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The Importance of Life Insurance Policy Reviews

By Ryan Barradas

Life insurance is an important part of an overall financial plan. Regular life insurance reviews performed by an experienced professional can determine whether the policy is performing according to expectations and meeting financial objectives.

There are many factors to consider that may impact the performance and suitability of a life insurance policy. It is important to review and determine that both product and planning objectives are being met. WealthPoint has compiled some of the most significant reasons that you would want to conduct a regular life insurance policy review.

Product Considerations for a Life Insurance Review

Life insurance policies are not investment vehicles that can be evaluated at the time of purchase and never looked at again. They require annual evaluation to ensure your policy will be there when you and your family need it the most. By reviewing your policies frequently, you will be prepared to make changes to ensure they perform as intended. These changes may be allocation changes, premium modifications or even underwriting and cost improvements. These subtle changes can pay immense dividends in the future in terms of policy performance.

Policy Funding Adequacy

Life insurance policies that have been underfunded may require additional premiums, adjustments to the benefits, or other corrective action. Overfunded policies may require fewer premiums.

Loans and Withdrawals

Lifetime distributions from permanent cash value life insurance products will affect policy performance. Periodic monitoring and review is essential to help ensure policies are meeting the intended objectives and to help avoid unexpected tax consequences.

Crediting Rate and Charge Assumptions

Life insurance policies are illustrated under certain assumptions that may change over time, both positively and negatively. This may impact policy performance. If crediting rates have increased, then the policy will perform better than expected and may produce a higher death benefit, more income or require lower premiums. On the other hand, if crediting rates decrease, then the policy may underperform expectations resulting in less death benefit, less income or will require more premiums.

Product Enhancements

Life insurance policies are always evolving, and new options are being offered. New policy product types, features and riders may provide you with increased planning opportunities. A routine policy review will ensure you are maximizing all your policy has to offer.

Policy Maturity

Older life insurance policies may have a maturity date of age 95 or 100. A policy review can help mitigate this problem. If a policy matures at age 95 or 100, the contract may stipulate that the carrier only has to payout the cash value as opposed to the death benefit. Often times, there’s a substantial difference between these two numbers; and in some cases, it could be millions of dollars. Knowing that this could be the result far in advance of the maturity date can ensure the policy pays out the desired amount of liquidity as opposed to a much smaller number.

Favorable Tax Treatment on Exchanges

Life insurance is a unique asset that receives special treatment under the Internal Revenue Code. If an opportunity exists to improve on an existing life insurance policy, in most instances, a permanent life insurance policy may be exchanged, allowing the policyowner to obtain a new permanent life insurance policy while continuing to defer income taxation on any accumulated gain.

Planning Models

Changes to Needs and Objectives

Risk tolerance can change over time and life insurance should be reviewed periodically to make sure the product type and design continues to be appropriate. Additionally, it is important to review policy ownership and beneficiary designations to ensure the objectives of the life insurance policy will be met.

Regulatory Changes

State and Federal laws change over time and may impact planning objectives and results. A consistent life insurance review can ensure that all laws are being abided to.

Carrier Financial Strength

Like other major financial institutions, life insurance companies are reviewed by rating agencies to analyze strength and stability.

Medical Advances

Improvements in how conditions are detected and treated may impact the underlying mortality assumptions used to price life insurance products. Newer products may provide superior overall financial performance.

Life Insurance Trusts

Life insurance trusts are frequently utilized as a part of sound planning. As with any other asset held in trust, the Trustee of a life insurance policy has a fiduciary responsibility to review trust owned life insurance and ensure that policies are performing adequately. Failure to do so may result in litigation for which the Trustee is personally liable. Trustees may seek the services of an insurance specialist for this purpose, who can help to evaluate the performance of the policies and advise on appropriate actions. In addition, an insurance specialist can help the Trustee in assessing the current level of life insurance protection and whether it provides the appropriate amount of coverage necessary to meet the trust’s financial objectives.

After reviewing the importance of a life insurance policy review, consider contacting our team of insurance advisors. WealthPoint brings years of expertise to the table for insurance policy reviews.