CASE STUDY

Life Insurance Policy Review

Current Situation:
Of the many financial instruments that make up a client's portfolio, life insurance policies tend to be the least monitored. Many portfolios contain life insurance policies that have not been reviewed since the policies were purchased. Like other financial tools, life insurance policies need to be managed and adjusted to keep pace with market conditions and with the insured's needs and goals.

Common Problem:
Here are common problems discovered in many portfolios:

  • Crediting or dividend rate at time of purchase was 400-500 basis points higher than the current crediting rate of the policy, and no adjustment to the contribution amount has ever been made. The policy is greatly underfunded and will lapse well before the participant's projected mortality, unless enormous dollars are added to the policy today.
  • Client's policy was issued when the client was a smoker; but the client stopped smoking over 10 years ago. Premiums still reflect the smoker classification.
  • Client took out large loans on whole life policies. The loans are still outstanding and the client is paying interest rates of 7% or higher.
  • Client has large life insurance policies paying premiums in excess of $100,000 per year. Given reduced interest rates, policy values are not projected to be high enough to ever pay the policy premiums. This could mean 20 or more years of premiums still to be paid.
  • A business owner client has a key man policy on his life. The policy is over 20 years old. The client is 75 and the cash value well exceeds the contract basis. There would be a large income tax due if the policy were cashed in.

Solution – Review the Portfolio
As with any product evolution, life insurance products have become more efficiently priced and flexible in nature. In addition, there are many variations of product architectures available that can serve as wonderful alternatives to older policies that are not performing, and/or were never structured properly.

How it Works:
In order to begin the review, we must obtain a signed authorization from the owner of the policy(s). This authorization allows us to gather the information we need from the carrier in order to make an objective and thorough review of the policies.

As a result of the review, we may suggest:

  1. "altering" the policies already in force;
  2. keeping current policies in force and changing nothing;
  3. replacing some or all of the policies that are not performing, or changing their structure to better meet specific needs and goals; and/or
  4. settling (selling) policies where the sale price may benefit the client more than cashing them in or replacing them.
CASE STUDY EXAMPLE – MRS. LOWEDEN
Mrs. Loweden recently lost her husband. He was 79 and she is 68. She had five "Second to Die" policies in her portfolio, totaling $15,000,000 of coverage. The policies were all cash value life insurance policies with large term blends to keep the premium low. In a reduced interest environment, the policy values were projected to NEVER offset the premium. Mrs. Loweden was not interested in paying a six-figure premium for the rest of her life.

Mrs. Loweden decided to look at new life insurance and qualified for the carrier's top rates:
Carrier: Highly Rated Insurance Carrier
Coverage Amount: $15,000,000 Insurance Benefit
Premium: $1,000,000 of cash value was exchanged from existing life portfolio to the new carrier's policy.
Premium Period: No further premiums after exchange is completed – guaranteed!
Policy Duration: Death benefit guaranteed to Mrs. Loweden's age of 100. Market conditions will NOT have any effect on the coverage amount or duration.

Summary:
Mrs. Loweden was thrilled because we were able to:

  • maintain the exact same level of coverage;
  • reduce her premium outlay to $0;
  • lock in the coverage, giving her peace of mind that she will not pay another premium regardless of market performance and will have coverage until her death – guaranteed!

This is just one example of the many ways we can help!

It is also important to review disability insurance coverage. Like life insurance, coverage levels can lag behind changes in compensation.

The material is for informational purposes only. Although this strategy may involve tax, legal, and accounting information, we are not offering such advice and suggest you consult your tax professional and advisors. Trusts are drafted by attorneys. Transition costs of converting deferred annuities to SPIA's or taking withdrawals may occur, so this should be examined carefully. The SPIA has been illustrated with First Colony as of 1/05. Rates change on a monthly basis. The life insurance policy assumes Standard NS risk class for both individuals. The carrier illustrated is Pacific Life. This is not a contract or policy, and the carrier's illustration should be attached showing all legal disclaimers. Insurance services provided by Mesirow Insurance Services.