A collection of insightful and informative articles from Myerson Wealth's “Recipes for Success” newsletter
Sometimes, the term “whole life” can mislead policy owners into thinking they can “set and forget” their life insurance policies. Nothing is further from the truth. Whole life, and other cash value policies, are seldom designed to be “set in stone” – and death benefits are not necessarily guaranteed forever. For these reasons, I’ve been on an ongoing crusade to remind professional advisors to regularly review their clients’ policies. Below are the four major life insurance policy pitfalls I often see, and how one might remedy them. We’ll get to the free stuff at the conclusion of this post.
Very recently, we helped a client who owned a whole life policy purchased in early 2010. It had a death benefit of $1.1 million and had accumulated more than $400,000 in cash value. That is very low-leverage for someone in their mid-50s. As the client is very healthy, we successfully secured him an indexed universal life policy from a new carrier – with no additional premiums and a new death benefit of $3.3 million. This is only one example of the importance of how a life insurance portfolio review can deliver significant value (and, in this particular case, triple the value).
Picture this: In the early ‘90s, you purchase a whole life or other cash value policy with a dividend or interest crediting rate between seven and 10 percent. You pay the premiums required at that time, and believe the policy is set. The reality? As interest rates decline over the years, so do the policy yields, leaving you with far less earnings than you ever expected. The result: unless additional premiums are made (sometimes substantially greater than what might be affordable), the policy costs will erode the remaining cash value and the policy will lapse. I previously wrote about this issue through the shocking experience of a 93-year-old client.
Policy owners who intentionally borrow from policies (not engineered specifically for purposes of income planning) may also face complications. By effectively creating a loan that accrues interest, the owner jeopardizes the policy’s performance and therefore subjects it to risk of lapsing due to lack of cash. We work with carriers who accept exchanges of policies with existing policy loans. In doing so, we engineer the new policy to pay off the loan with internal policy values. The result is a policy with no loan, no further accrued interest, and no risk of imploding.
Orphaned policies can deprive the policy owner of important benefits that come with regular reviews. True – the majority of policies are assigned to a replacement agent, but due to a lack of incentive (financial, moral or emotional) for the adopter, policyholders are lucky to receive more than an annual statement in the mail.
In the case of an orphaned policy, it’s more important than ever to stay abreast of changes and, when appropriate, appoint a preferred agent of record who can oversee and consult on your policy.
The FREE Stuff
Routine insurance check-ups can help you identify, mitigate and resolve policy underperformance. Myerson Wealth would be happy to conduct a comprehensive analysis of your client’s existing life insurance portfolio, free of charge, to ensure it does the following:
Please contact us if you are interested in this complimentary service.
* LIMRA is a worldwide research, consulting and professional development organization that helps more than 600 insurance and financial services companies in 73 countries increase their marketing and distribution effectiveness.