By Shane Johnson. Originally published at ValueWalk.
Revisiting life insurance might not top your list of new activities to try. But reviewing your insurance portfolio periodically with a professional can be valuable for every policyholder – even if you purchased your policies as recently as two years ago. That’s because the insurance industry continuously evolves, and a lot has changed in recent years. New product types, as well as attractive new features and riders have come to market. Some products, such as term insurance, have been repriced. In addition, the economy and financial markets have also changed. Interest rates – a key factor in the performance of permanent, cash value life insurance – have hovered near historic lows for years. Thus, existing policies have underperformed, and low bond rates have led insurance companies to increase the costs of guarantees on new policies.
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All of that means a review can help you identify if there are opportunities to make improvements to your insurance portfolio, such as:
- Increasing the death benefit for the same or lower premium
- Enhancing the cash value for the same or lower premium
- Extending the duration of a guaranteed policy for the same or lower premium
- Exchanging a non-guaranteed policy for a guaranteed policy
- Lowering or eliminating the premium while maintaining the same death benefit
- Adding long-term care coverage to a policy for little or no additional premium
- Exchanging your policy for one from an insurance company with greater financial strength
For smaller portfolios (less than $1 million) a review every three to four years may be sufficient, but for those with larger amounts of insurance, it might make sense to do a review every year or so.
Six Questions To Ask When Reviewing Your Existing Insurance Coverage
To help identify products and strategies that might improve your position, here are six questions to ask your agent as you review your existing insurance coverage.
- What do I own and why do I own it? Each life insurance policy in your portfolio was purchased with a specific objective in mind. While the goal of a review is to determine whether and how your insurance portfolio could be improved, a good review will also give you a clearer view of what each policy should accomplish.
- How will my policies perform? The financial markets are volatile and economic conditions change. Your agent should stress-test your insurance portfolio by analyzing how it would perform under different sets of assumptions about market returns, interest rates and other variables pertinent to the type of policy you own. These sensitivity analyses can help ensure your policies will perform optimally not just under the current environment, but under a range of various possible scenarios.
- Are my policies funded adequately? Policies that have been underfunded may require additional premiums, adjustments to the benefits, or other corrective action. Overfunded policies may require fewer premiums.
- Will I need to go through underwriting? If your agent identifies an opportunity to improve coverage, they may recommend switching policies. Since that would require underwriting, a good agent will always pre-screen to make sure you will qualify for the new policies and ensure that there is no gap in coverage.
- Should I own my policy outright or hold them in a trust? Removing assets from your taxable estate by owning insurance in an Irrevocable Life Insurance Trust (ILIT) may be an effective way to reduce your tax burden, while also protecting those assets from debtors and creditors. But the answer to whether you should use a trust for your insurance assets is complex, and depends on your unique circumstances, including your needs and what’s most important to you. A good agent understands that all the elements of a financial plan are interconnected and will make specific recommendations in the context of your overall financial picture. No decision should happen in a vacuum.
- Are you an independent agent who will show me multiple policy options from different insurance companies? Some agents will show you only a limited number of available policies because they are affiliated with certain companies. But coverages might differ quite a bit across companies, so if you’re not seeing a full range of options, you may be missing out on an opportunity to find a better combination of coverages and premiums. Similarly, an advisor who is fully independent will be incentivized to act solely in your best interest and offer you a truly objective analysis of your policies. Look for an insurance advisor who is focused on solving client problems, not selling product, and who has the in-depth knowledge to do so. Aim to understand how they choose the products and companies. Make sure they have access to the best available products across companies, and the ability to have influence at those companies.
The best-case scenario is that your agent recommends making no changes at all because your current policies are the best solutions for your needs. In that case, you’ll gain the peace of mind of knowing that you are adequately protected and not paying too much for that protection. And isn’t peace of mind ultimately what you want from your life insurance?
About the Author
Shane Johnson is senior partner at Perspective Financial Group, an Alera Group Company.
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