For many individuals life insurance is their largest unmanaged asset. Unfortunately, after a policy is purchased it often is put in a drawer and not looked at again until a death claim is filed. Like an investment portfolio a life insurance policy portfolio should be reviewed every couple of years or at a minimum when there is a meaningful change in a client’s life.
This begs the question . . what should be checked in a life insurance portfolio review? Clearly, a financial advisor will want to make sure the existing policy(ies) compares favorably to what is available in the marketplace by conducting a policy performance review. But, there is much more to examine than the performance of the policy itself. In addition to the policy analysis, a critical part of the review process should include a review of the “people” . . . the policy owner and beneficiary(s).
Questions for a People Review
Following are ten questions you can ask as part of a “people” review of a life insurance policy:
▪ Why did you purchase the particular policy? Since you purchased the policy(ies) has anything in your personal or business life changed that might influence what you want to use the policy(ies) for today? All life insurance reviews should start with an understanding of what matters to the client and what they want to accomplish with their life insurance. The answer to these questions will give you an indication of the “who” and “how” to structure the policy ownership and beneficiary(ies) designations.
▪ Has there been any significant changes in your health status since the purchase of your policy(ies)? Pay particular attention to whether the insured’s smoker status has changed or whether a period of time has passed since recovering from a medical impairment because positive health improvements may result in better underwriting rates. In contrast, a negative change in an insured/owner’s health tells you the urgency of the review.
▪ Do you currently participate in an avocations that might be considered dangerous (e.g., aviation, ballooning, auto racing, scuba diving, mountain/rock climbing, skydiving, bungee jumping)? This question is important because participation in some avocations can result in a rating.
▪ Has your marital status changed since the purchase of your policy(ies)? This question avoids having an ex-spouse as an unintentional beneficiary.
▪ Are the beneficiaries under the policy(ies) still what you want?
▪ Have there been changes in your immediate family such as birth, adoption or death of a family member? This question is important because you don’t want a beneficiary designation to unintentionally disinherit a family member.
▪ Has there been a change in the health status of any of your policy beneficiaries since the purchase of your policy(ies)? In addition to knowing about the health of the insured, a change in the health of a beneficiary can signal a need to modify beneficiary designations from outright to a trust.
▪ Has there been a change in a beneficiary’s ability to manage their finances? A change in a beneficiary’s mental ability can signal a need to modify beneficiary designations.
▪ Since the purchase of the policy have you changed either the owner or beneficiary designation? A change in designation can result in unintended tax consequences, some which can be corrected.
▪ If the policy owner and beneficiary is a business, did the insured sign a written notice prior to policy issue giving the business the right to acquire the policy? This is an important question because business policies issued after August 17, 2006 will be subject to taxation if the insured has not given his/her consent.
Almost eight in 10 U.S. households currently do not have a personal life insurance representative to turn to. Clearly clients need help with their life insurance portfolio. Just asking the above questions can help you identify shortcomings with a client’s insurance arrangement. DBS has developed the a beneficiary checklist to help you identify problems with beneficiary designations. Contact us today and ask for it!