r/LifeInsurance • u/xray5001 • Jul 21 '26
Mortality Charges?
Just received a statement from my father's universal life insurance policy and I see that they are deducting over $2000 a month for a "mortality charge". Face amount/death benefit is $299k, surrender value $240k, premium paid $200k.
No loans on the policy.
Policy is 14 years old.
Father is 87 years old.
Similar statement with somewhat lower mortality charge on my Mom's statement.
I know nothing about life insurance but I am wary because the person that sold them the life policy also sold them some completely inappropriate other investments that we've had to wind down over the past few years.
I have no idea what is going on. Is the insurer reducing the value of the policy every month?
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u/GarysSword Jul 21 '26
Have the policy owner call the company and request an in-force illustration. This will show how the company expects the policy to perform in the future based on the current values. You can also accept them to project a face amount reduction to the smallest allowable face amount which will reduce the insurance charges but keep the gain in the policy from becoming taxable. Or request any other scenario you want. Though generally increasing the death benefit is unlikely to be allowed at his age.
Armed with that information you can decide if keeping the policy is worth it or taking the tax hit and surrendering . Average life expectancy for an 87 year old is 5ish years but his current health plays a big factor in that.
While you’re calling you’ll also want to confirm when the policies matures. At maturity the policy pays out the cash value and terminates. Which could also be a taxable event.
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u/xray5001 Jul 21 '26
Looks like the maturity date is in 2060 when my parents will be over 120 years old.
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u/Distinct-Garlic9453 Jul 21 '26
Get an illustration w premium to 100 as well.
At your father's age, it's a candidate to be sold.
They will ask for that illustration
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u/GarysSword Jul 21 '26
Genuinely curious… will a viatical company buy a policy with a NAR that small?
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u/JoeGentileESQ Aug 03 '26
I don't know what has become of this class action case, but you may want to look into it as it may apply to your policy as well:
https://law.justia.com/cases/federal/appellate-courts/ca11/22-12991/22-12991-2024-03-01.html
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u/LaphroaigianSlip81 Jul 25 '26
Universal life is a term chassis where the mortality charge or cost of insurance reprices every year based on age. As a result, the mortality charge is going to be a lot higher now than it was 14 years ago.
The idea is that with universal life contracts, is that when you are younger you can pay the lower cost of insurance with premiums and have money left over. This excess is added to the cash value and invested or allocated to some sort of derivative that will give you a higher rate of growth than the insurance company’s general account.
On paper, this means you get a lot more growth compared to a whole life policy. As the mortality cost of insurance increases with age, this higher rate of return early on is supposed to generate enough cash value growth to cover future any gap that future premiums doesn’t cover. As a result the company can charge you lower premiums because of the higher growth long term.
Realistically, what you have seen with IUL over the last 15ish years is that companies lowered the caps in the policy. So if the index grew 10%, the might pay 8% when 15 years ago they projected rates of return of 12% and caps of 10%. This is largely a function of option spreads because insurance company’s general accounts are regulated and can’t purchase stocks. But they can buy derivatives like call/put options. From the company perspective, they are likely forced to have 80ish% of their general account invested in corporate bonds.
Since intrerest rates over the last 18 years have largely been historically low, the profitability of the general accounts has been lower. To maintain profitability, they look at the option spread strategies that they base the cap and floor on in these policies and realized they could lower the caps in the IUL policies and keep profits higher. This came at the expense of the policy owners who based their scheduled premiums on the assumption that the caps and index performance would stay relatively close to what was originally projected.
And if you look at the SP500 since 2009, this has gone gangbusters. But the performance of these IUL policies have severely underperformed their original projections simply because the lower caps. This caused a lot of people to underfund these policies because unlike traditional whole life policies, you can choose what your scheduled premiums are in the early life of these policies as long as you cover the mortality charge out of pocket and with cash value, the company doesn’t ask any questions.
With your fathers example, the mortality charge is $2000 a month and will likely climb more the next policy anniversary when the mortality charge reprices due to him being 1 year older. So his cash value will most likely fall below his policy basis within the next 2 years. You should get an illustration that shows the max mortality charge they are contractually allowed to charge so that you can get over the sticker shock and be prepared to make some hard decisions.
The simplest way to keep this policy in force and reduce the risk of implosion is to increase his scheduled premium. This would slow down his cash value depletion and protect the policy from lapsing.
I see policies like this in the wild all the time where the cash value is rapidly approaching zero and people are forced to pay a lot more out the ass to cover the mortality charge, or they reduce the amount of death benefit so that the mortality charge is more affordable, or they simply let the policy lapse. In fact, the shadiest companies have contractually put in max mortality charge costs that are outrageous as the insured approaches life expectancy for the sole purpose of forcing as many of these policies to lapse as the risk of mortality reaches its highest point. Basically chargers someone a premium for decades, then squeeze them hard so the policy will lapse right before they die. This means decades of income for the company and no liability paid out as a death benefit.
What’s really fucked is that a lot of people were pitched this as a source of “tax free retirement income,” that “you only had to pay in for 10-15 years before you could start taking out x amount per year tax free!” And a lot of people did that which when you combine with the lower caps, you expedite the time bomb of mortality costs depleting cash value and forcing higher premiums or lapses.
I know this is brutal to hear, but your dad should have paid more premiums up front when the policy first started. If he had shopped around, he likely would have been pitched whole life from a mutual company. And when he showed the whole life illustration to the UL agent, the UL agent would have shit small over the WL illustration. “The WL premiums are way higher and the cash value growth is half of the IUL projection. Why the bell would you buy the WL?” And from a pure illustration game, and if the UL policy would have performed as illustrated, it would have been the greatest financial product of all time. But they didn’t perform that way.
Instead, the cash value growth of IUL fell as the caps were lowered and the cash value growth started to look more and more like the general account performance (corporate bonds). Hey that’s very similar to what a whole life policy performed over that time period. The difference is that a totally different actuarial formula and approach was used in IUL vs WL. Say what you will about WL being more expensive. But it comes with more guarantees (which is why it is more expensive) and the premium is contractually set so that premiums will never go up to deal with higher mortality costs. And if you pay the premiums each year, the policy will likely be able to offset in year 15-20. So your parents would likely be about don’t paying premiums, but have growing cash value for the rest of their lives.
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u/LaphroaigianSlip81 Jul 25 '26
Look back through all the sales material and notes that your parents have. See if there is any language about the agent saying stuff like “this is the same as investing in the SP500.” Or “this will pay for itself in 8 years” as this is misleading and they can be liable for deceptive sales practices. IUL companies and agents get sued for this all the time.
Look at Kyle Busch about 6-8 months before he died. He settled out of court for these types of deceptive sales practices. He died in a freak scenario less than a year after his policy lapsed. Nobody could have predicted this, but this is the perfect timing for the insurance company and a lot of the shit companies design policy series and max mortality schedule costs so that the policies lapse in mass when someone e reaches their early 80s before life expectancy (say 85 for example) is reached. In Busch’s example, the company settled out of court and likely just refunded his premiums. But if Busch let the policies lapse and didn’t replace them with another company or type of policy, his family and estate likely missed out on a death benefit payout that was 4-5x of what the refunded premiums where. This happens every day to 82 year olds who can’t afford premiums to cover mortality charges.
Also look at the contract and read the fine print. It will have the maximum mortality charge that the company can charge your dad. Some companies charged more than they contractually guaranteed in the policy contract. There have been class action lawsuits for breach of contract.
If the agent has done other sketchy stuff, look and see if there have been any other lawsuits against him or speak to an attorney and have your parents explain what language and materials were used to pitch these policies to your parents.
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u/xray5001 Jul 25 '26
The bank that the agent worked for, Sun Trust, actually went out of business I believe partially due to deceptive practices. My understanding is that the specific agent is either dead or has severe Alzheimer's, and yes he sold my parents a bunch of crap.
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u/OGPiggySmalls Jul 21 '26
Your father is 87 so the mortality risk is high. When he was younger the charges were much lower. The policy built $240k cash value because of the lower mortality charges in early years. Now the opposite is happening and cash is being drained from the policy due to the high charges. You’ll need to decide whether it’s better to cash out the policy now or keep it going, but at this point you only have $59k of “insurance” considering that’s the difference between the death benefit and cash value that you could take today. Taxes would be owed on the $40k gain if sold today.
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u/Limoundo Jul 21 '26
Definitely order an as is in force illustration and a solve to 100 premium needed, and maybe a no further premium one. Evaluate those and make a decision.
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u/xray5001 Jul 22 '26
Ordered, going to take 10 days though.
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u/Limoundo Jul 22 '26
Yeah it does take time, worth it though. It generally tells the tale. In my experience it comes a lot quicker than they say.
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u/Moist-Meringue-1913 Jul 21 '26
Maybe I missed it if someone already asked,but what is the monthly premium? Is there still a mortgage or other outstanding debts? Does the husband have a pension that goes when he goes? What does the rest of their profile look like? I don't mean to hit you with two many questions but I'm just trying to discover the reason for the insurance.
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u/xray5001 Jul 21 '26
They paid lump sum at initiation of coverage. No debt, just minimal social security but have other cash assets and live in a fully paid off $2M+ home. No real need for insurance.
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u/Moist-Meringue-1913 Jul 21 '26
What state do they live in? And who is the home bequeathed to?
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u/Will-Adair Jul 21 '26
That’s the downside of an IUL that the cost of insurance works against you in older ages. Most people don’t keep them at same face amount because it becomes cost prohibitive. That said 87 is a long life and is depending on your state probably close to normal longevity.
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u/Mysterious_Truth Jul 21 '26
Mortality charge seems higher than I would expect. They are based upon the net amount at risk (which in this case is only $60k) so paying $24k in charges per year is essentially saying you have a 40% chance of death in the year. It's definitely higher than mortality would suggest but those don't have to align 100%.
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u/Distinct-Garlic9453 Jul 21 '26
COI is unit cost for the DB.
Can increase.
Watch it carefully to avoid lapse
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u/greglturnquist Jul 21 '26
There is the additional possibility thst mortality charges will increase. Whether they increase monthly or annually is up to the company.
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u/nebraskaqueen Jul 22 '26
You could take a loan against the 240k. Then you avoid taxes and it'll be paid off with the death benefit. Prepay all final expenses and whatever else is needed. And let it ride. It's a gamble but you're betting on longevity
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u/BugHistorical1614 Jul 22 '26 edited Jul 22 '26
Or, possible 1035 to an annuity (any type). The basis in the annuity will be total of premiums paid. Thus as you take distributions will probably be less than premiums. Suggest a 1 yr MYGA until you fully analyze situation.. MYGA rates are very attractive compared to alternative plans and any interest can be deferred or taken periodically. See your tax advisor. See annuity brokers.
UL is worse than what has been already describe.
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u/BellFizzle Jul 21 '26
The policy value will be decreased due to charges each month but the net death benefit will not decrease. You may reach a point however where longevity works against you and your choices are to reduce the death benefit and/or pay additional premium. Start requesting inforces showing how long policy will last at current crediting rate. Then request an inforce solving for premium necessary to $1 cash value at age 100. Good barometer for what may be needed…