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Life Insurance Reviews: Is It Time to Check Under the Hood?

Allan Goldstein

Most people spend more time and are far more invested in purchasing a new car than their life insurance. Once they buy their policy, they sit back and forget about it.  However, like a car, an insurance policy requires ongoing maintenance.

Professional wealth advisors and their clients should realize that purchasing life insurance is actually just the beginning of a process. As with any financial instrument, a life insurance policy should be reviewed regularly to ensure it remains the best available product to accomplish a client’s wealth-transfer, risk-management or capital creation goals.

Although a client’s age is certainly an important factor in determining available options, it is not the only consideration. Even if a client purchased the life insurance policy years ago, changes in market conditions, industry practices, mortality tables and the client’s personal health, family or business circumstances could mean policies now available to the client today may be superior to those policies  purchased originally, at a younger age.

Evolving Market Conditions

Many people mistakenly think their life insurance policy represents a guarantee, but in reality, most policies are based upon projections of future value resulting from assumptions made regarding market performance and mortality. If underlying investment returns don’t meet expectations, the value and performance of the policy won’t meet original projections. Policy reviews help an advisor and client to determine performance relative to initial projections, and will identify if a new policy, or making a change to the existing policy, provides a better alternative.

Changes in the Insurance Industry

Life insurance policies have become less expensive and more efficient in recent years as mortality rates have improved and underwriters gain greater understanding of a variety of health conditions. A client may qualify for a better underwriting class today than when he or she initially applied, resulting in a better offer.

In addition, advancements in cloud computing, mobile technologies and data analytics enable insurance companies to operate more efficiently. The savings have led to lower premiums for consumers. Clients with older policies may not be receiving the benefits of industry advancements. Furthermore, new products introduced, such as Indexed Universal Life (IUL), provide alternative engines for harnessing equity market growth within the policy. Improved products may often contain better pricing and performance than older alternatives.

As a result of changes in the insurance industry, an insurer may now offer the client a policy with lower costs or improved performance relative to the existing policy. The client may also be able to use the cash value of the existing policy in a tax-free 1035 exchange in order to purchase a more efficient policy with a lower premium or a longer guarantee.

Changes in the Client’s Personal Life

In addition to market and industry factors, a client’s personal situation may have undergone significant changes. Some examples are a change in a client’s health condition, family size or the value of their business interests. Undergoing a policy review will allow the advisor and the client to determine whether existing policies meets current and future needs.

Permanent Policy Reviews

When reviewing a permanent policy, an in-force illustration will demonstrate how a policy is expected to perform based on its current condition, coupled with the insurer’s assumptions for investment performance, mortality charges and expenses. If the existing policy’s growth is tied to interest rates, there is a very good chance the policy will expire sooner than what was originally projected (when the policy was purchased) due to the historically low interest rates. If it’s an equity-based policy, the policy may have a greater cash value than is necessary, allowing the client to possibly reduce premium outlay.

In addition, if the client’s health condition has improved, he or she may be eligible for an improved underwriting class. Through the use of negotiated underwriting, a broker such as Goldstein Financial Group can submit the client’s health records to multiple carriers and essentially create a competitive auction for the client’s business. Having a broker package the client’s health information and present to several providers is an efficient way to determine if there is a better alternative. 

Term Policy Reviews

Every year that passes brings a client closer to the expiration of the policy’s term. If a change to the client’s insurance needs or health condition creates the need to extend the term or convert to a permanent policy, it is better to act sooner than later. If the client waits, unanticipated events (such as a change in the client’s health condition) may prevent him or her from obtaining coverage.

Often when people buy term insurance – and particularly when they purchase it online – they choose a policy based solely on price. The premium, however, is only one aspect of the policy. In determining whether an existing term policy is right for the client, a policy review will also consider other factors:

  • Quality of the carrier. How financially strong and stable is the carrier? Does the carrier use industry-leading mortality charges for clients?
  • Underwriting classification. Is the client in the best possible class given improvements in mortality rates and medical advancements?
  • Conversion options. How long is the conversion period? To what type of permanent coverage may the client convert?
  • Length and amount of coverage. Is the coverage sufficient to achieve the client’s risk-management and wealth-preservation goals? Is the amount of coverage sufficient given the current value of the client’s business or other assets?
  • Recent changes in the client’s health conditions. If the client’s health has declined, should he or she convert to a permanent policy? If the client’s health has improved, is he or she eligible for a new policy with improved underwriting, lower premiums or both?
  • Ownership of the policy. Is the ownership of the policy structured properly to minimize tax implications? Should the policy be held in a trust?

Although shopping for term insurance solely based on price is easy, it often leads consumers to purchase policies not appropriate for their needs.

Scheduling a Policy Review

After getting a clear picture of the existing policy, advisors and their clients can compare the existing coverage to all available alternatives to determine which strategy best meets the client’s goals. If a better policy is available, the client can roll the cash value of the existing policy into a new policy using a tax-free 1035 exchange.

At Goldstein Financial Group, we are committed to helping advisors and their high-net-worth clients grow, protect and transfer wealth in a tax-efficient manner. Please contact us with questions or to schedule a review of your clients’ existing life insurance policies.  

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