Blog post

Sometimes, the term “whole life” can mislead policy owners into thinking they can “set and forget” their life insurance policies. Nothing is further from the truth. Whole life, and other cash value policies, are seldom designed to be “set in stone” – and death benefits are not necessarily guaranteed forever. For these reasons, I’ve been on an ongoing crusade to remind professional advisors to regularly review their clients’ policies. Below are the four major life insurance policy pitfalls I often see, and how one might remedy them. We’ll get to the free stuff at the conclusion of this post.

1. Funneling Too Much Cash into a Whole Life Policy
   Often, policy owners will pay premiums on whole life policies for many years – thus accumulating a substantial amount of cash value. The original policy intent may have been a combination of life insurance and cash value, but as time passes, it very often becomes evident that intergenerational wealth transfer is far more significant to the policy owner than the existence of cash value. However, it’s important to note that when the insured dies, his or her beneficiaries do not receive that additional cash value. They will only be paid out the policy’s death benefit. The solution? Leveraging the cash value through a 1035 Tax-Free Exchange. By transferring the cash directly from the whole life carrier into a specially designed universal life insurance policy, there is no tax on any inherent gain, and moreover, the death benefit can be hugely leveraged.
2. Very recently, we helped a client who owned a whole life policy purchased in early 2010. It had a death benefit of $1.1 million and had accumulated more than $400,000 in cash value. That is very low-leverage for someone in their mid-50s. As the client is very healthy, we successfully secured him an indexed universal life policy from a new carrier – with no additional premiums and a new death benefit of $3.3 million. This is only one example of the importance of how a life insurance portfolio review can deliver significant value (and, in this particular case, triple the value).

2. Ignoring Interest Rates
   To understand how interest rates affect life insurance policies, consider how insurers manage their collected premiums in the first place. They invest in bonds, mortgages and other funds – the yield on which is then determinative of the premium required to fund the policy until death.
3. Picture this: In the early ‘90s, you purchase a whole life or other cash value policy with a dividend or interest crediting rate between seven and 10 percent. You pay the premiums required at that time, and believe the policy is set. The reality? As interest rates decline over the years, so do the policy yields, leaving you with far less earnings than you ever expected. The result: unless additional premiums are made (sometimes substantially greater than what might be affordable), the policy costs will erode the remaining cash value and the policy will lapse. I previously wrote about this issue through the shocking experience of a 93-year-old client.
4. Not Understanding Policy Loans
   Policy loans go hand-in-glove with lower interest-rates. At the time of issuance, illustrations show how the policy may respond to certain assumptions over several decades – sometimes advertising that premiums might be “switched off” after 10, 12 or 15 years. In truth, the fine print states that those “short-pay scenarios” will only pan out if the policy is able to consistently earn interest or dividends aligned with the original projections. That can be especially problematic for whole life policy owners in cases where automatic premium loans exist. Those loans cover missed premium payments by drawing from the cash value to keep the policy in force. Premiums are often missed or even ceased for a broad variety of reasons, but most often because of dissatisfaction in the policy’s performance. The loans bear an interest charge, which if not paid out of pocket, accrue and compound the problem.
5. Policy owners who intentionally borrow from policies (not engineered specifically for purposes of income planning) may also face complications. By effectively creating a loan that accrues interest, the owner jeopardizes the policy’s performance and therefore subjects it to risk of lapsing due to lack of cash. We work with carriers who accept exchanges of policies with existing policy loans. In doing so, we engineer the new policy to pay off the loan with internal policy values. The result is a policy with no loan, no further accrued interest, and no risk of imploding.

4. Failure to Manage Orphaned Policies
   There are various events that can leave a life insurance policy orphaned – including the death, retirement or departure of an agent. If you think those cases are rare, think again. LIMRA* estimates that more than 40 percent of all life insurance policies are orphaned.
5. Orphaned policies can deprive the policy owner of important benefits that come with regular reviews. True – the majority of policies are assigned to a replacement agent, but due to a lack of incentive (financial, moral or emotional) for the adopter, policyholders are lucky to receive more than an annual statement in the mail.
6. In the case of an orphaned policy, it’s more important than ever to stay abreast of changes and, when appropriate, appoint a preferred agent of record who can oversee and consult on your policy.

The FREE Stuff

Routine insurance check-ups can help you identify, mitigate and resolve policy underperformance. Myerson Wealth would be happy to conduct a comprehensive analysis of your client’s existing life insurance portfolio, free of charge, to ensure it does the following:

• Provides the benefits – death, or living – as originally intended;
• Performs on course with its original plan, or can be corrected efficiently to do so;
• Delivers the best value to the policy owner through minimized premiums and maximized results;
• Maximizes value on the sale of the portfolio through a life-settlement arrangement, if the policy is no longer required.

Please contact us if you are interested in this complimentary service.

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August 11, 2020