Variable Life Insurance
The Peters’ Market Risk*
The Peters, seeking high growth potential, purchased a Variable Life Insurance policy. They allocated the cash value to subaccounts tied to the stock market. Over the first five years, the market underperformed, leading to a significant drop in their cash value. The high and numerous fees—including mortality charges, administrative fees, and investment management fees—accelerated the decline. The insurer notified them that they needed to pay unexpectedly large catch-up premiums to prevent the policy from lapsing, exposing them to $500,000 in lost protection and unexpected cost.
Potential Denial (The Lapse):
Poor investment performance, coupled with high fees, eroded the cash value and triggered a policy lapse or required a massive, unexpected premium increase to maintain the death benefit.
Risk Identified by My Policy Advocate:
Significant market risk, high and numerous fees, policy complexity, and the potential for policy lapse if investments underperform.
Policy Language:
“If the Cash Surrender Value is not sufficient to cover the Monthly Deduction Amount, the policy may enter a grace period, after which it will terminate and lapse.”
Discovery by Clara, our Ai Assistant:
Clara identifies the subaccount structure and the multiple layers of explicit and implicit fees (mortality, administration, subaccount management). It flags the policy's policy lapse provision triggered by insufficient cash value due to market risk.
Questions to Ask Your Agent:
- What is the total percentage of annual fees deducted from my policy's cash value, including administrative and investment management fees?
- Can you run an in-force illustration showing a guaranteed 0% return to demonstrate the minimum required premium to prevent a lapse?
* This scenario described is fictious and is solely for illustrative or educational purposes so the insured has the opportunity to discuss these issues with their licensed insurance producer.
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