Life Insurance Policy Management

Taking an active role in managing your clients' life insurance - that often accounts for a very large percentage of their net worth - isn't a superfluous service but is necessary to avoid problems or missed opportunities, either of which have a very high probability of occurring.

It isn't possible to know which policies have problems or are missing opportunities by merely asking whether the client thinks his insurance policies are in good shape anymore than a physician can gain anything useful by merely asking if patients are feeling good. Rather, physicians order routine tests to detect serious problems that are not in any way obvious without the tests. As is the case with health problems life insurance policy problems are much easier to resolve the earlier they are detected. But life insurance is either completely ignored or when it is reviewed it is by commission-motivated salespersons whose training and experience are at odds with an objective and expert evaluation.

Katt & Company (fee-only life insurance advisors) is asking you to consider working with us in devising a compatible procedure for reviewing life insurance for interested clients. To this end the following issues may help you sort out your support or rejection of working with us to manage your clients life insurance policies.

1. It is your opinion that permanent life insurance is a relatively simple asset to understand and not in need of any expertise beyond your firm's skills with the help of local insurance salespersons. This will put you squarely in the REJECT camp and you can get back to work.

2. Whether you think life insurance is relatively simple or complicated you have little confidence that Katt & Company will be of much help - its REJECT time.

3. Yes its complicated, and Katt & Company may be even half as good as Katt thinks, but you haven't got the time or interest to worry about such things - so its REJECT time.

4. Its complicated and Katt & Company would be a good choice for this work - BUT you have gotten so many clients from local insurance agents that you are stuck with a system that has fed your family - with some regret REJECT time.

5. None of the above, but for some non-definable reason - REJECT.

6. Well, if there are still a few good advisors who haven't hit the REJECT button yet, please continue.

Common Problems or Missed Opportunities

Poor Policy Pricing - Many life insurance companies think of policyowners as short-term obligations to be impressed while courting then treated with poor policy pricing that goes completely unnoticed. Poor pricing produces poor policy values often requiring higher premiums. If insureds are still in about the same health they were when buying the policy this problem can be easily corrected. We can send you redacted reports that address this very common problem.

Underfunded - Legitimate and quite normal changes in interest rates from the time of purchase have caused policy performance to change without a corresponding increase in premiums to achieve the same goals set when the policy was purchased. This isn't necessarily a problem with the insurance company (as poor pricing is), but a failure to properly monitor and manage the policy. This can easily be corrected. Please see my November 1999 AAII Journal column, Managing the Cash Values of Permanent Life Insurance.

Policy Loans - Policy loans are almost always a very bad idea because they cause poor policy performance. Generally loans should either be repaid or they may be removed by using a different accounting strategy for the policy.

Split Dollar - Generally, split-dollar is a misunderstood sales gimmick that many tax attorneys are more enthusiastic about than they should be. In 22 years I have only seen a relatively few number of cases where the intended split dollar arrangement was actually set-up or accounted for properly. Even when split dollar has been done correctly, it has some unpleasant long-term consequences that insurance agents don't really understand or ignore.

Variable Life - These are policies that allow the owner to manage the investments, usually preferring equity funds. Most VL is improperly designed and in serious need of immediate attention. Please see my July 1999, The Do's and Don'ts of Buying Variable Life Insurance Policies, AAII Journal column and my November 2001, Variable Life Insurance Policies and Stock Market Volatility AAII Journal column.

Changes in Insureds' Health - Both substantial improvement or deterioration in insureds' health can have very significant life insurance planning and policy management implications. Also, a change from smoking to non-smoking status should be known and acted upon.

Ownership and Beneficiary Issues - Serious tax and people-planning problems can be avoided by confirming each policy's ownership and beneficiary information, including knowledge of ownership and beneficiary changes.

Inappropriate Policy Designs - Many insurance agents use the solution-in-search-of-a-problem sales approach that puts every buyer into the same policy design. Most common is treating every estate planning life insurance sale as a liquidy need, when most estates are not illiquid. Estates without true liquidity needs can use life insurance in more creative ways. The point is to show the client alternatives, and let them make informed choices. This process should be done for possibly restructuring existing policies as well.

Myriad of Inexplicable Screw Ups - Unintended errors are made all of the time that would be easily found and corrected if anyone looked. For example, a policy is not issued with the design presented by the agent. Recently, a level death benefit design was issued with increasing death benefits but with the same premium meaning the policy was unintentionally underfunded from the outset. Or, a female insured is charged much higher male mortality rates by mistake.

Possible Alternatives for Managing Clints' Life Insurance

Policy Inventory - We can either instruct your office or we can obtain basic policy information including a current in-force illustration for all clients wanting your help. This is done via limited-power-of-attorney forms that simply authorize your office or us to request information. When the information is in we can review it and indicate to you if there are any potential problems. If your client wants these concerns pursued they can hire us to perform a Policy Review or take their concerns elsewhere. There is no charge for this Policy Inventory service.

Policy Audit - Same process as the Policy Inventory but we then perform several tests that may better define potential problems. The results will be communicated to your client in a report and if there are apparent potential problems they can hire us or take these concerns elsewhere. Policy Audits will cost $300 per policy.

Policy Review - A thorough review of a policy that can be done in place of the Policy Audit or as a result of the Policy Audit. Policy Reviews not only identify possible problems but present alternative solutions. They generally take three to five hours at our normal hourly rate of $285. Depending on the findings in the Policy Review your client may want our help in further defining certain issues and implementing any changes they may desire.

If you are interested in the idea of providing your clients with a much higher level of professional service for their life insurance (via your and our combined efforts) please contact me. At the very least we can send you redacted reports as interesting issues come up in our practice that you can use for your own education.