The importance of a Life Insurance Policy Audit

On July 20, 2017, the Wall Street Journal published an article entitled “Happy 100th Birthday! There Goes Your Life Insurance.”  The article focuses on some older policies that mature when the insured attains age 100, or even 95, whereupon the insurance company terminates the policy and gives the owner the then cash value (even if it is much less than the premiums or the death benefit).  This is but one example of why it is vital to review your life insurance contracts on a regular basis.

If a policy is owned by a trust, a policy review is generally prudent, to ensure that the trustee is properly discharging his/her/its fiduciary duty.

A corporate officer or company president should also have key man and so-called “Buy/Sell” policies reviewed (both life insurance and disability).

Regardless of who owns a policy, a review of most types of permanent life insurance is advisable every 3-5 years, for any or all of the following reasons:

  • Determine if the policy is performing as anticipated (compare actual performance to the “as issued/sold” design).

Many life insurance policies are underperforming due to lower interest rates, increases in cost of insurance charged by the carrier, increases in the carrier’s administrative charges, and, for whole life insurance, a decrease in the dividend. 

  • Note if the policy matures at a certain age of the insured, or if it can run until death (many older policies terminate at age 95 or 100).
  • Determine if the policy is running off outdated mortality tables, such as the 1980 mortality tables.
  • To run hypothetical illustrations to explore different options and scenarios
  • Identify the initial need or reason for the policy
  • Identify the current reason or need for the policy
  • Determine if the existing policy is best suited for the current needs of the policy owner.
  • To make any adjustments to the policy
  • To surrender the policy
  • To sell the policy on the secondary market
  • To undertake a tax-free 1035 exchange of the policy into one better suited for the owner.  “Better” might mean a policy with more death benefit for the same premium, stronger guarantees, and/or extended maturity (where the death benefit lasts until death).
  • Identify and perhaps exercise any policy riders
  • For a term policy, note any conversion date limitations or restrictions
  • Review the ratings and financial strength of the carrier
  • Is the policy owned pursuant to a split-dollar arrangement?
  • Are there any liens or collateral assignments against a policy?
  • To determine the income and/or estate tax exposure upon death or earlier policy surrender

If you are a trustee or policy owner that wants a review/audit of an in-force policy, please contact your Apexium advisor.  We typically require a recent statement from the carrier and, if available, the actual contract, to commence the process.

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Apexium is not a law firm, does not draft legal documents and does not render legal advice.