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The Importance of Life Insurance Policy Reviews

September 1, 2016


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. Some of the most significant reasons to conduct regular life insurance policy reviews include:

Product Considerations


Policy Funding Adequacy                                 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.


Product Enhancements                                    New product types, features, and riders may                                                                                              provide increased planning opportunities.


Policy Maturity                                                   Older life insurance policies may have a                                                                                                       maturity1 date of age 95 or 100. A policy review can                                                                                 help mitigate this problem.


Favorable Tax Treatment on Exchanges2    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 Paradigms


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.


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.



1 Coverage terminates and the cash value is paid

2 Section 1035 of the Internal Revenue Code



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.3 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.



3 Uniform Prudent Investor Act (UPIA)  

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