The Good News. When properly designed and implemented, life insurance plays an important role in a successful estate plan.

The Bad News. Despite its important role in the client’s estate plan, life insurance often suffers from improper design, implementation and administration. It frequently carries a negative purchase and ongoing ownership experience. It can be a sore subject to say the least.

The Irony. Clients often pay meticulous attention to important traditional assets — businesses, securities and real estate — and plan extensively for their transfer. Life insurance assets can equal or exceed the value of these traditional assets but may receive little or no attention and can be left in an underperforming state for years.

The Opportunity. Several major industry changes are causing policy owners to evaluate existing life insurance coverage and improve the quality of the life insurance portfolio. Evaluation can result in (1) a reduction of the premium needed to sustain the same coverage, or (2) a material increase in the amount of coverage for the same premium. Furthermore, evaluation of a client’s life insurance can address the goals of a professional adviser by providing meaningful, valuable service and achieving superior results for the client.

Why All the Recent Buzz About Reviewing Life Insurance Policies?

Simply put: circumstances change. To elaborate and to borrow terms from Economics 101, “macro” trends (industry changes) and “micro” trends (changes in the client’s particular situation) both drive the need to evaluate clients’ life insurance policies.

Macro Trends Affecting Life Insurance Policies

• Premium and benefit guarantees
• Health and medical improvements
• Reduced mortality charges from insurance companies
• Decrease in interest rates
• Emergence of the secondary market for life insurance policies.

Micro Trends: Changes in the Client’s Situation

• Marriage
• Divorce
• Birth of children or grandchildren (resulting in additional heirs and additional room for gifting)
• Death of a spouse
• Noticeable change in health
• Lack of desire or ability to pay premiums
• Change in value, nature or composition of assets
• Change in estate tax liability.

The Unanswerable Question Posed to Advisers: “Is My Policy Good or Bad?”

Imagine your new client bought a whole life policy 18 years ago. No one has laid eyes on it, much less reviewed or evaluated it, in 12 years. He is frustrated and confused and decides to ask one of his trusted advisers for a professional opinion of the policy. He highly values objectivity and, like many, decides to ask his accountant. He proceeds with a set of predictable questions: Why do I have this life insurance policy? Do I still need it? Should it be in a trust or can I own it? How is this policy doing? Is there a better policy out there?

The client asks valid questions, but the situation needs a framework to bring all the issues into sharp focus. Evaluating a policy in a proper perspective and manner requires assessment from seven distinct perspectives. The Seven P’s, as they are known, each have analytical questions and actions associated with them.

1. Purpose—What need is the policy addressing? Does the need still exist? Why was the policy originally purchased? Have the circumstances materially changed?
2. Placement—Is the policy in the right place? Are the ownership and beneficiary arrangements suitable based on the current facts? Is it properly integrated into the client’s current plan? Is the policy documentation thorough, accurate and professional?
3. Professional—Is there a trusted insurance professional who is actively involved, creative, product-neutral and capable of handling complex concepts?
4. Product—Was there a process for matching the product type to the need? What was the process and is the product still suitable? Carriers continually redesign existing products or introduce new ones to the market. The capabilities of a specially designed product may be particularly well suited to meet the specific needs of a client.
5. Performance—When looking back to the inception of the policy, how has the policy performed against original expectations? Is it materially behind or ahead of plan?
6. Price—What will it cost to get this policy to do what we need it to do? Performance (#5 above) is retrospective, whereas Price is prospective. Starting today and looking forward, how does the premium requirement compare to the cost of a new policy that accomplishes the same end result?
7. Provider—Has the financial rating or credit quality of the insurance company changed materially? How large, sound and well-established is the insurance company?

Certain concerns can be addressed by making changes to the existing policy: change a beneficiary to address a concern in purpose; change the owner (after full consideration of possible tax consequences) to address a concern in placement. Other concerns can only be fully addressed by purchase of a new policy, including price and provider.

Policy Improvement Tools. Perfecting a life insurance portfolio may mean more than just adjusting the old policy or exchanging for a new policy. Sometimes fixing an “underperformance” problem calls for radical alteration of the insurance in place. A myriad of creative possibilities exist when reformatting a client’s life insurance:

• Request improvement of the risk rating on an existing policy
• Reduce an existing policy down to its most efficient core and couple with a new policy
• Couple a life insurance policy with a life-only annuity
• Sell (life settle) the existing policy and consider alternatives for the proceeds, including the purchase of a new policy
• Use a combination of term insurance and permanent insurance
• Preserve flexibility with a new $0 surrender charge policy
• And so on…

As circumstances change, life insurance needs change too. Actively managing a life insurance portfolio and evaluating the seven core components of a policy can help surface and address areas of concern. Addressing a life insurance need requires creativity from and collaboration among the client’s trusted advisers. The result can pay off for the adviser in terms of value delivered and can certainly pay off for the client.

Ken Samuelson and Brandon Davis are Principals at The Morehead Group Inc., a financial services firm in Charlotte specializing in life insurance for high net worth individuals and families. They can be reached via phone (704) 334-2700.

This article is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or financial services professional. The concepts may not be suitable for every situation. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies. Securities and Investment Advisory Services offered through NFP Securities, Inc. a Broker/Dealer, Member NASD/SIPC and a Federally Registered Investment Advisor. The Morehead Group is a member of PartnersFinancial, a division of NFP Insurance Services, Inc., which is a subsidiary of National Financial Partners Corp (NFP), the parent company of NFP Securities, Inc. Full article originally appeared in the March 2007 issue of The Will & The Way, the newsletter published by the North Carolina Bar Association’s Estate Planning and Fiduciary Law Section.

Reprinted with permission.