If you’ve purchased a whole-life, variable-life or universal life policy, you may have a problem in the not-too-distant future. If your life insurance policies are all through your employer or are all “term” life policies, you can rest easy.

Often, when whole-life, universal-life and variable-life policies are sold, illustrations (projections) are provided to show how the policy will grow in value and in many, if not all cases, how the policy will be able at some point in the future to self-pay all ongoing premiums. In many cases, the investment return and/or interest-rate assumptions used in the illustrations are too rosy.

A recent Wall Street Journal article (May 26, 2009) discussed how the strategy of using life insurance to pay for estate taxes was causing some estate plans to self destruct. The problem, however, is not limited to life insurance in estate plans. If the policy can’t generate enough earnings to pay premiums, it’s possible for the policy to lapse. This is true whether the policy is used in an estate plan or to provide for a surviving spouse.

The Wall Street Journal article quotes Bill Boersma, president of Opportunity Concepts in Grand Rapids, Michigan, who said he has worked with many “troubled policies” lately and predicts a “tsunami” of lapses over the next few years.

If the underlying policy assumptions about interest rates and investment returns are too optimistic, the policy may begin generating internal loans to pay the premium payments. You need to keep a close eye on your life insurance policy statements to avoid an unpleasant surprise. You may want to contact your insurance agent and ask for some new policy illustrations that use more conservative future return assumptions. If you’re considering buying a new policy, check out the investment return and interest rate assumptions carefully.