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:
Why should you perform a regular review of your life insurance?
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:
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:
If you have a policy that is not performing as illustrated, there are some things that can be done:
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 Chris@TwelvePointsWealth.com