The Planner's Perspective: The Life Of An Insurance Policy
By Paul Morrone, CFP ®, CPA, MSA
Our era of historically low interest rates has wreaked havoc on the life insurance plans of many Americans. Back in the 80’s, purchasing a universal life policy was a social norm. Astronomically high interest rates created illustrations that yielded big death benefits and low premiums that made it look almost too good to pass up. As part of the steady decline in rates since the early 80’s, many people continue to dutifully pay their premiums on time only to receive a notice that their policy is in jeopardy of lapsing. Now they find themselves either without coverage or having to pay much more than planned into the policy simply to keep it in force.
Like any asset class, life insurance (specifically permanent insurance) needs to be managed, monitored and evaluated on a periodic basis. Changes in interest crediting rates can have a material impact on a policy’s performance and often go undetected for years until it is too late. What was once believed to become an asset later in life as a result of illustrated cash value accumulation, may now have turned into an added expense at best and a liability at worst. A policy on the verge of lapsing may require additional cash infusions to keep up with the cost of insurance as an individual ages, a cost many may not be able to afford in retirement when they are on a fixed income.
Reviewing your life insurance coverage should go beyond reading your annual statement and paying your premium on time. It is important to request periodic in-force illustrations and review them with a financial professional to see how your policy has actually performed relative to how it was illustrated when you bought it. Proactively reviewing the performance of your insurance policy will help to identify the potential for lapsed policies and, if needed, allow you to spread the financial burden of higher premium payments over several years instead of only months. Life insurance should also be evaluated to determine if it is still suitable for the policy owner as their needs may have changed as life progressed. Increasing, changing or even eliminating the type or amount of coverage may be prudent based upon and individual’s needs and the policy’s impact on their estate plan, cash flow and goals.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.