The Importance of an Independent Review on Your Life Insurance

 In Personal & Family Finance, Resources

Over my nearly twenty years in the financial services business I have seen countless instances where a failure to review and monitor life insurance policies has led to a rude awakening for a person or, worse yet, their family. Sadly, many individuals operate under the mistaken belief that they can simply acquire a life insurance policy, stick it in a file in their office, pay the annual premiums and move on without any ongoing maintenance or care.

That sort of hands-off treatment of a life insurance policy can, and often does, result in policies failing to perform as originally illustrated; which could lead to your having to pay more cash into the policy than you had originally planned; reduce the death benefit or could even result in an outright and unexpected lapse of coverage. Thankfully, these sorts of issues typically do not spring up on a policy owner overnight. You typically have more than enough lead time to get in front of them and make the necessary modifications or take action before things get too bad. In order do so, however, you need to be proactive and take regular and consistent steps to review your policies.

The best place to start is with an annual review of the policy. Ideally, the agent who sold you the policy in question will be doing this for you as part of their ongoing service model. Unfortunately, however, many agents drop the ball when it comes to ongoing service and review. This can be the result of simply being busy, they could have left the business or simply retired.

The way the insurance industry traditionally pays its agents has a lot to do with this as well. You see, agents are generally compensated with up-front sales commissions when a policy is placed and they receive very little compensation going forward. In essence, this sort of compensation structure incentives agents to be “hit and run” and move on too quickly to new business after placing a policy. As such, it is easy to see how the ongoing service can easily fall by the wayside for some practitioners.

Like any other asset that you own, a life insurance policy needs to be reviewed and evaluated to ensure that:

  1. The policy is performing as originally illustrated;
  2. The policy continues to be suitable based upon your current financial situation; and
  3. The policy pricing and underwriting assessment is the most competitive in light of the changing nature of the insurance market.

Why should you perform a regular review of your life insurance?

  • Over the past decade, interest rates have fallen rather dramatically. This reduction in interest rates has resulted in many policies not performing as they were originally illustrated. As a consequence of this underperformance in the policy, you may be called upon to increase the premium payments into the policy simply to maintain the same level of coverage, or a reduce the death benefit on the policy altogether. (Neither of which are generally welcomed options.)
  • Reviews are all the more important when dealing with Variable Insurance Policies.


    • Many Variable Policies were issued with illustrated rates of return in excess of 8% per year.  
    • If the policies have not hit their targeted rates each year, the policy may be in jeopardy of lapsing.
    • Real world example: I have been working with one family whose Survivorship Variable Universal Life Policy was issued 15 years ago with an illustrated rate of 8% per year.  Needless to say the policy has not attained that on an ongoing basis; especially with the precipitous market drop in 2008 and 2009. Even based upon the original illustration rate of 8% (which we continue to believe to be unrealistic and overly optimistic), the policy looks like it may lapse within the next 12 years (age 74 for the husband and age 72 for the wife). Steps are being taken to address this as we speak.  
    • The most disturbing component of this review, was not that the policy is in such poor financial shape; rather, it was how difficult it was to get the client on board with the need for a review in the first place. Initially, they felt that the policy was doing well because they “like their agent.” Then, when we explained the potential issues in greater detail they were concerned about how their agent would feel about us looking into the policy. Once they got over their initial objections, they are now squarely on board with our review process and their focus is rightly on the state of the policy and what can be done about it, rather than their relationship with the agent or his hurt feelings. (Had the original agent been doing his job, he would have been out in front of this issue years ago himself and the clients would be in a much better position today.)
  • It is not always bad news though – sometimes the policy may have accumulated more cash value than originally planned which could be deployed into a new policy to purchase more death benefit, or reduce ongoing premium costs;
  • Significant changes in the insurance industry have led to a consolidation of companies through mergers and acquisitions; sometimes resulting in declines in the financial ratings and/or performance;
  • Improvements in an insured’s health and today’s more aggressive mortality pricing environment can create opportunities to dramatically reduce current premium outlays;

The inattention to how a life insurance policy is performing is disturbing. Many owners (whether they are individuals, trustees or corporations) do not give their insurance policies anywhere near the same treatment they would other assets. This is particularly true if you are serving as a trustee of a life insurance trust. As a trustee, you owe a fiduciary duty to the beneficiaries of the trust. Private trustees are typically required to comply with the Uniform Prudent Investor Act (UPIA); which broadly requires that the trustee follow a prudent process to:

  • Monitor performance of trust assets;
  • Investigate the appropriateness of holdings; and
  • Manage assets to minimize cost and maximize benefits.

In addition, trustees should keep a file of all communications to be able to demonstrate their diligence on behalf of the trust. It all starts with obtaining a “point-in-time” or “in-force” illustration on each policy. (This is an illustration that shows how a policy is performing today.) If you are dealing with a Whole Life Policy or a non-guaranteed Universal or Variable Universal Life Policy, you should ask for a series of illustrations reflecting potential impact of declining crediting rates and investment rates of return on Variable policies and increasing cost of insurance to stress test the policy.  

Trustees should pay attention to the following areas when doing their reviews:

  • Performance – is the policy performing as originally illustrated? Comparing the in-force illustration to the original illustration is often times enlightening (and disturbing) to trustees.
  • Current health of insured
  • Financial strength of carrier
  • Impact of increases in cost of insurance or decrease in crediting rates on the policy
  • Funding – is the current funding still appropriate?

If you have a policy that is not performing as illustrated, there are some things that can be done:

  • Restructure the policy – change the dividend option, reduce the death benefit, partial surrenders of paid-up-additions, partial withdrawal of a Universal Life policy
  • Add money: pay down loan balances, begin paying annual loan interest, resume paying premiums (stop automatic policy loans)
  • Replace it with a new one: 1035 exchange to a new policy
  • Surrender/sell: full surrender of the policy, life settlement

Reviewing your life insurance certainly entails an amount of work; but given how important the insurance likely plays in your overall estate planning, it is generally time well spent. Utilizing an independent third-party can be beneficial as well. For instance, in the real world example outlined above, I am confident that the agent was well aware of how poorly that Variable policy was performing; but he didn’t want to deal with it (or the clients) so he chose not to. Sometimes a second set of eyes can lend more clarity to the situation.

If you have questions or want to review your life insurance policy, email

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