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Do You Own a Life Insurance Policy? Don't Just Set It and Forget It!

Life insurance is an important tool in any financial plan. As time passes, your needs or reasons for your insurance can change.  It is important to revisit your goals as your circumstances evolve.

Many of you have already taken the important step of obtaining life insurance to ensure that your loved ones will be provided for if something ever happened to you.  However, all too often, this process is treated with a “set it and forget it” mindset.  An extremely important component of owning a life insurance policy is periodically reviewing the coverage to make sure it continues to address your goals which tend to evolve over time.  There are common life events that should trigger a review of all life insurance to ensure that both the type and amount of coverage remains appropriate.  Examples include marriage or divorce, new child, death of a loved one, purchase of a new home, employment change or change in a key person of a business, etc.  Additionally, in cases where a policy is owned by a trust, the trustee has a fiduciary responsibility to the trust beneficiaries which should include conducting periodic reviews to ensure that assets owned by the trust are still prudent.  There are also other factors that may impact your life insurance which make periodic reviews essential.

Effects of recent economic and investment environment on life insurance

Recent trends in the investment and economic environment have had a significant impact on the insurance industry and potentially your existing life insurance policy.  This is especially true for “permanent” types of life insurance that rely on an “investment component” to support the policy.  Examples of permanent life insurance include whole life, universal life and variable universal life.  In recent times, interest rates have come down substantially to historic lows.  This has had an impact on both dividends paid on whole life policies as well as interest crediting rates for universal life policies.  This has led to many policies not living up to the expectations that existed when they were initially purchased. 

Don’t let unexpected consequences catch you by surprise

Poor performance of a life insurance policy can lead to unexpected situations where policy owners could face unpleasant consequences, including:

  • Erosion of cash value – some policies, such as universal life, have a cost of insurance taken from the cash value of a policy, usually each month.  This cost of insurance increases every year as you get older.  A policy can look like it is performing well in your younger years, but the cash value will have to support higher costs of insurance in your older years to stay in force.
  • Increased premiums – some policies are sold with the idea of only paying for a set period of time (e.g. 10 years).  Years can go by and all of a sudden premiums, in some cases substantially higher than the original premiums, can be required again.  If you have not had a premium increase yet, it may be lurking around the corner.
  • Policy lapse – if the premium or cost of insurance is not paid, the policy will lapse and you will no longer have the benefit that would be paid to your beneficiaries. 
  • Adverse tax ramifications – in some scenarios, when a policy lapses, there can be significant tax gains realized.  This is especially true for policies that have substantial loans taken against them.

Goals and circumstances will change over time

As time passes, your needs or reasons for your insurance can change.  It is important to revisit your goals as your circumstances evolve.  For example, perhaps you wish to no longer pay premiums on your policy but still want to maintain a guaranteed death benefit to a certain age.   Alternatively, you no longer have a need for the coverage and would rather the cash value was invested in a different vehicle.  Whatever your goals may be, Curran Wealth Management is happy to help you evaluate your situation and understand your options.

Actions to take

The first step is to contact us.  We will help you review the goals for your life insurance and the best way to achieve those goals.  We can also coordinate the gathering of key information about your existing policy by requesting an “in force illustration” from your insurance carrier to help project the performance of your policy using present day market conditions.  We will provide you with a formal policy review and discuss your options.   We can also obtain important information to help determine cost basis or outstanding loan balances on your policy.  Our goal is to help you be proactive and avoid potential issues that could arise down the road with your policy.

Curran Wealth Management is here to help you

In a recent example, a client had an irrevocable life insurance trust (ILIT) that owned a permanent life policy purchased in the 1990’s.  It was a second to die policy (covering a husband and wife) and had a cash value of about $400,000.  The policy did not perform as originally projected and the clients were not interested in continuing the premium payments of about $14,000 per year.  In addition to no longer paying premiums, their goals evolved and their new goals were discussed.  It was important to the client to guarantee coverage through age 105 and maximize their death benefit to be used as an inheritance for their children.  Together, we requested an “inforce illustration” for the policy.  We compared the existing policy to newer products offered by the leading, highly rated insurance companies.  In the end, the decision was easy.  The clients preferred a guaranteed life product which better maximized their new objectives.  We assisted with a process called a 1035 exchange which allowed us to transfer the cash value of the old policy to the new policy with no tax consequences.  The results were:

  • No more premium payments were required
  • The “no-lapse guarantee” of the new policy ensures that it will stay in force to age 105 
  • The death benefit increased by approximately $300,000 from $1.1 million to $1.4 million (more than 27%)

In summary

Life insurance policies, especially permanent policies, should be reviewed periodically to:

  • Ensure your coverage aligns with your potentially evolving goals and objectives
  • Avoid unpleasant surprises such as increase premiums or policy lapse
  • Assess the impact of the changing economic/investment environment on you policy,
  • Address certain life events (e.g. marriage, divorce, having a child, death of a loved one etc.)
  • To maintain a trustee’s fiduciary duties with policies owned in trust

Whenever you are accessing your current insurance policy, considering changes to an existing policy, or replacement of an existing policy, it is recommended that you should seek the advice of a financial professional to help you understand and work through all of the options and consequences.  Additionally, if replacing a policy, it is never advisable to cancel existing coverage before the new coverage is in place.  Curran Wealth Management is here to help you.  

 We are always happy to assist with matters such as these.  Please contact our office for review of your policy. 

Please check with your Curran Wealth relationship manager, 
or contact Curran Wealth Management if you have any questions.  

The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. It is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security.  CIM, LLC does not provide tax or legal advice.  No one connected with CIM, LLC can ensure tax consequences of any transaction.  The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.