For insured’s under the misperception that their life insurance policy is iron clad simply because they pay their annually billed premium, these folks may be in for an abrupt and expensive surprise. Many policies are designed to stay in force only on the basis of critical assumptions being met or exceeded over the life of the policy. Let me explain. For many policy types, the premium payment alone is insufficient to keep the policy in force. Once received by the insurance company, your client’s premium then needs to be invested at an assumed rate of return such that the premium plus the rate of return earnings are sufficient to keep the policy in force. If the assumed earnings are not realized, the policy may very likely be stripped away by the carrier unless significant premium increases are agreed to and established as the new, ongoing premium (also subject to assumed rate of return projections). In certain policy types, the maximum, annually compounded assumed rate of return is 12%! Good luck with that.
Properly conducted, an “in force policy review” will identify those policies that are “damaged goods” and in danger of unintentionally lapsing. Policies in Irrevocable Life Insurance Trusts (ILIT’s) require particular care and attention, as the trustee is at risk should the trust beneficiaries be left without their anticipated benefits.
In the current economic environment, policy lapses and/or significant premium increases are not at all unusual. Cash flow is being eaten up to keep policies afloat and in other cases, policies are being forfeited, neither of which your client will find acceptable.
Life insurance policy reviews ought to be conducted on a regular basis, no differently than a car is tuned up or an individual has a health exam on a regular basis. Solutions to failing policies do exist but can only be explored once, and if, we know that the current policy in force is a candidate to be lost. See your insurance agent or ask your advisor to refer you to an agent skilled in uncovering the issues and presenting the remedies.