As technology, health-care improvements, and access to information changes, life insurance products evolve and improve. More often than not, this results in greater values and less expensive offerings with a higher overall quality.
The policies available today are far better products than in previous generations and will continue to improve. If you currently own an insurance policy or represent the interests of an insurance policy owner, we have listed some key reasons why this insurance should be reviewed periodically (we recommend a review every two years, at minimum.)
Keep in mind that carriers are large corporations that deal with thousands of employees and an even larger number of clients. Mistakes happen, and you can’t always rely on the carrier to act in your best interest.
Ownership and Beneficiary Designations
We often find that the ownership and beneficiary designations of an in-force policy do not match the client’s objectives. Typically, clients’ needs for life insurance will change throughout their financial lives. As clients’ finances evolve, so does their need for better and more complex options. As the purpose of insurance changes from simply providing for a spouse or paying off debts, to estate settlement purposes and more, these ownership and beneficiary designations have to reflect the client’s updated needs.
Variable Life Insurance
Given the market returns in the past, many of these policies will not have the ability to last until life expectancy, and they will either require substantially more premium or lapse. The primary risk with variable insurance is investment risk. As negative market returns occur while mortality expenses increase, variable policies have very little chance of recovering without a substantial infusion of additional premiums. Make sure you review the investment allocation of the subaccounts on every policy review, paying particular attention to fund expenses and diversification.
Whole Life, Universal Life, and Indexed Life
The same threats that apply to existing variable insurance also apply to existing whole, universal, and indexed life policies. In these cases, interest rates over the past twenty-five years have decreased so drastically that many in-force contracts are not performing at a level even close to what was initially projected, and many will lapse.
Declining Mortality Costs
Modern medicine has enabled Americans to live considerably longer than previous generations. This trend is reflected in the mortality tables used by the life insurance industry today and, in turn, affects how much these contracts cost.
A mortality table is a set of information used by actuaries to determine the probability of a person’s age at death. These tables are used as a guide to assess mortality risk and determine an expected lifespan of any given client.
It normally takes at least three to four years for these tables to be built into the price of new policies. Product development is very slow in this industry. Current mortality tables are based on information from 2001; therefore, any policy issued between 2005 and 2006 (or before) is likely based on substantially higher mortality costs. Before the 2001 table update, insurance carriers were using formulas based on the previous structure, which was created in 1980. If you look at 1980 mortality tables versus the 2001 set, the difference is significant. Mortality tables will change and likely improve over the course of your life insurance ownership, so be aware when these changes occur so you can determine whether the new mortality tables present you with an opportunity to improve your portfolio.
General Expense and Commission Reductions
Like most industries, costs continue to follow downward pressure, providing a better product for the consumer. It costs less to buy life insurance today than ever before.
It is also valuable to note that as consumers and consumer advocates have grown to require more transparency from carriers, various carrier costs and charges have changed. This has also driven down general policy expenses, and the result is a better competitive market.
An agent today also makes less commission in renewals than in previous decades. This allows the carrier to sell a more competitive policy and pass the savings on to the consumer. Unfortunately, it also creates an environment where consumers aren’t getting the guidance they deserve because there is less agent incentive to service the insurance.
Better Rate Classes Now Exist for the Consumer
Rate class is defined as the underwriting class (and ultimately determined by the carrier) and reflects the price at which the insured can purchase a policy.
Better rate classes that were not available until recently now exist for the consumer. Ratings such as preferred, super preferred, standard plus, and preferred tobacco were not available in the past, and this specialization is crucial in making new policies more competitive; rate classes will improve as medicine and research continues to advance.
Carriers have and will become more aggressive in underwriting certain conditions that had previously resulted in declines, postpones, or ratings requiring extra premium. For all the above reasons and more, we recommend a complete policy review at least every two years.
As your health condition changes over time, so might the underwriting of an existing policy. If the carrier becomes more aggressive on a health condition or your health improves, inquire about your existing policies as to whether an in-force rate class reduction is available on that contract. If so, your policy could become less expensive and might perform much better than what was projected based on the original rate class issue.
Policy riders are additional benefits added to policies at a cost to help policyholders better accomplish their goals. Features such as long-term care, continuation after age one hundred, overloan protection, and no-lapse guarantees provide clients with far superior products that didn’t exist at their current levels of sophistication and value when many consumers purchased their existing policies.
Changes in legislation and tax law can affect the efficacy of an in-force policy, as they can cause existing policies to fail to accomplish their intended strategies. The policy review process must consider these changes with regard to their impact on your portfolio.
Remember, the ultimate goal is to end up with the right policy at the appropriate price, with the right carrier for your needs, and a responsible, long-term maintenance strategy so that the policy pays off at the insured’s death. This is what we ultimately consider a “good deal” when buying insurance.