In today’s financial environment, most educated consumers meet with their financial advisors to review their goals and rebalance their investment portfolio. Most of us also refinanced any mortgages on our properties when interest rates dropped. Why? Because things change. If we’re not regularly evaluating the markets, then chances are that opportunities are being missed.
Life insurance is no exception
Life insurance premiums may represent one of your major expenses and the policy benefits may possibly be the most valuable single asset on your balance sheet, yet most consumers tend to neglect life insurance through a “buy and hold” approach.
Part of the reason for this is the nature of life insurance distribution and another part is the reality that life insurance products are very complicated. What you own was more likely “sold” to you rather than you initiating the purchase and there are no standardized benchmarks (like the S&P 500 or mortgage interest rates) to enable us to make educated comparisons. So with life insurance, we typically “set it and forget it”.
But when it comes to life insurance, it doesn’t have to be this way, and it shouldn’t. What makes sense is to become educated in order to properly evaluate what you own and make the right decisions. And we can help.
Know what you own
In the same way that we monitor our clients’ portfolios and their plans for retirement and their family legacy, we regularly review life insurance contracts owned by our clients.
For clients approaching retirement or who are retired, long-term care planning and probate/estate transfer issues are typically more of a concern than owning life insurance originally purchased to replace your income to protect your spouse and children. Has your plan taken this into consideration? If so, what should you do with the insurance you already own?
Maybe what is in place is exactly what is needed, but how do you know? Given how complicated these products are, most of us don’t really understand what we own. Does what you own currently still serve the purpose intended when you purchased it? Could you pay less for it today? Could you eliminate it altogether? Have you explored any alternatives?
Life Insurance Economics have changed
There continue to be a wide variety of life insurance and annuity products available today and the mechanics of different product structures operate very differently. For existing policies, low interest rates are not only causing carriers to reduce their crediting rates (dividends or interest), but more and more frequently, carriers are now raising expenses in existing contracts as well. The result is that a majority of life insurance policies are under-performing with respect to their original assumptions and in comparison to market alternatives and very often are at risk of either lapsing or in need of higher premiums. In many cases, this provides an opportunity for us to help you understand what you own and to further assist you with your planning needs.
We have helped clients:
Extend coverage that is in danger of lapsing –
A couple was paying $10,000 annually on a survivorship policy that was scheduled to lapse when they are in their early 80’s unless they increase the premium to at least $17,000. We found an alternative policy with the same death benefit guaranteed to age 105 and with an annual premium of $9,200.
Reduce the cost of premiums on existing policies –
A 66-year-old retiree is paying $1,900 in annual premiums for a $100,000 policy. His goal is to provide a death benefit to his heirs, but his existing policy focuses on generating cash value. By transferring the cash value to a new contract, we obtained a $100,000 death benefit guaranteed for life with no further premiums required.
Provide more death benefit for the same premium –
A 60-year-old man owns a $320,000 policy and has been paying a $3,600 annual premium for 19 years. The policy is projected to lapse at age 83 under current assumptions and age 72 as guaranteed. The premium would need to be doubled to have a reasonable chance of lasting as long as he needs it to last. An exchange of cash value and the continuance of the $3,600 annual premium procures a new policy guaranteed to age 105 with a higher death benefit of $370,000.
Provide the same death benefit for a lower premium –
A couple in their mid-forties each has a $250,000 universal life policy. In order to maintain the policies, the wife’s premium must be quintupled and the husband’s premium must be increased by 750%. The market provided alternatives on a guaranteed basis for a fraction of what the original policies required.
Decide whether to continue paying premiums –
A 65-year-old man is paying $3,800 annually for two whole life insurance policies with $300,000 of death benefit and $150,000 of cash value. His financial situation no longer requires the death benefit. We arranged to transfer the cash value to a single long-term care contract offering significant long-term care benefits, as well as a similar death benefit and access to cash value if needed. Premiums savings over 20 years amount to $72,000.
Change the dividend option to reduce or eliminate future premiums –
A 50-year-old man with a $1 million whole life policy is paying $13,000 per year on a monthly basis. After changing the premium mode from monthly to “annual” and changing the dividend option to “reduce premium” from “purchase paid-up additions”, we repositioned the policy to last to age 100 with no additional premiums required. Given his life expectancy, the premium savings could approach $500,000.
Schedule a Policy Review
An investment review is a process of benchmarking portfolio performance against what is available in the market. It also means ensuring that the portfolio strategy fits with your financial situation and goals. Life insurance is a financial instrument and, like any other investment, it needs to be managed in a changing market. Considering the product complexities, it is not advisable to ignore what you own or to attempt to self-diagnose the problems and potential solutions.
Trusted and Objective Advice
Like an investment portfolio review, it is more important than ever to evaluate your existing insurance to ensure your policies are performing adequately. ACM Wealth provides policy reviews and our advisors maintain the expertise to assist you with evaluating your life insurance, long-term care, and annuity planning needs. Please reach out to your advisor for with any questions or concerns you may have.