Insurance is a key safety net for many. If your portfolio is down by 40%, your insurance may be even more vital. The economic meltdown has had profound impact on insurance coverage itself and the companies issuing your policies. NYC based insurance guru Lee Slavutin, of Stern Slavutin 2, Inc., offered the following checklist of ideas to help guide you in reviewing your life insurance.
You face at least two important risks relating to your life insurance portfolio in 2009 and beyond:
1. Policy lapses because of investment losses in the stock market. This will be an issue for some variable life policies invested in equity sub-accounts. Variable life is a type of life insurance in which you can select mutual-type funds from those offered by the insurer within your policy. You thus assume the benefits, or lately the risks, of the performance of those funds. If the funds were hammered in the market decline, you policy will have been as well.
2. Insurance company impairments or failures.
Reviewing and Monitoring.
Monitoring your insurance policies will require greater vigilance in 2009. Here are some of the steps you should take:
1. Evaluate more frequently (e.g., monthly or quarterly) your variable life insurance policy investment accounts and values.
2. Re-test your policies. This means obtaining a current "in-force illustration" for each of your policies. This is a projection of where your policy is today and how it will perform based on its current status, not the assumptions used when you first purchased it long ago. Those assumptions, especially in light of the recession, may not be panning out. Use this information to determine if the current premiums you are paying are adequate to maintain the policy.
3. If you need to goose up your premiums, can you afford to do so? If the policy is held in a trust, consider the need to have additional gifts made to the trust. Have your estate planner determine whether there are adequate demand (Crummey) powers to permit those gifts to qualify for the annual gift exclusion (now $13,000/year).
4. More frequent checks (e.g., monthly, or even weekly you have reason to be worried) on the ratings for the insurance company that issued your policy. Consider the ratings of all the rating services, not just one. You can obtain ratings by visiting the rating agencies' web sites. This will requires you to register, but there is no fee to obtain current ratings. Some companies have already been downgraded, and others have been taken over by state regulators (e.g., Standard Life Insurance Company of Indiana and Penn Treaty Network America Insurance Company). The agencies and their websites are: ◙ AM Best - www.ambest.com ; ◙ Fitch - www.Fitchratings.com ; ◙ Moodys - www.Moodys.com. ◙ Standard & Poors - www.standardandpoors.com.5. Understand the limitations of the ratings. The rating services are not perfect, but can be a valuable source of information on the financial strength of the insurers. If a company is downgraded and you are thinking of replacing your policy with a new policy from another carrier, review carefully the following "replacement" issues: ◙ Is replacement really in your best interest? Are there large surrender charges? Compare the surrender value with the account value to see if there is a penalty. ◙ Are you insurable at favorable rates? Never cancel an old policy until you have replacement coverage in place. You can pay a modest initial premium to put the new policy into effect and later get the money from the old policy transferred as a tax free exchange.