possibly told) is that the policy would be “paid-up” after a fixed number of premium payments. Often, the projected number of premium payments was built to coincide with the policy owner’s retirement, such that as income contracted, so would expenses. In many cases we’ve seen, while premium outlays were still required to fund the policy, actual contributions were switched off as planned (and sometimes as unplanned).
The result: POLICY LOANS! And in many cases, these loans bear extremely high-interest rates, often as high as 8%. With each passing year that a premium is required and not paid, the loan grows greater and greater, and if interest on these loans is not paid, the loan value will erode the death benefit. Depending on how long the policy has been in force, these loans can eventually cause the policy to reduce significantly, or even lapse the policy while the insured is still alive. This would be the worst situation, as not only would there be no further death benefit, but in some cases, there could even be a taxable gain recognized by the policy-owner. Myerson Wealth has worked with many clients to fix the issues caused by these loans. Unlike a corked wine that is irreparable, we can often rectify a tainted life insurance policy.
If you, a client or a family member have a permanent policy with an outstanding loan, please call or email us and we will advise, without any cost or any obligation to work with us, what options might be available to remedy the “corked” policy.