Ask the Expert: Runaway insurance premiums

We bought a $100,000 universal life policy for my husband 27 years ago. We were paying $800 a year until six years ago. Then the insurer said there's no money in the policy, and that the premium would go up 9 percent a year. Last year, we paid $3,672. We're on a fixed income and cannot afford these exorbitant bills. We complained to the state attorney general but didn't get anywhere. We also went to a lawyer who wrote a letter for us, to no avail. 

You're not alone. Many people who bought universal life insurance policies years ago have experienced unexpected premium hikes. Unfortunately, your options are limited. The premium increases aren't illegal.

These policies combine insurance with a tax-deferred investment account (called "cash value"), which can be used to subsidize the premium payments. Your policy always costs more than $800 a year; the insurer tapped the investment account to make up the shortfall. Policies were often sold with projected investment returns that would maintain this subsidy forever. But naturally, those returns weren't guaranteed -- and they didn't materialize. Now you must pay the full premium to maintain coverage.

Your options now depend on how much, if any, cash value remains. One is to reduce the coverage. Perhaps you could afford a $50,000 policy, for example. Another is to exchange the remaining cash value for an income-paying annuity -- a transaction called a tax-free 1035 exchange. Its big advantage is that your future investment gains in the annuity are offset by the policy's past investment losses. If the policy's investments lost $10,000, for example, the first $10,000 earned in the annuity is tax-free. Your final option is simply to drop the policy.

The bottom line
A life insurance premium that is subsidized by the policy's cash value can rise dramatically.

Websites with more information
Click here to link to a discussion of the issue at the AARP website, aarp.us/mpPfGA