Life Insurance Periodic Review

Everyone who owns an insurance policy should be certain to conduct insurance
reviews. A recent study found that in 75% of cases, the person insured could
have reduced their premium outlay by an average of 40%, or increased their
coverage by an average of 40% for the same outlay. These changes occur because
insurance policies have evolved over time. Mortality rates have improved,
people are living longer, and since insurance companies are going to pay claims
later, newer policies will be cheaper than older policies even though the
people insured are older. Underwriting is also different than in the past. Even
for people with health impairments, insurance companies will pay later because
of improved health and longevity, so that they can charge less. Also, some
companies have different understandings of different illnesses. For example,
when shopping for insurance for an older client with a heart condition, five
companies declined, three companies offered insurance at higher than standard
rates, and one company offered standard rates. The level of sophistication on
different health issues differs by insurance company. A client with Multiple
Sclerosis may be able to secure insurance depending on the type of MS and
recent 5-year health history.

Many people will shop around with multiple insurance agents instead of
having one agent properly package the health information and submit it. This
can create a tremendous time delay, and be inefficient. It should be shopped
properly at the outset by someone who acts as a broker — in effect, the
purchasing agent. It is also important as part of the review process to get all
of the relevant information up front. The agent should ask all of the questions
that an insurance medical examiner will ask before submitting an application.
Specific questions include family history, illnesses, surgeries, doctors seen,
medications, lifestyle, nicotine use, etc. Even for existing policies, you may
be able to get a reduced premium or a new classification. Instances include, if
you smoked when you took out the initial policy but now don’t, if you had
cancer or any other chronic condition, but you have not had a recurrence, or
the condition is stable or improved. The insurance company would change the
rating on the existing policy. For medical impairments, you will have to fill
out a declaration and possibly undergo a new medical exam. The insurance
company will obtain your current medical records. If you have quit smoking for
two years or longer, you should notify the insurance company requesting a
change in rate. They may require a urine specimen. Some companies may consider
any type of nicotine use, including cigars, pipes, cigarettes and chewing
tobacco, and some may only view cigarette smoking as an issue.

Policy Performance

Old variable insurance policies were sometimes sold with projections
indicating rates of return that were never sustainable. The underlying assets
of the policy need to be considered. Other insurance policies are structured
based on the insurance company’s return, and not on the policies investment
assets. Insurance companies invest primarily in high-grade bonds and mortgages.
As interest rates have fallen, the projections of most policies were not
realized. If the projections that were set when the policy was issued are not
met, the policy may have to be funded differently – either with greater
premiums, or for a longer period of time. It is also important to determine how
the insurer credits earnings to a policy. Most insurance companies look at its
overall portfolio return for the year and make a determination of what to
credit to the policies. Interest rates may increase from 5% to 6%, but the
insurance company may only have turned over and reinvested 10% of its
portfolio. This illustrates a fundamental concept in crediting to insurance
policies, that the policies’ returns are sensitive to returns in the market,
but with a lag due to the turnover factor. They follow the market both when
returns are going down as well as when they are going up.

Status of the Insurance Company

If your insurance company doesn’t survive, the initial projections may be
irrelevant. When Mutual Benefit went under, policyholders received coverage so
that they were protected, but the economic arrangements of those policies were
quite different. A.M. Best, Moody’s, Duff and Phelps, Standard and Poor’s and
Weiss all rate insurance companies. Vendors can provide an analysis of the
financials and report all agency ratings for an insurance company.

What are the Goals

Why was the insurance purchased originally? What are the current goals and
needs? What overall planning and financial circumstances exist now, and how
have they changed? Consider lifestyle assets versus inheritance assets. For
example, the insurance may have been purchased with the possibility of
accessing cash value. This may no longer need to be an issue. Policies are
issued today that have a different structure. This same person may no longer
need cash value after retirement. Instead he may just need insurance
protection. New policies have a very competitive price, build little cash
value, but assure a death benefit. This person may be able to use this type of
guaranteed death benefit policy. It is also known by other names: no-lapse
guarantee, or secondary guarantee universal life. In this case, you could
replace the old policy by exchanging the cash value from the existing insurance
in a 1035 (tax-free) exchange from the old policy to a new guaranteed policy.
The new policy could be structured with premiums that are substantially less
than they were before, or with an insurance face amount that is much greater
for the same premiums. In some instances, no further premiums will have to be
paid.

Existing Trust

Things change. If you are unhappy with your existing trust, you may want to
evaluate the possibilities of changing the trust, or transferring the policies
to a new trust. Big lifestyle changes may lead you to reevaluate your insurance
goals, and when drafting a new trust, you should make sure to address your new
needs. Whether it be new dependents, a new diagnosis, or even new tax laws, you
may want to consider starting from scratch.

Trustee Liability

If you are a trustee, you have a responsibility to monitor the policy, and it
is in your best interest to document this. Consider having something analogous
to an investment policy statement (IPS) for the insurance trust, stating the
goals and objectives of the trust. Review the policy and determine if it is
performing as it was initially illustrated. Does it meet what was originally
projected? Every few years you could ask the insurance company for a new
illustration, and inquire, based on how the policy current stands, how long the
premiums will continue to be paid. If there are significant changes in your
goals or estate plan, the insurance should be reviewed as part of this
change.

Term insurance policies have premiums guaranteed for a certain period of
time. Every few years this should be reviewed. Are the goals still consistent?
Every 3-4 years it might pay to check and see if there are new policies that
are more favorable than your current existing policy.

Policy Option

Many policies have an option to convert term insurance into a permanent
policy. It will be more costly, but the coverage will not end, nor will it
suddenly and drastically go up in cost. The conversion options are very
important. For example, if someone has a health change, exercising a conversion
option may be vitally important. The conversion is based on your health at the
time the policy was taken out, not your current health.

Administrative Issues

If the premiums on your policy are not paid annually, an extra charge is
incurred. There is thus a cost and hassle factor in paying annually, rather
than at more frequent increments. The extra costs are not deductible (e.g., as
an interest payment). Confirm who the beneficiary is with the insurance
company. The owner should be confirmed. You want to have written verification
by the insurance company.

Funding Strategy

Your funding strategy should be reviewed and monitored. The simplest
approach is for an individual to pay premiums or for gifts to pay premiums.
There may be more complex arrangements with a plan paying for the insurance,
split dollar arrangements, and other techniques. If it’s a second to die policy
and one spouse dies, you lose half your annual exclusion gifts. You should also
check if GST (Generation-Skipping Tax) implications are being triggered.

Conclusion

Periodic insurance reviews are essential to protect your insurance coverage
and optimize your planning. With every health and planning change in your life,
it is crucial to reevaluate your insurance and trusts. In addition, reviewing
your insurance of a regular basis every three or four years could save you money you
didn’t even know about. The above discussion will provide a starting point for
this analysis.

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© Law Made Easy Press, LLC.

The discussions above are general and complex and competent legal and tax
advice must be sought before implementing any of the ideas discussed.