Life Insurance Periodic Review

Life Insurance Periodic Review

By: Martin M. Shenkman, CPA, MBA, JD

Everyone who owns an insurance policy should be certain to conduct insurance reviews. A recent study found that in 75% of cases, the person insured could have reduced their premium outlay by an average of 40%, or increased their coverage by an average of 40% for the same outlay. These changes occur because insurance policies have evolved over time. Mortality rates have improved, people are living longer, and since insurance companies are going to pay claims later, newer policies will be cheaper than older policies even though the people insured are older. Underwriting is also different than in the past. Even for people with health impairments, insurance companies will pay later because of improved health and longevity, so that they can charge less. Also, some companies have different understandings of different illnesses. For example, when shopping for insurance for an older client with a heart condition, five companies declined, three companies offered insurance at higher than standard rates, and one company offered standard rates. The level of sophistication on different health issues differs by insurance company. A client with Multiple Sclerosis may be able to secure insurance depending on the type of MS and recent 5-year health history.

Many people will shop around with multiple insurance agents instead of having one agent properly package the health information and submit it. This can create a tremendous time delay, and be inefficient. It should be shopped properly at the outset by someone who acts as a broker — in effect, the purchasing agent. It is also important as part of the review process to get all of the relevant information up front. The agent should ask all of the questions that an insurance medical examiner will ask before submitting an application. Specific questions include family history, illnesses, surgeries, doctors seen, medications, lifestyle, nicotine use, etc. Even for existing policies, you may be able to get a reduced premium or a new classification. Instances include, if you smoked when you took out the initial policy but now don't, if you had cancer or any other chronic condition, but you have not had a recurrence, or the condition is stable or improved. The insurance company would change the rating on the existing policy. For medical impairments, you will have to fill out a declaration and possibly undergo a new medical exam. The insurance company will obtain your current medical records. If you have quit smoking for two years or longer, you should notify the insurance company requesting a change in rate. They may require a urine specimen. Some companies may consider any type of nicotine use, including cigars, pipes, cigarettes and chewing tobacco, and some may only view cigarette smoking as an issue.

Policy Performance

Old variable insurance policies were sometimes sold with projections indicating rates of return that were never sustainable. The underlying assets of the policy need to be considered. Other insurance policies are structured based on the insurance company's return, and not on the policies investment assets. Insurance companies invest primarily in high-grade bonds and mortgages. As interest rates have fallen, the projections of most policies were not realized. If the projections that were set when the policy was issued are not met, the policy may have to be funded differently - either with greater premiums, or for a longer period of time. It is also important to determine how the insurer credits earnings to a policy. Most insurance companies look at its overall portfolio return for the year and make a determination of what to credit to the policies. Interest rates may increase from 5% to 6%, but the insurance company may only have turned over and reinvested 10% of its portfolio. This illustrates a fundamental concept in crediting to insurance policies, that the policies' returns are sensitive to returns in the market, but with a lag due to the turnover factor. They follow the market both when returns are going down as well as when they are going up.

Status of the Insurance Company

If your insurance company doesn't survive, the initial projections may be irrelevant. When Mutual Benefit went under, policyholders received coverage so that they were protected, but the economic arrangements of those policies were quite different. A.M. Best, Moody's, Duff and Phelps, Standard and Poor's and Weiss all rate insurance companies. Vendors can provide an analysis of the financials and report all agency ratings for an insurance company.

What are the Goals

Why was the insurance purchased originally? What are the current goals and needs? What overall planning and financial circumstances exist now, and how have they changed? Consider lifestyle assets versus inheritance assets. For example, the insurance may have been purchased with the possibility of accessing cash value. This may no longer need to be an issue. Policies are issued today that have a different structure. This same person may no longer need cash value after retirement. Instead he may just need insurance protection. New policies have a very competitive price, build little cash value, but assure a death benefit. This person may be able to use this type of guaranteed death benefit policy. It is also known by other names: no-lapse guarantee, or secondary guarantee universal life. In this case, you could replace the old policy by exchanging the cash value from the existing insurance in a 1035 (tax-free) exchange from the old policy to a new guaranteed policy. The new policy could be structured with premiums that are substantially less than they were before, or with an insurance face amount that is much greater for the same premiums. In some instances, no further premiums will have to be paid.

Existing Trust

Things change. If you are unhappy with your existing trust, you may want to evaluate the possibilities of changing the trust, or transferring the policies to a new trust. Big lifestyle changes may lead you to reevaluate your insurance goals, and when drafting a new trust, you should make sure to address your new needs. Whether it be new dependents, a new diagnosis, or even new tax laws, you may want to consider starting from scratch.

Trustee Liability

If you are a trustee, you have a responsibility to monitor the policy, and it is in your best interest to document this. Consider having something analogous to an investment policy statement (IPS) for the insurance trust, stating the goals and objectives of the trust. Review the policy and determine if it is performing as it was initially illustrated. Does it meet what was originally projected? Every few years you could ask the insurance company for a new illustration, and inquire, based on how the policy current stands, how long the premiums will continue to be paid. If there are significant changes in your goals or estate plan, the insurance should be reviewed as part of this change.

Term insurance policies have premiums guaranteed for a certain period of time. Every few years this should be reviewed. Are the goals still consistent? Every 3-4 years it might pay to check and see if there are new policies that are more favorable than your current existing policy.

Policy Option

Many policies have an option to convert term insurance into a permanent policy. It will be more costly, but the coverage will not end, nor will it suddenly and drastically go up in cost. The conversion options are very important. For example, if someone has a health change, exercising a conversion option may be vitally important. The conversion is based on your health at the time the policy was taken out, not your current health.

Administrative Issues

If the premiums on your policy are not paid annually, an extra charge is incurred. There is thus a cost and hassle factor in paying annually, rather than at more frequent increments. The extra costs are not deductible (e.g., as an interest payment). Confirm who the beneficiary is with the insurance company. The owner should be confirmed. You want to have written verification by the insurance company.

Funding Strategy

Your funding strategy should be reviewed and monitored. The simplest approach is for an individual to pay premiums or for gifts to pay premiums. There may be more complex arrangements with a plan paying for the insurance, split dollar arrangements, and other techniques. If it's a second to die policy and one spouse dies, you lose half your annual exclusion gifts. You should also check if GST (Generation-Skipping Tax) implications are being triggered.


Periodic insurance reviews are essential to protect your insurance coverage and optimize your planning. With every health and planning change in your life, it is crucial to reevaluate your insurance and trusts. In addition, reviewing your insurance of a regular basis every three or four years could save you money you didn't even know about. The above discussion will provide a starting point for this analysis.


© Law Made Easy Press, LLC.

The discussions above are general and complex and competent legal and tax advice must be sought before implementing any of the ideas discussed.

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