Life Insurance Portfolio Reviews

Are You Optimizing Your Life Insurance Coverage?

Life insurance is a complex and highly flexible financial instrument. But too often, it is purchased for a specific purpose, crossed off the financial “to-do” list and tucked away.

Why You Need to Evaluate Your Existing Life Insurance

Chances are, your life has changed since you last purchased life insurance. The insurance industry has undergone dramatic changes, and interest rates have plummeted. If you have not taken a good look at your life insurance policies lately, you might be missing out on essential information about the performance of your policies and possible gains resulting from more current, cost-effective coverage. A policy review is a critical component of a sound financial planning strategy. It begins with some basic questions:

• Is your existing life insurance policy providing adequate coverage?

• Have the needs that prompted the purchase of your existing life insurance policy changed?

• How is your policy performing relative to its original objective?

• Is your policy on track to meet intended goals?

• Are your insurance products among the most competitive and cost-effective on the market today?

What Is a Policy Portfolio Review?

The objective of a policy review is to ensure that your life insurance coverage is in alignment with your current financial needs. It takes into account personally owned contracts, trust owned contracts and employer-provided benefits to give you an accurate assessment of the adequacy of your coverage.

Due to significant changes within the life insurance industry in recent years, this is a good time to review your life insurance policies to ensure that you are getting the most benefit possible out of your life insurance coverage and that you have the right type of life insurance to meet your specific needs. Over the past decade, life insurance products advanced considerably. A policy review ensures that your life insurance policy meets your needs today. We can provide you with a thorough explanation of how your policy has performed, projected cash values at designated intervals and an assessment about the number of years that the policy will remain in force based on current assumptions. In cases where there is a clear advantage, we will also provide you with information on alternative policies. 

What Factors Can Affect a Life Insurance Policy’s Performance?

• Many may be underperforming from several years of low market performance or interest rate reductions.

• Policies that were under-funded, or funded with a combination of term and permanent coverage to keep costs down. The result can be longer than expected or higher than expected premiums.

• Policies whose premiums vanished. In some cases, premiums are now reappearing due to unmonitored policy loans.

• Lower insurance company ratings.

• Term coverage or graded premium policies that may increase substantially in cost.ance Policies Reviewed?

Any client is a candidate for a policy review, however, the primary prospects fall into the following four categories:Younger clients • who purchased term insurance some time ago (to save on the near term cost) but have a long-term life insurance need.Middle-aged clients • who have purchased insurance for family protection, but might be paying more than necessary because they are holding term or group term coverage that might put their families at risk or they are not utilizing life insurance that builds cash value as efficiently as other policies could.Business owners • who are using life insurance to handle their continuation plans, benefit plans or key-person coverage, and could benefit from stronger, more appropriate or efficient coverage.Trustees • who could place themselves at legal risk, or their clients’ goals and beneficiaries’ needs at risk, by not diligently monitoring their trust owned life insurance.Case Studies*Younger ClientsJim and Laurie bought a term contract to pay off their mortgage in the event Jim died unexpectedly. Since then, the couple had two children and Laurie stopped working. They undergo a policy review and their advisor points out several things to them. First, the couple’s existing insurance, the term policy and a small $50,000 group term contract Jim has through work, is far below the couple’s current needs – survivor support, covering college costs as well as paying off the mortgage. Moreover, their term coverage, even though level, is scheduled to have a jump in premium based on the guaranteed premiums in their contract. Their advisor shows them how they can cover all of their costs with nearly a 125 percent increase over their current coverage, while only increasing their costs about 35 percent over an expected jump in term rates.Business OwnerGeorge and Spencer are co-owners in a business. Some years ago they set up a cross purchase business continuation plan where each planned to buy out the other in the event of a death. They funded the insurance with a combination of permanent coverage and term coverage. The permanent coverage was a universal life, intended to provide a source of supplemental retirement income. The term was intended to cover any gaps in the cost of the business. Now years later, the business has increased tremendously in value. They speak with their advisor when they realize the gap in coverage. He notices that the universal life insurance is severely underperforming based on the six-year-old illustration. George and Spencer are shown that they can both increase their coverage and help maintain their planned supplemental retirement income. By dropping their term and replacing the policy with two new permanent policies, they have the death benefit protection they need while using a portion of their funds to help build supplemental retirement income.Older Clients Utilizing a TrustCharlie and Stella set up their estate plan 10 years ago. As part of the plan, they set up an irrevocable trust and the trustee purchased two second-to-die policies on their lives from two different companies. One was a participating whole life contract, the other was a universal life contract. The couple has diligently made gifts for premium payments each year, and the trust has worked well. However, nobody – including the trustee – has reviewed the life insurance policies. At the urging of their life insurance advisor and their CPA, Charlie and Stella contacted the trustee and asked to have the policies reviewed. As it turned out, neither policy was performing as expected. Both were sold using assumptions that, while reasonable for the economic climate 10 years ago, are unrealistically high in today’s environment. The participating whole life policy was at risk to fail because of dividend cuts over the last 10 years. The universal life policy was being credited a rate a full 550 basis points lower than the illustration on which the policy was sold. For that policy to stay in force would require an additional 12 years of premiums over the original design.* Case studies are for informational purposes only. Please keep in mind that results of these cases may not represent the

typical client advisor relationship and actual results will vary from client toWho Should Have Their Life Insurance Policies Reviewed?

Any client is a candidate for a policy review, however, the primary prospects fall into the following four categories:

Middle-aged clients • who have purchased insurance for family protection, but might be paying more than necessary because they are holding term or group term coverage that might put their families at risk or they are not utilizing life insurance that builds cash value as efficiently as other policies could.

Trustees • who could place themselves at legal risk, or their clients’ goals and beneficiaries’ needs at risk, by not diligently monitoring their trust owned life insurance.

Business owners • who are using life insurance to handle their continuation plans, benefit plans or key-person coverage, and could benefit from stronger, more appropriate or efficient coverage.

Younger clients • who purchased term insurance some time ago (to save on the near term cost) but have a long-term life insurance need.

Case Studies*

Older Clients Utilizing a Trust

Charlie and Stella set up their estate plan 10 years ago. As part of the plan, they set up an irrevocable trust and the trustee purchased two second-to-die policies on their lives from two different companies. One was a participating whole life contract, the other was a universal life contract. The couple has diligently made gifts for premium payments each year, and the trust has worked well. However, nobody – including the trustee – has reviewed the life insurance policies. At the urging of their life insurance advisor and their CPA, Charlie and Stella contacted the trustee and asked to have the policies reviewed. As it turned out, neither policy was performing as expected. Both were sold using assumptions that, while reasonable for the economic climate 10 years ago, are unrealistically high in today’s environment. The participating whole life policy was at risk to fail because of dividend cuts over the last 10 years. The universal life policy was being credited a rate a full 550 basis points lower than the illustration on which the policy was sold. For that policy to stay in force would require an additional 12 years of premiums over the original design.

Business Owner

George and Spencer are co-owners in a business. Some years ago they set up a cross purchase business continuation plan where each planned to buy out the other in the event of a death. They funded the insurance with a combination of permanent coverage and term coverage. The permanent coverage was universal life, intended to provide a source of supplemental retirement income. The term was intended to cover any gaps in the cost of the business. Now years later, the business has increased tremendously in value. They speak with their advisor when they realize the gap in coverage. He notices that the universal life insurance is severely underperforming based on the six-year-old illustration. George and Spencer are shown that they can both increase their coverage and help maintain their planned supplemental retirement income. By dropping their term and replacing the policy with two new permanent policies, they have the death benefit protection they need while using a portion of their funds to help build supplemental retirement income.

Younger Clients

Jim and Laurie bought a term contract to pay off their mortgage in the event Jim died unexpectedly. Since then, the couple had two children and Laurie stopped working. They undergo a policy review and their advisor points out several things to them. First, the couple’s existing insurance, the term policy and a small $50,000 group term contract Jim has through work, is far below the couple’s current needs – survivor support, covering college costs as well as paying off the mortgage. Moreover, their term coverage, even though level, is scheduled to have a jump in premium based on the guaranteed premiums in their contract. Their advisor shows them how they can cover all of their costs with an increase in their current coverage, while only modestly increasing their costs over an expected jump in term rates.

* The hypothetical case study results are for illustrative purposes only and should not be deemed a representation of past or future results. These examples do not represent any specific product, nor do they reflect sales charges or other expenses that may be required for some investments. No representation is made as to the accurateness of the analysis.

There are considerable issues that need to be considered before replacing life insurance such as, but not limited to; commissions, fees, expenses, surrender charges, premiums, and new contestability period. There may also be unfavorable tax consequences caused by surrendering an existing policy, such as a potential tax on outstanding policy loans. Please discuss your situation with your financial advisor.

What Information Do I Need for a Policy Portfolio Review?

We need to assess your current needs and gather information on your current contracts, including group benefits information, copies of personally owned contracts and, possibly, in-force ledgers on existing contracts, which you might need to obtain from your insurance company.