Periodically Review Your Life Insurance

Physician's Money Digest, May 15 2003, Volume 10, Issue 9

With the equity markets faltering andinterest rates plummeting over the pastseveral years, many families are reassessingfinancial and estate plans. An often overlookedbut crucial component of a comprehensiveplan involves assessing the performance of insurancepolicies. Like many sectors, theinsurance industry has been dramaticallychanged by terrorism and the persistenceof economic weakness.


Individuals have seen auto andhomeowners insurance rates jump dramatically.New homebuyers have evenexperienced difficulty in securing homeownerscoverage. Business owners haveexperienced similar challenges in renewingcorporate coverage. A January surveyby the National Federation ofIndependent Business indicates thatmanaging insurance coverage is one ofthe primary concerns of small businessowners. Holders of long-term care policieshave been roiled by the instability ofseveral major carriers. Although the policydetails may be complicated, coverageis generally not difficult to understand interms of cost and benefit.

However, many policyholders areunable to access the information neededto evaluate the status of their insurance.This is particularly true of permanent(ie, cash-value) life insurance policies inwhich an insurance agent may have projected ananticipated performance based on a set of assumptionsthat have not been met.

Many challenges face policy owners when theyascertain the value of a life insurance contract.Often, the original agent has left the business.Perhaps more important are the changes that haveaffected the insurance industry. For example, morecompetitive pricing has been achieved throughinnovative product development, lower insurancecosts, and increased regulatory scrutiny.


As a result, many older policies havebecome outdated and a comprehensivereview and assessment may be necessary.For example, one woman's $1-millioninsurance policy, which had been securedfor estate planning purposes, wasexamined. Although the policyholderhad dutifully paid the policy for over adecade, which was held through a major,financially solvent carrier, it was imminentlyfailing and would lapse in 5 to 7years. Despite the policyholder's increasedage, it was possible for her financialplanner to extend their coverage forthe entirety of her life through a strongercarrier at no additional annual cost.

An 80-year-old policyholder's financialplan was also reviewed. He's a widowerwith 3 grown children, 1 with specialneeds. Life insurance was purchasedas part of his total estate plan tofacilitate equalization of estate valuesamong his 3 children. The initial insurancepolicy for the benefit of the special-needs child, with the eldest child astrustee, was purchased over 30 yearsago. Approximately 16 years ago, thepolicy was rewritten at a $300,000level, with estimates of future performance thatdid not actually materialize.

Slightly before the policyholder's 80th birthday,he received notification from the insurancecompany that his premium was increasing from$6000 to $30,000 annually. Failure to pay theincrease would result in policy lapse, even thoughthe policyholder was never directly notified of anyweakening in policy condition. Fortunately, by advocatingon the policyholder's behalf, his financialplanner was able to develop options that preservedthe coverage level at $300,000, with policy premiumsthat were significantly more manageable.


A helpful financial advisory service for individualsand businesses should be able to assist thosepolicyholders who are affected by the recent legislationregarding split-dollar life insurance orSection 419 plans. Their analysis should include areview of policy design and policy performance,along with potential options or redesign alternatives.What should you do to assess the value ofyour coverage? Here are some questions to ask:

• What is the carrier's financial rating? Get ratingsfrom at least 2 major rating services (eg, S&P,Moody's, and Fitch). A rating of less than "A" is acause for concern and warrants further review.

• What type of coverage do you own? There are3 major types of permanent life insurance: variable,whole, and universal. Review the effect of the marketdecline on your variable life policy. Likewise,review the effect of the dramatic interest ratedecrease on the whole and universal life policies.

• Request a current projection of policy performancebased on the carrier's current assumptions.Consider only the guarantees when assessing theprojected policy performance.

• Is your agent's opinion biased? Seek a reviewfrom at least 2 insurance professionals and be certainthat 1 is an independent and unbiased source.

As you evaluate your financial planning strategyand tools, your life insurance plan should notbe neglected. With so many changes in the insuranceindustry, you may be missing an opportunityto fine-tune your financial plan. With lifeinsurance plans, you can control the viability andultimately the value of your coverage.

Shannon Rowan is vicepresident for ChevyChase Financial Services,managing theFinancial PlanningGroup. He has morethan 15 years of experiencein the financial servicesindustry. He welcomesquestions orcomments at 240-497-7247 or and securitiesservices providedby Chevy Chase Securities,Inc, a subsidiaryof Chevy ChaseBank and memberNASD/SIPC. Investmentsare not obligationsof, or guaranteedby, Chevy Chase Bankor any other bank andare not FDIC-insured.