How Financial Planners Can Safeguard Client Life Insurance?

Did you know that, according to a Harris Poll, about 65% of the population mistakenly thinks that the price initially established with an insurer for their non-guaranteed life insurance policy is set in stone? And 70% of life insurance policyholders haven’t reviewed the performance of their life insurance portfolio in over 12 years. Not only that, but over 90% of trustees managing Irrevocable Life Insurance Trusts (ILITs) or Special Needs Trusts (SNTs) are the insured’s eldest son or daughter—who is often an amateur trustee. While well-intentioned, they rarely have the skills or knowledge to act in their own best interest—or in the beneficiary’s best interest. Some eye-opening numbers, right? Let’s dig deeper.

The Hidden Risk in Policies

If you or your client purchased a life insurance policy between 1983-2003, there’s a 45% chance that it is a Flexible Premium Life Insurance contract (Universal Life). Unlike their more expensive predecessor, Whole Life Insurance, Universal Life policies were not guaranteed to last for the rest of one’s life. Today, approximately 35% of these policies are expiring prematurely due to:

• Lower sustained interest rates
• Neglect from amateur trustees

Even the American Bar Association referenced this crisis in its flagship book, The Life Insurance Policy Crisis.

The Truth About Policy Management

One of the biggest misconceptions is that the agent or broker who sold the life insurance monitors the policy to ensure it remains in force. This is not the case.

• Agents work for the insurance company—not the insured.
• Their role is to sell and deliver the policy—not to manage it.
• The insurance company’s only responsibility is to provide coverage and send an annual statement.

This means that policy management falls on the insured or trustee—and CPAs should ensure sufficient premium payments are made to keep the insurance in force until the insured’s life expectancy. 

Why Professionals Must Not Overlook Policy Reviews

Just last week, when we met a senior partner at a CPA firm who was adamant that they should not involve themselves with their client’s life insurance portfolio—as if it were taboo. To that, we say: As trusted advisors, CPAs meet with clients at least once a year. Why not rethink this mindset and bring your:

• Diagnostic & analytic skills
• Consultative expertise
• Common sense financial approach

…to help clients recognize and prevent their policies from expiring prematurely?

Why aren’t CPAs addressing this growing and insidious problem? A firm that collaborates with a client’s most important financial matters shouldn’t ignore their life insurance portfolio—especially when 30-40% of their net estate may be tied to these policies.

Why Independent Policy Evaluations Are a Must

To avoid policy lapse, CPAs should recommend that clients obtain an independent policy performance evaluation from an unbiased source. Why?

• Many insurers are increasing internal costs of insurance (COI)—which makes the situation even worse for policyholders.
• Low interest rates have reduced policy sustainability, leaving many unaware their coverage is at risk.

Steps to Evaluate a Client’s Existing Policy

The first step in evaluating a client’s existing policy is to obtain:

• An independent Performance Evaluation of the insurance company.
• A Historic Projection from the life insurer’s home office to determine how long the policy will last based on current premium payments.

Once this information is obtained, a CPA can determine:

• How much additional premium is needed to keep the policy in force?
• If the current policy is sustainable for the client’s desired duration.

Five Options to Prevent Lapse

Once a policy evaluation is complete, clients typically have five options:

1. Increase premium payments to keep the original death benefit in force until their mid-90s.
2. Reduce the death benefit while keeping premiums the same—allowing coverage to last longer.
3. Purchase a new policy (if health permits) with the ability to cover long-term care costs and extend policy guarantees.
4. Sell the policy as a life settlement (if the client is over 70)—potentially receiving more than the surrender value.
5. Use a combination of the above strategies for maximum effectiveness.

Final Thoughts

As a professional, we are our client’s most trusted financial professional. Ignoring life insurance policy performance could lead to significant estate losses—but by taking simple proactive steps, you can help your clients protect their wealth and legacy.

• Encourage policy performance evaluations.
• Identify potential funding gaps.
• Ensure clients take appropriate actions to extend their coverage.

By doing so, you differentiate yourself as a forward-thinking CPA who helps clients avoid financial disasters before they happen. Your shortcut to staying informed, receive curated news, expert analysis, and actionable insights to help you stay ahead in your industry!