Are you managing your life insurance policy correctly?

By: John Henry McDonald
If you own a life insurance policy that is coupled with mutual funds you might be in for a big unpleasant surprise.

Minimum life insurance premiums are often calculated using illustration software that allows an agent to use assumptions as high as 10.5 percent. The higher the rate of return means the lower the illustrated premium will be.

I don't think I have to tell you that the stock market has stripped away most of the returns for the last five years, thus making many variable universal life insurance policies in risk of lapsing. Over the last decade or so, lots of these policies have been sold as retirement plans, or private pension plans.

There are ways to accumulate dollars for retirement that can be withdrawn tax-free.

Most retirement plans are successful if the ongoing rates of return are at nine and 10 percent. That's just not going to happen. So if you're taking dollars out of a life insurance policy that has been funded by stock mutual funds you could be in real danger of a lapse.

And here's some more bad news: If you've been taking loans from your policy when it lapses, those loans become taxable as ordinary income. So all those retirement dollars that you've been taking can be taxable to you if your policy lapses.

In force ledger – This is a request to your life insurance company to give you the truth about the policy that you own.
And in force ledger will tell you if your current policy funding is sufficient to allow your policy to continue. And it will tell you how long you can go before the policy lapses.

You may find you need to add substantial dollars to your life insurance policy or that you need to take out less money that you've been used to receiving.