Confused About Overloaned Policy

Apr 14, 2016

  1. Richard Fulco
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    Richard Fulco New Member

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    Question: If someone has a Universal Life policy with say $3,000 in Cash Value and perhaps $2850 in outstanding loans/interest why will this cause the policy to go into a lapse pending status? If the policy owner has always made the premium payments and will continue to do so, why will the policy ultimately lapse? Even if the outstanding loans/interest surpasses the existing Cash Value, can't the policy owner continue to religiously make the premium payments and keep the policy in force? Thank you.

    Regards,

    Richard Fulco
    Humble Customer Service Agent
     
  2. Ksutton
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    Ksutton Guru

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    The cost of insurance will continue to rise - that, along with the interest on the loan. ....

    You will need to be more specific as to the age of the insured - how long the policy has been in force , how was the policy funded prior to taking the loan out .... There are too many variables to say when this policy will be gone .

    But from what I know - I've seen UL policies, that had no loans taken out, lapse. the insured was only making minimum payments and had no idea that the cost of insurance would eventually become so great that it would and did eat away the cash value and eventually caused the policy to "eat itself" .... (depending on how the policy is set up will depend on the outcome .)

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    Also , what is the face value of the policy ? The more information the better .

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    And another thing - are these premium payments the minimum ? Or has this policy been overfunded ? ... Much to consider :/
     
    Ksutton, Apr 14, 2016
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  3. WinoBlues
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    WinoBlues Guru

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    If you are a CS rep it is not your place or pay grade to advise on this.

    Just got off the phone with a CSR. My first sentence to him after giving the policy and agent info. "the client would like to know if he can reduce the face amount to $X.?" CSR~"What? Oh that is a mistake? Let me see if I can help you come up with an alternative". I wanted to reach through the phone and choke him just to shut him up the end of the conversation.
     
  4. LGilmore
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    LGilmore Guru

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    Are you fairly new? Simple quick answer. A UL can lapse even if the person pays their premium after borrowing because the cost of insurance is still charged every month and since it's based on a term insurance table the cost rises. A customer doesn't see this until the very end because they don't realize it or it wasn't explained.

    Basically when they bought the policy say $50 premium covered the cost of insurance say 10 bucks and the remaining 40 bucks goes to the investment pool for the client. Now work ahead 30 years. The client is still paying $50 a month, but now internally the insurance costs 100 bucks a month. So his/her 50 bucks from the outside is supplemented by 50 bucks from the inside.

    This works as long as there is money inside the policy. Taking loans reduces that pool of money and at some point in the future when the client pays their 50 bucks, there isn't another 50 or 75 or 100 bucks in the pool to help pay the cost of insurance and the policy implodes.

    This was a very common occurrence a couple decades ago.
     
    LGilmore, Apr 15, 2016
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  5. Richard Fulco
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    Richard Fulco New Member

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    Thank you all for your responses. Best Regards, Richard Fulco Humble Customer Service Rep new to insurance.
     
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