When was the last time you reviewed your life insurance policies to determine if the policies were performing as expected? When it relates to investments (e.g. stocks, mutual funds, IRAs, etc.), people monitor performance regularly, sometimes as often as daily. But when it comes to life insurance policies, people tend to buy them and place the policies in a safe place and rarely monitor the performance.
Failure to review policies periodically may be due to the lack of understanding how policies work, or the false understanding that death benefits or cash value accumulations are guaranteed. Because insurance policies contain a number of assumptions and have a significant investment element in them, it is essential to review a policy’s performance every two to three years.
When a policy premium is computed, it is based upon a number of factors, including health classification, mortality rates, administrative charges and projected dividend scale or investment performance. At the time of sale, the insurance company generally provides a "guaranteed" and "current" death benefit and cash accumulation value. The "guaranteed" rate is the worst-case scenario and reflects what the premium would be, assuming the lowest interest rate and the highest expense charge allowed under the policy contract.
The "current" rate illustration reflects what the death benefit and cash value accumulation would be, assuming interest and expense rates that existed at the time the policy was issued. Invariably, premiums were paid based on the current rate, as no one would buy a policy based upon the low guaranteed performance.
With the record low interest rates we have experienced over the past few years, many life insurance policies have not performed as expected. As a result, a premium that was scheduled to vanish may now need to be continued for a number of additional years, or even increased. Some policies are even in serious jeopardy of lapsing if corrective action is not taken. The best way to evaluate a policy’s performance and viability is to conduct a life insurance policy audit.
A life insurance audit involves looking at the performance of your life insurance policies and the impact the performance has on future premium payments. The life insurance audit can project how much longer you have to continue making your premium payments, whether the premium has to increase or if it can decrease, and the projected future cash surrender value and death benefit.
The information you obtain from the audit can then be used to determine whether you should keep that policy in force or reduce your premiums by acquiring a new policy in a tax-free exchange.
Our experience indicates that in about 60 percent of the cases, policy problems or opportunities are identified. If problems are uncovered, the earlier they are identified, the easier it is to take corrective action. In other cases, we find that premium payments can be reduced, possibly by the purchase of a new policy.
The reduction in the premium payment can be attributed to a number of factors, including reduced mortality expenses that aren’t passed on to existing policyholders, guaranteed features that have been enhanced over the past few years, new health classifications that didn’t exist at the time of purchase and a change in the type of insurance such as a change from whole life to universal life or a change to a policy with a new company with better performance.
While an insurance policy audit may not be a matter of life or death, it might be the difference between having a policy in force or not when it is needed.
Lyn Gamerdinger, CFP, CPA, MST,
is a financial planner at Kolb+Co. Financial Advisers, LLC, a financial planning, wealth management and risk management consulting firm in Milwaukee. She can be contacted at (414) 543-2100 or lgamerdinger@KolbCo.com. The firm’s Web site is www.KolbCo.com.
September 3, 2004, Small Business Times, Milwaukee, WI
