What To Advise Senior Clients With Existing Life Insurance

During estate plan reviews of senior clients, they will often ask, “What should I do with my existing life insurance?”

This insurance may have been purchased years ago for any number of reasons, such as childrens education, survivor income, estate liquidity, etc.

Whenever I hear this question, I respond (as attorneys are apt to do) with a question of my own: “What is the purpose of the insurance?” This is the question I most often ask, whether discussing the issue with the client, the insurance agent or any other advisors.

That would appear to be a basic questionone that people expect to answer before proceeding much further in the discussion of protection strategies.

However, you may be surprised to learn that sometimes neither the agent nor the other advisors know the answer. Fortunately, though, most senior clients usually can recall the reason they bought the coverage.

Typically, the discussion turns up one of three alternatives: The original purpose still applies; the nature of the need has changed; or the original purpose no longer exists.

If the original purpose still applies, then the discussion turns to the life insurance itself and whether the agent thinks that the existing policy meets the clients needs. This is the agents turf, and I prefer to stay out of that discussion except to discuss generalities, like the difference between term and permanent coverage.

If the nature of the need has changed, then we discuss how to meet the new need. This may involve a change in the type of insurance, as well as in design of the estate plan.

A classic example here occurs when the original coverage was chosen to protect the spouse and children from a loss of income at the death of the insured. Now, however, the children are grown, but the insureds estate also has grown–to the point where estate taxes are a problem.

In a case like this, the insured may own a term policy. But now a permanent policy purchased by a life insurance trust may be more appropriate.

Sometimes the original need no longer exist. For example: What if the client had a taxable estate based on technology stocks purchased in 1995, and now the estate is no longer large enough to be taxable? This may be particularly the case considering the larger exemption equivalents of $1 million available currently.

Here, we generally discuss several ideas with the client. First, is the change in situation permanent? If the client believes, for example, that technology stocks will make him rich once again, then the life insurance may be needed again for the same purpose but at a later date.

Second, might there be a different need for life insurance, either now or later, that the client will want to cover? In this regard, we discuss the possible difficulty of obtaining new coverage later. If there may be a later need, whatever it may be, it may be prudent to retain the existing insurance until a more definite decision can be made.

Finally, if the client still questions the need for the life insurance, what alternatives are available for the client to consider? Should the policy be surrendered? Should an annuity be purchased with the living proceeds? Should the proceeds be applied for a different kind of coverage, such as long term care insurance? Should the client engage in a tax-deferred Section 1035 exchange?

The question of what to do with existing life insurance has no standard answers. Therefore, it is very important for senior clients to seek out the advice of a professional before making any changes in their existing life insurance plan.

If they make decisions on their own, without the advice and counsel of their attorney and insurance advisor, they could end up creating more problems for themselves than they think they have solved.

Douglas I. Friedman, a partner in the law firm of Friedman & Downey, P.C., in Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is doug@fdatty.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.