The CPA’s Annual Life Insurance Audit

Laura Sherris, Esq.
Published Date:
Dec 1, 2015

Based on a recent study by the National Association of Insurance Commissioners, over 60% of people who own life insurance have no idea what they own or how it works. Twenty-nine percent of people also said that they need more insurance but no one has asked them about it.

The policy review process should be a cornerstone of CPAs’ offered services. There have been several changes in the financial markets and the insurance industry that directly impact the performance of permanent life insurance policies. These include:

-  Changes in interest rates

- Changes in mortality costs or costs of insurance

- Changes in the stock market

- Changes in policy design

- Changes in tax law

One illustrative example is the audit of a $3 million variable universal life policy that was owned by a 65-year-old man. The audit exposed that under current projections, the policy would lapse when he turned 76, while he would be paying $35,000 in premiums per year. The audit, however, also found a guaranteed universal life policy that was guaranteed until age 88 for the same premium. The end result was a surprised and relieved client, and a substantial commission to the CPA.

Another noteworthy example is a couple that had a trust owned survivor whole life policy - the wrong type of policy - for the benefit of their son. The death benefit was $425,000, and an audit showed that a new contract would immediately double their death benefit at the same premium. It would also be guaranteed against lapse to age 100.

Recent audits such as these uncovered opportunities for clients to create far more death benefit or to save thousands in their premiums, resulting in net gains for the client and a greater appreciation for the CPA. These types of policy reviews also have the potential to become another source of income for CPAs. A sample policy review program could include the following:

- Policy summary

- Review of the policies’ structure, ownership, beneficiaries, and payment methods and performance

- Re-evaluation of the underwriting class

- Assessment of possible rate class improvements

- Possible alternatives to the existing policy or policies

Experience shows that most agents do not have a regular procedure for following up with existing clients, which presents an opportunity for CPAs to add to their client services.

Once accountants see the tremendous amount of business that can be generated through a policy review program,  CPAs can develop a process to regularly offer reviews to all existing clients.

The Power of the Program

Those of you who currently have a review program in place are familiar with how effective it can be in helping policy owners understand what they own.  A simple review can confirm that the fundamentals of the contract were properly structured at the time of issue, along with providing projections on values, real term of the policy, loans, potential tax liability, and lapse risk, among others.

Fiduciary Responsibility

A review program can focus on the people who need it the most: trustees of a life insurance trust. Your trustees will find this is an excellent way to resolve their due diligence issues and protect against potential lawsuits for breach of fiduciary duty.

When a trustee assumes the role of trustee, they often take on a responsibility that is typically not well understood. Helping the trustee navigate these responsibilities will make your firm a resource the trustee will rely on in the future. 

Melvin A. Warshaw and David Neufeld, in their article, “The ILIT Liability Minefield: Trustees’ and Counsel’s Risks,” warn against an increasing trend of lawsuits against trustees related to their fiduciary duties and supervision of trust assets. As the authors point out, many trustees who accept the appointment may not be aware that they are responsible for duties such as: 

- Cashing in or selling original policies and replacing them with newer, better performing policies that diversify and minimize risk to the beneficiaries

- Monitoring the policies to determine if any policy is underperforming and evaluating whether a new policy may provide greater benefit

- Recognizing that policy illustrations for non-guaranteed policies are not predictions, but merely projections

As Warshaw and Neufeld state, “an unskilled trustee typically relies on the donor-insured’s legal or tax professional concerning the administration of an ILIT . . . [p]rofessionals serving as advisors to the donor-insured and friends or family who are unsophisticated ILIT trustees have the same basic fiduciary duties as a skilled trustee.”

The “Uniform Prudent Investors Act” can be found here and spells out exactly what actions are required from a trustee.

A review of the carrier’s financial strength alone is no longer adequate to satisfy the fiduciary responsibility.  To meet fiduciary duty, the trustee must perform an annual detailed analysis that will compare the performance of an existing product against any other products that could be offered to provide the maximum benefit to the trust. 

This presents a tremendous opportunity for CPAs who provide a well-organized life insurance review process.  The policy review is the foundation of solid insurance planning.

sherrisLaura Sherris, Esq., earned a BA, Economics & Finance, Magna Cum Laude, from the University of Pennsylvania, and J.D. Cum Laude from NYU School of Law.  She works with CPAs to set up annual life insurance audit programs, and structure life insurance properly for estate planning, matrimonial cases and special situations. She has a New York Trusts and Estates law practice, is a New York State Bar Association member of the Trust & Estates Section and Elder Law & Special Needs Section. Ms. Sherris is licensed in several states in long term care insurance, life insurance & disability insurance.  For more information, please visit Ms. Sherris can be reached at  (516) 496-7938,  (516) 384-1678 or

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