Review and Revise Insurance Porfolios

By Alan D. Kahn

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New classifications of insureds. Most insurers have generously discounted the premiums of many policies for applicants that are in excellent health. Even for others, insurance rates due to reductions in mortality experience costs and operating expenses have also declined. These savings would not, however, apply to someone whose health has deteriorated significantly and is considered uninsurable. For individuals that have lost weight, stopped smoking, or whose health has otherwise improved or even remained unchanged, reapplying now may reduce costs.

Term insurance rates. The most significant savings have taken place in term insurance. In many cases, policies that have been in force for 10 or 15 years can be replaced with plans that save 30% to 40% of the premium. In addition to premium reductions, insurers have created five-, 10-, 15-, 20-, and even 30-year fixed premium term programs. Many programs can be used for business needs, such as buy-sell agreements, or for estate planning purposes. Also, most of these term programs can be converted to a permanent insurance plan if needed. Now is a good time to lock in a fixed-term premium and period based upon business or personal needs.

Guaranteed universal and variable insurance programs. Unlike their predecessors, newer programs offer guaranteed death benefits for a given period and premium. Unlike term insurance, they can be guaranteed for the policyholder’s entire life. The unforeseen variables—lower interest rates or higher company operating costs—that ultimately affect future premiums and death benefits can be completely eliminated.

To determine whether an insured’s permanent insurance programs include a guaranteed death benefit, ask the insurer for a “guaranteed illustration.” An insurance professional should review the illustration to determine and evaluate the available options.

Additional considerations. Never drop existing coverage until new coverage is obtained and bound. In addition, allow time to evaluate which plan makes the most sense for the insured, whether an individual, a business, or a family. Also, choose plans that can flexibly accommodate changing needs; for example, a 20-year term plan with a conversion feature allows the option of retaining the plan for the insured’s entire life.

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Term insurance. This is pure insurance with no cash reserve attached that simply provides one year of coverage on the insured’s life. A product can be purchased that increases annually, or the premium can be locked in for five, 10, 15, 20, or even 30 years. Although term insurance is most appropriate for needs that will decline or be eliminated over time, a policy that is renewable and convertible locks in the insured’s future insurability. In other words, the insured may convert the term to a permanent product in the future, regardless of health.

Whole life insurance. This is the most traditional life insurance product on the market. For a stipulated premium, the insurance company guarantees the insured’s death benefit and cash values in the contract. The cost of insurance or mortality charges are frozen at issue, and the investment risk of the cash values is assumed by the company. Although the premium cost is usually higher than other permanent products, other benefits are provided. The death benefit will increase as cash values increase, premiums may disappear in the future based upon dividend performance, and loans may be used to borrow premiums in the future to keep the policy going should circumstances change. For example, consider a husband and wife that purchased a “second to die” whole life insurance product and then divorced after the policy was in force for eight years. The couple no longer wanted to fund the contract, but the beneficiaries decided to use borrowings to keep the policy going. Although the death benefit declined somewhat over time because of the increasing loan, it still paid to keep the policy instead of cashing it in. Both insureds were no longer insurable, and although the couple had the option of splitting the policy in two, no funds were available with which to do this.

Combination of whole life with term rider. This has the same characteristics of whole life insurance, along with a rider of term insurance. The term rider amount should convert to whole life over time by using whole life dividends that purchase more whole life insurance and thereafter reduce the term portion of the policy. The reason one would purchase a blended policy of whole life and term is to keep the premium as low as possible and allow the dividends (which are not guaranteed) to purchase 100% of permanent protection over time. The premium will be lower than just whole life, but only the whole life portion of the death benefit will be guaranteed.

Universal insurance. This is interest-sensitive life insurance where the death benefit and premiums are flexible. The cash values may have little or no guarantees, however, and are based on the performance of the company. The cost of insurance or mortality charges are subject to maximum company guarantees and continue to increase with the insured’s age, thus increasing the cost of these policies.

Guaranteed universal insurance. Major improvements in universal-type programs have been brought about by competition and the growing dissatisfaction with previous “gimmicky” plans (e.g., lower-priced premiums that would not maintain the death benefits over the long run). Newer universal programs offer guaranteed death benefits for a period of time for a guaranteed premium. For example, with certain companies, one can now purchase a guaranteed universal death benefit to age 100 or 115, based on a guaranteed premium. Should interest rates decline or mortality charges increase beyond the insurance company’s projections, the risk of loss is transferred to the insurance company; the death benefit is still guaranteed.

Variable universal life insurance. These programs are similar to universal life programs in that premiums and death benefits are flexible. The cash values are a function of the underlying investment portfolios selected by the policyholder. Some contracts offer as many as five to 10 different mutual fund companies along with their corresponding fund choices. The policyowner therefore retains investment risk and control. Additionally, some newer contracts may offer a guaranteed death benefit option that is similar to guaranteed universal programs.