With most investments, market conditions, innovations, and efficiencies impact performance. The same is true with life insurance. So, like any other investment in your portfolio, an investment in life insurance should be monitored to ensure that it is maximizing return and meeting your objectives.
We recommend reviewing your insurance policy every few years, even if only a cursory review. This will serve as a reminder to update your insurance when life events occur such as getting married, purchasing a new home, or starting a business. Similarly, business and estate planning factors like estate tax law changes, estate equalization, an increase in valuations for buy/sell agreements, new liquidity needs upon death, or a need to retain and reward key employees may prompt insurance policy revisions.
Perhaps less understood and often overlooked are the market conditions, innovations, and efficiencies that have made newer insurance solutions less costly and more productive. The following are a few changes that create opportunity to improve the return on your premium dollar investment.
- Mortality Tables: People are living longer, leading to lower mortality rates. Older policies may use mortality tables from 1980 to 2000 (and we have even seen some from the 1960s). These outdated tables severely underestimate life expectancies. Current contracts use 2021 mortality tables which result in much lower cost per $1,000 of death benefit. The death benefit is the amount paid to beneficiaries when you die. Basically, you can get more coverage for the same premium dollar now than you could 20 years ago.
- Distribution Differences: Life insurance companies distribute products differently now than they did in the past. For example, John Hancock used to have life insurance offices and sales staff all across the country. Now, John Hancock manages approximately $500 billion in assets and manufactures life insurance policies that are distributed through independent life insurance brokers. This is a much more cost effective distribution system.
- Policy Type: Years ago, there was one permanent policy type: whole life insurance. Perhaps one of the best innovations in the industry in the past 20 years is the addition of a long-term care rider to the death benefit. This tacks a living benefit on a death benefit. Basically, if you die, your beneficiary receives the death benefit tax free. However, if your health declines and you need qualified long-term care (at home, in assisted living, or in a nursing home), you can use your death benefit to pay for that care tax free. Any benefits used will reduce the death benefit by that amount. For example, if you have $1,000,000 death benefit policy and use $300,000 tax free for long-term care expenses, your beneficiary will receive the remaining $700,000 of death benefit tax free. One contract covering multiple contingencies is truly a game changing innovation!
Let’s put these into practice via two different scenarios.
- Case Study 1: Reduce premium, increase death benefit slightly, add a long-term care rider
A 58 year-old female had three older whole life policies with a combined cash value of $55,000, death benefit of $400,000, and an annual premium of $5,500. We were able to move the cash value to a new policy and secure a $500,000 death benefit with a long-term care rider, as well as reduce the annual premium to $1,800.
- Case Study 2: : Increase death benefit paying the same premium for estate taxes
A retired business owner and his wife, ages 71 and 70, respectively, had an older survivorship whole life policy (pays death benefit upon second to die) with $2,200,000 cash value, $6,000,000 in death benefit, and annual premium of $53,000. We rolled the cash value into a new policy with the same annual premium of $53,000 and effectively increased the death benefit to $8,200,000. The higher death benefit will help pay additional estate taxes and benefit their heirs.
Most people do not think of their life insurance premium as an investment in an asset. These cases are just two of multiple examples where our insurance policy review services helped our clients substantially enhance their financial position. Reviewing your existing life insurance portfolio may result in an improved return on your premium dollar, potential for added ancillary benefits, and a better financial outcome for you and your family. We offer these services for our valued clients and would be happy to engage in a full audit of your existing policies. Please reach out to your Relationship Manager should you wish to have your policies reviewed.
