Life Insurance Financial Evaluation

Unfortunately, most policies are infrequently, if ever, reviewed after purchase.  Since many of today’s policies have fluctuating interest rates and/or investment sub-accounts, it is imperative that the policy owner monitor the policy’s performance on a regular basis.  In light of the upcoming changes to the estate tax exemption and rapidly changing interest rates, reviewing existing policies is more critical than it has been in many years.

We begin by contacting the existing carrier for current policy information.  Our first step is to verify policy titling, address and tax information.  We frequently find address, ownership and beneficiary designations that are incorrect or out of date.  These errors can cause enormous problems if not corrected prior to any claims being filed on the policy. Similarly, confirming the tax basis in a policy is essential to managing any cash withdrawals or exchanges made from the policy to avoid unnecessary taxation.

We then review the insured’s medical rating to see if any changes are indicated such as having a smoker rating removed if the insured has stopped smoking.  We also review policy riders, if applicable, for cost and ongoing necessity.  This is especially important as it pertains to term conversion riders.  If an insured’s health has changed since the policy was issued, a conversion may be the most cost-effective means of maintaining coverage going forward.

Next, we evaluate alternative policy designs based upon the client’s current need for coverage. These re-projections are based upon information provided by the client and their advisor regarding anticipated changes in the amount of death benefit required or available premium outlay. 

These may include but are not limited to the following alternatives:

• Current policy with no changes
• Maintain current policy death benefit and solve for the level premium needed to maintain coverage to age XX
• Maintain current policy premium outlay and solve for the current level death benefit that can be maintained to age XX
• No further premiums and maintain current policy death benefit to determine how long the policy will remain in force
• No further premiums and solve for the reduced level policy death benefit that can be maintained to age XX

We then prepare detailed reports for the client and their advisor that include our findings and current policy projections and a comparative analysis of existing policy alternatives. 

The second step is to compare the existing policy projections to alternative options that are currently available in the insurance marketplace today.  We start by determining the client’s eligibility for new coverage based upon their current medical history.

We then obtain multiple quotes from top-rated carriers to determine if premium savings or coverage improvements are achievable based upon updated underwriting.  We do this on an “informal” basis as opposed to submitting a full application to any carriers.  This informal approach leaves no footprints in the marketplace and no medical records are posted to the Medical Information Bureau (MIB), the insurance industry’s shared medical reporting platform.

We will also evaluate alternative policy options that may not have been available when the current policy was acquired.  Most notably is the option to add a long-term care rider to an underlying life insurance policy.  This enables the client to effectively cover both risks with a single policy.  There may also have been significant developments in policy design and these newer policy structures will also be evaluated and presented to the client and their advisor.

Once we complete our analysis we will share our findings with the client and their advisor as to the alternative options, if any, that may provide improvements to their insurance coverage.

The third step is to review options for terminating the existing policy if all or a portion of it is no longer wanted or needed. 

The policy owner can surrender cash value policies back to the insurance company for the cash surrender value.  This may have tax consequences.

Alternatively, if the policy owner does not need the cash from the policy currently they can execute a 1035 exchange and transfer the policy cash value to an annuity to defer taxes or to retain the cost basis of the original policy.  There are many annuity options available for the client to consider if this option is chosen.

Recently, the option of selling a policy to a third party has become available.  These transactions are known as “life settlements” and they may afford the policy owner the opportunity to sell the policy for more than the cash surrender value if they qualify. Typically, the insured is 70 years of age or older and has had a change in health since the policy was initially issued.  The client has the choice of receiving cash for the policy or in some cases that can elect to retain a portion of the death benefit with no further premium outlays.

Another option to consider is gifting the policy to a charity.  This requires careful planning as the value of the gifted policy needs to be accurately determined to maximize the value of the deduction to the donor.

Additionally, AFR has developed the ILIT MAX Plan which gives the policy owner the ability to transfer their existing policy into a program that will allow them to defer or eliminate taxes on a significant portion of their taxable investment accounts.  

In summary, the LIFE Program is designed to provide advisors and clients with a comprehensive range of options to assist in the decision-making process regarding the continuation or disposition of existing life insurance policies.