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Take Your Life Insurance to the Doctor: Why Policy Review is Critical

Updated: Oct 20, 2023

When it comes to life insurance, many clients tend to adopt a 'set it and forget it' mindset. However, life insurance policies need regular check-ups to ensure they’re still performing optimally, just like visiting the doctor annually to check on your personal well-being. As we approach this annual review season, let's explore why a policy review is critical to adapt someone's life insurance to their changing goals.

Quite commonly, people buy life insurance at one point in their life for a good and reasonable purpose. Then, life happens, and clients often find themselves holding onto ineffective policies that they continue to pay for without a clear understanding of why they own them. Adding to the stress, interest and dividend rates have seen declines over the years, causing uncertainties about performance of the life insurance policies. Even with the most recent spike in interest rates, insurance companies general accounts will lag in passing that through to the policy owner.

With all of these changes, what clients want out of their life insurance shifts as well. Here are a few examples of life events that would warrant a life insurance review:

  1. Changing Family Needs: As families grow, so do their financial responsibilities. Clients may initially purchase life insurance to safeguard their loved ones, but as children grow up and become financially independent, the need for substantial coverage may decrease.

  2. Evolving Business Needs: Entrepreneurs often buy life insurance to protect their businesses. As businesses grow or change in structure, the insurance policies they hold may need to change with them. Business owners can also utilize life insurance as part of their succession planning, ensuring a smooth transition of ownership.

  3. Estate Tax Planning: Many purchase life insurance to provide much-needed liquidity to cover expenses and financial obligations, such as estate taxes. For clients with an ILIT, the higher exemption amounts could mean it contains excessive insurance, resulting in unnecessary premium payments.

  4. Improved Liquidity: Clients often find themselves more financially liquid than when they initially purchased their policies. This newfound liquidity prompts a reassessment of whether existing policies align with their current financial situation.

  5. Balance Death Benefit and Cash Value: Many clients begin with plans favoring cash value when they’re younger and need to access the money. As clients age, the balance often shifts towards a greater need for a death benefit rather than policy cash value.

  6. Trust Funding: Trusts may require funding based on beneficial interest requirements, and life insurance can be a valuable asset for this purpose.

With a well-planned strategy, life insurance can transition from being a necessity to a financial tool. There are several things you can do to get the most out of a client’s life insurance policy, including:

  • Policy Replacement: If your client bought a policy for cash accumulation, but now has more need for death benefit, they may be able to obtain more death benefit at a lower cost of insurance by switching to a different policy type. Or the old policy just isn’t performing well and there are better products in the market. Or the old policy is performing just fine, but it was designed with more or less risk than the client now wants in their portfolio. The list could go on.

  • Premium Holiday: Your client is unsure whether they will need the policy in the future. If so, they might choose to cease paying premiums for the time being and “wait and see” what the future holds. The policy must have accumulated enough cash value to allow for reduced or “skipped” premiums without running the risk of lapse.

  • Reduced Paid Up: Your client wants to keep some coverage, but doesn’t want to keep paying premiums and doesn’t mind a reduction in death benefit. They may be able to stop paying premiums altogether and reduce the death benefit to the point where the policy is “paid up.”

  • Policy Repurpose: Can you mitigate another risk, other than premature death? Your client might be able to obtain Long Term Care benefits by adding a rider to an existing policy or exchanging for a new policy that includes such benefits.

  • Surrender for Cash Value: A.K.A. take the money and run. This is the path of least resistance. However, you could miss an opportunity to optimize your client’s planning.

  • Cost Basis Recovery: Check to see if cost basis is significantly higher than cash value. If so, it could make sense to exchange the policy for an annuity to preserve cost basis and have the growth between cash value and cost basis remain untaxed.

  • Life Settlement: Your client is approaching life expectancy and would rather have cash now than wait until after death to distribute to beneficiaries. Life settlement companies (selected with proper due diligence) will offer to buy your client’s policy for somewhere between its cash value and death benefit amount.

  • Gift to Charity: Naming a charity as beneficiary may reduce your client’s taxable estate at death, and allow the client to continue benefiting from cash value during their lifetime. Alternatively, gifting a policy during your client’s lifetime can result in a current-year tax deduction, and any future premiums paid to such a policy will also be deductible as charitable gifts.

Your expertise is instrumental in helping your clients achieve their financial goals. Regular policy reviews are a critical component of this journey, just a like a doctor monitors their patients’ health, to ensure the policy is performing its best. Initiate discussions with your clients to encourage policy reviews during this annual review season and let the specialists at NFP Insurance Solutions be your guide.


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