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Built to last: tips for preventing life insurance failure

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Life insurance is a promise that must be kept. The essence of life insurance is that it’s not a gamble or wager. It’s a guarantee, as opposed to other investments that cannot provide that certainty. 

This is why an essential part of any life insurance plan is to make sure it lasts. Every insurance professional should have a plan in place to ensure that the policy does not fail or lapse. This not only requires careful pre-planning but also involves regular follow-up and monitoring after the sale.  

Related: Life insurance policy reviews: 6 key questions explored

Follow-up after the sale is good business. It shows you still care and value the client even after you’ve made the sale. That says a lot about you, as opposed to someone who makes the sale and you never hear from them again.

I have had many clients over the years who cannot remember the name of their insurance agent because they haven’t seen or heard from him or her since they bought the policy. If anything, you want them to know who you are when that policy, the plan you created, pays off.  


What can you do in pre-planning mode to make sure that the life insurance policy will not fail?  

Term Policies 

Term life insurance, by definition, is meant to expire after the term. However, term insurance can made renewable and convertible to provide protection against the risk of uninsurability. That is one way a policy can fail, if it cannot be renewed. 

Even if term insurance can be renewed, the premium can increase due to age. If those premiums get too high, the client may not be able to make payments and the policy will expire. That is not good for anyone.

This is a conversation you should have before sale. The client needs to understand this.

Explain the options and document that conversation to avoid surprises later on. You might suggest level premiums over the term and the ability to convert the policy to permanent insurance without a new medical exam. 

Always follow-up after the sale to stay in communication with the client regarding the status of a policy. You’ll also find that in some cases, this leads to new life insurance sales for clients who want to upgrade their policies or switch to permanent insurance. 

Permanent policies 

Poorly structured policies or increasing premiums that are no longer affordable can cause even a permanent policy to lapse, resulting in the loss of the life insurance protection. For the client, a lapsed policy can be a devastating shock and be viewed as a broken promise. That is why the policy has to planned and explained during the pre-planning process — before the sale is made. 

Related: Not all life insurance loan provisions are created equal

Work with your client to create a plan that will hold up for life, or close to it. For example, clients need to know up front that permanent insurance is a long-term commitment and must be maintained or the death benefit will be lost.  

If the client cannot commit to funding the policy for life, then look into premiums paid over a term, for example, a 10-year pay policy. The premiums last for 10 years and the insurance is there for life without any additional premium payments.

Related: Life settlement market positioned for long-term growth

This is perfect for a client who will have good current earnings for the next 10 years. Then in retirement, the insurance stays in effect and the cash value grows without making additional premium payments.

Yes, this costs more, but after that 10–year term, you will have a very happy client who will know that the promise will be kept, not to mention cash value in the policy that can be a source of retirement income. 

Another idea is to structure level payments so that premiums cannot increase, as opposed to flexible payments. No one likes premium increases, especially as they age and tend to worry more about running out of money. 

If clients cannot afford the payments, work out a plan they can reasonably stick to. They might have to go with less life insurance, but less insurance is better than no insurance. 

Funding for the policy should also be planned ahead of time. One way to do this is to use existing client funds, if available. Use other less productive investments, including non-performing stocks and funds that might generate losses when sold, and even IRAs. 

Yes, there would be a tax from an IRA distribution, but that tax will have to be paid anyway and possibly at higher rates, especially if the IRA balance grows.

Required minimum distributions begin after age 70 ½ so IRA funds will begin forced distributions at that time.

Putting those funds into a permanent policy might be a better long-term financial plan: The cash value can be accessed tax-free (up to cost basis, and above this threshold via a policy loan); the eventual death benefit will also be distributed tax-free.

Think about using staggered-term annuities to ensure the funds are there when the premiums become due. This way the client knows the premiums will be paid and the insurance will be there. 

Some clients purchase survivorship life insurance that pays only on the death of the second spouse to die. These policies are popular because they are less expensive since they are based on two lives. Survivorship policies are generally not structured to include a payout at the first death, unless there is cash value to keep the policy in force without the surviving spouse having to continue making premium payments. When premiums continue after the first death, the policy can lapse if the surviving spouse no longer wants to continue the payments. 

The surviving spouse will feel a sense of loss and be worried about having the policy obligation continue, even when ample other funds are available. If there is no payout at the first death, a solution I use in the pre-planning phase is to couple the survivorship policy with smaller first-to-die policies on each spouse for enough so that funds are available to pay, and keep in force for life, premiums on the larger survivorship policy. 

Related: Report: life insurance policy lapse rates at a 20-year low

After-the-sale planning

Always follow up with clients after the sale. They should never forget who you are.  

Provide regular in-force illustrations so that clients can see and understand the status of their life insurance investment. This reassures them that they have a solid investment.

Related: 6 guaranteed minimum living benefit riders

Over time, better options may become available. For example, a long-term care rider could help alleviate the cash hemorrhage if funds might be needed for critical care not covered by Medicare, Medicaid or other health insurance. This expense could dry up funds needed to keep the policy in force. A premium waiver in the policy could also help.  

Review the cash value build-up to see what options are now available, using more accurate numbers. Maybe the plan should be updated using the cash value in the policy to create a better, more durable and protective plan. Or the client might want to use some of the policy for retirement income.

You may discussed this option during the pre-planning phase, so revisit that now. It might also be the policy fared better than expected and you would want clients to see that as well. 

What if clients’ financial situation changes and they cannot maintain payments? 

One option is to see how much of the premium they can continue to pay.

Hopefully, the insurance contract is sufficiently flexible to allow for changes without causing the loss of the policy. Maybe the death benefit can be reduced, and the premiums lowered to where they might be affordable.  See if there is cash value or dividends that could keep the policy going. 

You might suggest, like I have done successfully several times, that the beneficiaries continue the premium payments because they have the most to gain for the investment they are making. Their investment will pay-off tax free, unlike most other investments.

A more drastic solution if cash is needed, it to sell the policy via a life settlement arrangement. Hopefully this is a last resort, but at least some of funds can be salvaged and used if needed. 

Proper planning both before and especially after the sale, can ensure that the life insurance promise is kept. This planning will cement your relationship with your clients, and with your future clients — the beneficiaries.   

Life insurance policies should be built to last. 

Read also these articles by Ed Slott: 

All that glitters: 12 points to know about gold and IRAs 

Why IRAs need designated beneficiaries 

Tax and penalty trap: IRS clamps down on 60-day IRA rollovers 

How to wipe out an IRA: Run afoul of IRS distribution rules 


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