The one thing I know for certain about life insurance illustrations is that the non-guaranteed assumptions are always wrong. The economy does not proceed at a steady growth rate, yet that is what illustrations show for non-guaranteed assumptions. Life Insurance is an important financial instrument that needs to be monitored and reviewed on a regular basis. Without proper review and adjustment, if necessary, the policy owner may be faced with unexpected “sticker shock.”
Notwithstanding that fact, it is very common for an individual, or even a Trustee of a life insurance trust, to own life insurance and not take the necessary steps to protect the acquisition.
Example 1: An attorney for a trust beneficiary asked me to review a significant whole life policy owned by a trust. The short story is that the policy owner (i.e. “trustee”) had, at the direction of the grantor, allowed the premiums to be paid with policy cash value. This went on for sixteen years! The result was the accumulated debt and interest are draining the policy to the effect that the net death benefit (after loan repayment) is now below the original policy death benefit (and will continue to drop even if premiums are paid). Additionally, the policy is in danger of lapsing, there is substantial taxable gain in the policy, and the insured is no longer insurable.
Example 2: I did a policy review for an attorney/trustee recently. The trustee owned a $1M whole life policy. I was able to 1035 this into a new policy with a guaranteed death benefit (DB) of twice that amount for the same premium. The tradeoff was cash value vs. DB, but since the policy was acquired for the DB, the tradeoff made sense. It was a 20-year-old policy, and these are the ones where great things can be done due to new product innovation and updated mortality tables.
Policy Reviews may disclose any one of the following, and if done on a timely basis, the owner may take early action to address these problems:
- Premiums may need to be increased as a result of cash values being less than projected, or an increase in mortality expense charges.
- Benefits may drop if there are policy loans.
- Cash values may be less than illustrated.
- Premium payment dates, if missed, may eliminate guarantees. Have you read the fine print in your policy?
- The policy may be in danger of lapsing.
- There may be substantial benefits of new insurance products that have improved on older policies.
- The amount of life insurance owned may be greater than the current need due to tax law changes, or family changes.
- The insured may have quit smoking after the policy issue date, and therefore, is eligible for lower premiums.
- New products that may be less expensive, and/or long term care may be available.
- It is possible to exchange the life insurance policy for an annuity on a tax-free basis.
- The policy may no longer be needed, and a sale of the policy may be an option.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.
Securities offered through Advisory Group Equity Services, Ltd., Member FINRA/SIPC. 444 Washington Street, Woburn, MA 01801 (781) 933-6100.
This article should not be considered as providing accounting, business, financial, investment, legal, tax, or other professional advice or services. It is not a substitute for such professional advice or services, nor should it be used as the basis for any decisions or actions that may affect your business or you personally. This should only be one part of your research. You should seek authoritative guidance from a qualified accountant or attorney before taking any action.
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