Picture this: An individual, a family, a couple, or a business owner buys a life insurance policy, all to serve different needs. These policies are frequently purchased from different insurance advisors over the course of a few years. And then, these policies, which actually represent a life insurance portfolio, sit in a desk drawer for years, generally forgotten.
For those people who purchased life insurance even 10 or 15 years ago, a great deal has changed. And these changes mean you have an opportunity to provide an extremely valuable service by analyzing life insurance portfolios for your current clients and for prospective clients.
Clearly, the industry has responded to one of the most important changes: We are living longer. Today’s products are designed around the 2001 mortality tables, which reflect these longer life spans. Just compare the 2001 tables with the 1980 mortality tables of 30 years ago – and the 1958 mortality tables before that. Using more current tables means lower premium costs to the consumer, which is a win-win for all involved.
In addition, ongoing product development and enhancements have led to better performing products or products with highly desirable new features and benefits. For example, hybrid products currently combine life insurance with long term care protection. We are also seeing a shift toward stronger guarantees, which makes such products as traditional whole life and guaranteed no-lapse universal life more popular.
These guaranteed permanent products offer fairly positive internal rates of return (IRR), even in later ages in life. For example, some guaranteed survivorship life contracts with guaranteed premium and death benefit can show an IRR of 4 or 5 percent up to age 100, making it an attractive wealth transfer and estate planning tool that is not subject to federal income or estate tax costs.
The value of life insurance portfolio analysis
There are many clients out there who haven’t looked at their life insurance portfolios for years. Often, they don’t have an actively involved insurance professional who they trust and feel comfortable with. The key to the analysis is similar to a physician’s creed: First, do no harm. As you review these portfolios, focus on these questions:
- Why did the client purchase the life insurance in the first place?
- Do those reasons for purchasing the policy exist today, or has the situation changed?
- How is the product performing to meet the client’s objective?
- Can the portfolio be structured to add benefits at a lower cost or at the same cost?
A few examples should help you understand life insurance portfolio management.
Case study #1: Survivorship life insurance
Recently, I met with a couple, now in their early 60s, who purchased eight annual renewal term insurance contracts more than 15 years ago. With all the advancements in guarantees and simplicity of design in term insurance, it made sense to exchange these old contracts for term insurance that could provide an improved death benefit and lower premium payments while locking in a guaranteed level premium for a certain period of time. This also led to a discussion for the use of survivorship life insurance as part of their overall estate plan