Finding Reassurance in Your Life Insurance

by: Smith and Howard Wealth Management

People buy life insurance for many reasons. Typically it is thought of as a way to ensure that loved ones will be taken care of should they pass prematurely, but many people have also purchased policies as a way of implementing a forced savings plan to fund their children’s education need or provide income in retirement.

Often, people do not know many of the basic details of their life insurance policies – what’s in them, what they cover and don’t cover, key exclusions, beneficiary provisions and so on.  When preparing for our annual financial planning reviews with our clients, we have seen many individuals with older cash value life insurance policies that no longer serve their needs because as children have moved out and graduated college or perhaps they have accumulated sufficient assets to fund their retirement.

As a result we have been helping clients re-evaluate their goals to determine if there might be other insurance products that might meet their more immediate needs, like providing for additional income or long term care expenses. In other cases (usually those unable to get through underwriting) we have used the cash value as collateral for loans with lower interest than the internal borrowing rate within their existing policies. Strategies vary depending on needs, health status and the amount of cash value available (either in a single policy or in multiple which can be consolidated for these purposes).

Four other specific areas that we consider in a policy review are outlined below.

1. Insurance term periods expire. If the term on your term product expires, it could present real problems. If your policy’s term period is close to expiration, and with term rates being at an all-time low, now may be a good time to explore new policy options, including a term conversion to a permanent product. Sometimes, policy holders do not know that a term conversion option is even available to them.

2. Performance of universal life/variable life products varies – yours may or may not be serving you well. We recommend that your policy undergo a policy review by an experienced professional in order to better acquaint you with the details of it, and assess its performance. Given that interest rates continue to be low, and market volatility remains an ever-present reality, we are finding that some market-driven policies are not performing as originally intended. In this case, people often pay a substantially higher premium to keep their policy in force and active. In many cases, this becomes so cost prohibitive that they may have no choice but to lapse the policy. A policy review may uncover this potential problem early enough to find viable solutions to the problem.

Consider this recent example: A 69-year-old client had a $256,000 universal life policy that was projected to expire/lapse at around age 87. Based on a policy review, we recommended that she transfer the internal value of her existing policy to a new policy, with no taxable consequences. Additionally, she was able to work with an insurance provider to receive a guarantee this new policy to last for her lifetime, up to age 120. We suggested an increase in the death benefit from $256,000 to $326,000 and worked with the client and her provider to add a chronic illness rider to the new policy – all of this with no additional premiums.

3. Loans and withdraws can profoundly affect your policy. Depending on the type of policy you have, loans and withdrawals can potentially cause a reduction in the cash value, interest to accrue and a possible erosion of the policy due to insufficient values necessary to sustain the policy. Also, with certain universal life policies, withdrawals can potentially erode the life of the benefit guarantee (e.g., shortening a benefit that would normally last to age 100 to age 85). If you have a universal life policy, and you were delinquent in making a premium payment, that event could possibly take years off a death benefit guarantee. You may not have any idea that the whole design of your original policy has changed.

4. Missed details with life events can cause a failure. For example, consider what would happen if a change of beneficiary was never completed after a divorce, or if an ownership change within a business occurred.

We would be happy to provide a policy review of your current life insurance coverage to see if there might be better options to suit your financial needs. Such a review can be extremely valuable. While we do not sell products (such as insurance), our understanding of each client’s needs as well as what is available in the market can provide the guidance you need to seek the best solution for your circumstances. Please any SHWM team member at 404-874-6244 with questions or to schedule your policy review.