Proper Insurance Reviews

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Published by Scott Roberts, CPA, CLU

Let’s face it – after purchasing a life insurance policy most people simply tuck it away in a drawer or filing cabinet (or lose it) and never really look at it again.  They will pay the premiums as they receive notices, comfortable in the knowledge that they are covered, and all will go according to the original plan.  The problem with that, however; is that life insurance policies almost never go exactly according to the original plan, with the possible exception of term policies and some guaranteed universal life policies.  In fact, for all other types of permanent life insurance (whole life, universal life, indexed universal life, variable universal life, etc.), the one thing that we can pretty much guarantee is that things will not pan out as shown on the original illustration.  Interest rates change, crediting rates change, dividend rates change, cap rates change, expected returns are not realized and, in some cases, expenses inside the policy can be changed.

So what does that mean we should do?  The answer, quite simply, is to make sure periodic reviews are done of all policies. For more volatile products, such as variable universal life, these reviews should happen at least once per year, if not more frequently.  For products such as guaranteed universal life, every couple of years should suffice. Of course, everybody’s situation is different and the frequency of reviews should conform accordingly.

In addition to running an “inforce illustration” which will show an updated illustration of how the policy is projected to perform in the future, a review of the overall insurance portfolio (if there are multiple policies) should be done.  Questions should be asked such as: Is the total amount of insurance still appropriate? Are the policies still competitive?  Are the policies still the most appropriate type (term vs. permanent)? Are the policies owned in the most optimal way (individually vs. in trust)?

Ultimately, the goal of any insurance review is either to confirm that the current situation meets current requirements and all is structured appropriately, or to identify concrete steps to improve the plan.  Sometimes an insurance review shows that the best course of action is to exchange current policies for new policies that are projected to perform better, either saving future premiums or allowing for an increased death benefit with no increased premiums.  Or, perhaps a different product makes more sense at this point – clients often start with a term policy but move to a permanent policy as their cash flow situation changes.

Another common situation is where clients have older whole life policies that were designed to build up cash value for retirement and also provide a death benefit in the event of an early death.  But as these clients get older and accumulate more wealth, the cash value often becomes not as important but they now may find themselves in a situation where the death benefit can be used to effectively deal with estate taxes.  Of course, often in that situation it makes sense to consider a second-to-die policy instead.

Many times, a policy may be underperforming but switching to a new policy is not economically advisable. In those situations, careful consideration should be given to how the premiums may be adjusted to “shore up” the policy.  Catching these situations early through periodic reviews is critical to avoiding significant problems down the line.

Finally, a complete insurance review always considers the ownership structure of the policies.  Are they owned personally but now would be better owned in an irrevocable life insurance trust? If the policy is already in a trust, are the provisions of the trust still ideal?  Does the trust call for distributions at certain ages but now lifetime trusts might be more appropriate for asset protection and estate tax savings?  Should the policies be owned in a trust with other income-producing assets that can fund the premiums and avoid gift tax issues?

As you can see, there are a host of issues that should be considered during a properly thorough insurance review.  Be sure to have a seasoned professional, with planning experience conduct your periodic reviews – Nichols Wealth Partners would be happy to help with your reviews.



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