When was the last time you evaluated your existing life insurance policies, whether they are personal or being used for gifting or business purposes? If it has been more than five years – and especially if it has been more than 10 years – it's the right time to dust them off and take a look. Dramatic changes in the insurance industry, longer life spans (mortality lives) and declining interest rates have made this the perfect time to reassess the value you are getting from these critical policies.
Life insurance death benefits are a major source of capital for families and businesses. Not only are they an important asset that deserves attention but also it is a critical part of a sound financial strategy.
"You are likely in for a very pleasant surprise in terms of the increased benefits you might receive for what you are spending or receive similar benefits for less."
With a policy review, the objective is to ensure that your life insurance is lined up with your current financial needs. Proper plans encompass individually owned contracts, trust owned contracts and employer benefits to provide you with a clear assessment of the adequacy of your coverage.
When financial circumstances change, financial objectives change. Defining your "intended objective" is an important step in obtaining the best life insurance policy for you. This could involve re-evaluating the amount of funds that will be needed to support a surviving spouse and minor children, re-assessing a buy-sell agreement for your business or a variety of other needs.
The goal of an insurance policy review is to make sure your insurance is meeting your intended objectives in the most cost effective way possible. And the good news is that you are likely in for a very pleasant surprise in terms of the increased benefits you might receive for what you are spending or receive similar benefits for less.
What does a policy review entail?
A life insurance policy review often includes a thorough explanation of how a policy has performed, projected cash values at designated intervals and an assessment about the number of years that the policy will remain in force based on current assumptions.
A proper policy review entails more than just looking at a policyholder's death benefits – it should include these six elements: protection, annual premiums, ownership structure, beneficiary designations, supplementary benefits and cash value and performance. You will also want to make sure your insurance company is accessible and provides you with strong customer support.
Alternative policies or planning strategies are also introduced in cases where new products or solutions can better accomplish the policyholder's desired goals.
Why is now the right time?
Life insurance products have improved, offering newer policies that have lower cost structures – even products that have been introduced two or three years ago have to meet a more demanding and competitive market.
There has been more risk placed on the insurance company. A risk-shifting paradigm has taken place within the life insurance industry. Policyholders have also shifted to products that are guaranteed, only facing risk in their ability to pay premiums and their insurance carrier's insolvency. The long-term nature of these risks means companies can take on the risk through lower premiums.
"Plus, unlike the 'old days,' it's no longer a complicated, time-intensive effort. Generally, it takes little more than sending your financial advisor the cover sheets from your policies and answering a few lifestyle questions."
Better medical underwriting allows for more accurate evaluations of those being insured. Today's policies offer a much broader array of underwriting classes for healthy policyholders than in the past. Lower insurance rates are now available for older individuals who can demonstrate that they are healthier than the typical applicants.
Insurance policies and companies are "a-changin.'"
Smarter policyholders and competition within the insurance industry, online "shopping" and more savvy financial advisors have put pressure on life insurance companies to sharpen their pencils, as well as to create new products that meet today's needs and lifestyles. While whole and universal policies are far from obsolete, term policies have grown in popularity for their accessibility to families and individuals and their larger payouts at lower premiums.
Industry consolidation has had an impact. During your policy assessment, you will want to determine if your provider has a weak or strong rating. The recession hit many hard, and life insurance providers are no different – many are facing deteriorating financial conditions. Not only have low interest rates plagued insurance companies particularly intensely because they are primarily bond investors which can diminish credit-worthiness, but many policyholders view life insurance cash value as a source of funds to use in an emergency. With economic recovery lagging, greater demands for that money may increase.
New conversion privileges provide flexibility.
Term or more "temporary" insurance coverage accounts for approximately 25% of all life insurance – making it very easy for policyholders to re-enter the market and adjust their coverage to meet changes in their planning objectives. There are also conversion privileges, which means policyholders have the contractual right to convert term insurance coverage to other policyholders offered by the insurance company without evidence of insurability. This is a valuable provision to the policyholder and should be evaluated during the policy review.
Unique gifting opportunities are more readily available.
In 2011 and 2012, the increased gift and Generation-Skipping Transfer exemption amounts - $5 million per individual and $10 million per married couple – will likely enable people to forgive intra-family loans, which often result in debt obligation. This change allows for new opportunities – a more simplified existing wealth transfer plan, free trust cash flow and an increase amount of wealth transferred to trust beneficiaries.
The time to act is now!
There is much to consider when looking at your life insurance policy. Changes in the insurance industry, the new gifting rules, and increased longevity expectations provide ample reasons to reassess your life insurance goals. Though it's easy to forget about your policies, if you haven't reviewed them since the recession, it's a good time to ensure you are up to date with changes and your intended goals are being met.
"Wouldn't you refinance your home mortgage if it were at 10% today?"
Plus, unlike the "old days," it's no longer a complicated, time-intensive effort. Generally, it takes little more than sending your financial advisor the cover sheets from your policies and answering a few lifestyle questions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
