I've long been a critic of first and second generation Universal Life plans. Which is not to say that they didn't have a role to play, just that I think they required more "hands-on" attention by insureds than they were really prepared (or encouraged) to take on.
One of the biggest challenges to older plans is that they often become "upside-down;" that is, the internal costs far exceed the premium and interest credited, and they quickly become very expensive. Compounding this are IRS rules that effectively quash any hope of recovery by limiting premiums to a level where the policy just can't sustain itself.
The problem is that, if one doesn't really "goose" the cash value the first few years, then by the time the problem (insufficient cash value) becomes clear, it's too late to correct.
Or so I thought.
Turns out that although carriers can't illustrate level premiums sufficient to carry the policy forward, there's a stipulation in the tax code that if a policy violates IRS guidelines, once the cash value has been drained you can pay the premium needed to cover the monthly cost of insurance deductions/expenses. You just can't build a significant amount of cash value. So, you'd need to increase the premium each year as the cost of insurance deductions increase.
[ed: Link to relevant code is here, scroll down to 7702 f 6]
So, problem solved? Eh, to the extent that one can continue to pump cash into a quickly expiring insurance policy. The question then becomes whether that's really a good idea. Or it may be that this is the time to seriously consider selling the policy. Still, it's always nice to have options.
[Hat Tip: FoIB Sara S]
One of the biggest challenges to older plans is that they often become "upside-down;" that is, the internal costs far exceed the premium and interest credited, and they quickly become very expensive. Compounding this are IRS rules that effectively quash any hope of recovery by limiting premiums to a level where the policy just can't sustain itself.
The problem is that, if one doesn't really "goose" the cash value the first few years, then by the time the problem (insufficient cash value) becomes clear, it's too late to correct.
Or so I thought.
Turns out that although carriers can't illustrate level premiums sufficient to carry the policy forward, there's a stipulation in the tax code that if a policy violates IRS guidelines, once the cash value has been drained you can pay the premium needed to cover the monthly cost of insurance deductions/expenses. You just can't build a significant amount of cash value. So, you'd need to increase the premium each year as the cost of insurance deductions increase.
[ed: Link to relevant code is here, scroll down to 7702 f 6]
So, problem solved? Eh, to the extent that one can continue to pump cash into a quickly expiring insurance policy. The question then becomes whether that's really a good idea. Or it may be that this is the time to seriously consider selling the policy. Still, it's always nice to have options.
[Hat Tip: FoIB Sara S]
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