A number of state and federal regulations in recent years have brought an increased focus on carefully matching life insurance and annuity policies with individual client needs, often referred to as “best interest” review.
In-force policies may have been sold with fewer questions asked about client goals and resources, and these also may have shifted over time. It’s a good idea for insurance professionals to evaluate their clients’ and prospects’ older policies to make sure their needs continue to be met.
Changes in the economy and insurance marketplace also call for re-examination. Older policies may have been designed and sold based on interest rate and expense assumptions that no longer hold true, putting the policies in danger of lapsing or failing to meet client goals in the foreseeable future. At the same time, a new generation of life insurance products continues to enter the marketplace with more robust features and benefits, along with competitive death benefit guarantee options.
Consider these key reasons for conducting in-force policy evaluations:
- Clients may be paying more premium than necessary.
- Clients may be able to obtain more value for the same premium.
- Clients may be interested in additional features, like long-term care or chronic illness riders.
- Unintentional policy lapse, particularly from accumulated loans, can cause significant tax liabilities and loss of needed protection for clients.
If you have an existing insurance client base, you should do a periodic inventory of in-force policies that could use re-evaluation. Generally, focus on policies that are older, or at least past (or nearly past) their surrender charge period. Also look for policies with loans on them, regardless of age — these are frequently in most peril of lapsing or needing modification. Also include any clients who you know have had a major life change recently, such as marriage, birth of children, divorce, or death of a family member. Contact these clients and find out who would like to conduct a review.
For clients who are interested in doing a review, it helps to take a step-by-step approach to evaluating in-force insurance policies.
Step 1: Fact-find thoroughly with your clients.
Find out what policies your clients already have (or think they have!), including those purchased from someone else. When were they purchased? Have the clients had any major changes to their life circumstances or goals since that time? Regardless of whether there have been major changes, make sure you understand their present goals and resources. Make sure to ask about the factual information required by New York Regulation 187 for policies issued in New York (and even insurance professionals not operating in New York may find this list to be a useful reference guide).
Step 2: Obtain in-force ledgers for permanent insurance policies.
If you were not the writing agent on these policies, you may need to help the clients with requesting these illustrations, and/or obtain a broker of record change authorization. Also check on the status of term policies and find out when their fixed premiums will expire.
Step 3: Educate your clients about their policies.
Many clients do not understand how to interpret in-force ledgers. Help them understand the protections and values they have, future premiums to anticipate, guaranteed and non-guaranteed elements, and why the in-force ledger will inevitably differ from the original illustration. If the policy has an outstanding loan, educate them about the tax consequences of different methods for disposing of the loan.
Step 4: Evaluate whether any changes should be considered.
Looking at the in-force ledger, and comparing it with the facts you gathered in step 1, there are three possible outcomes:
- The policy still suits the clients’ needs and expectations — changes are not necessary.
- The policy could be in danger of future lapse based on current assumptions, but can be salvaged with some minor modifications.
- The policy no longer meets the clients’ needs and expectations, and requires major renovation and/or probable replacement.
Discuss with your clients which one of these categories their policy or policies falls into. If changes or replacement appear to be warranted, discuss possible solutions, set reasonable expectations, and find out what the clients’ preferences are for moving forward.
Step 5: Follow through on addressing the needs uncovered in the evaluation.
Even for policies in good shape, you should schedule a check-in every couple of years to make sure that continues to be the case.
For policies that need modification, re-illustrate the policy with the recommended changes and make sure the clients understand and are satisfied with the new situation before submitting the policy change request.
For policies that warrant replacement, working with a knowledgeable broker can help you identify the carriers and products that can provide the best fit for your clients’ needs, goals, and underwriting situation, and facilitate the application and underwriting process. Remember to follow replacement regulations for your state, and never surrender a policy until its replacement is in force.
If in-force policies are not monitored and end up lapsing, you stand to lose unhappy clients, or even face litigation liability if clients were not adequately informed about their risks and options at the time of sale or impending lapse. Other clients could be lost if their policies aren’t as optimal as they could be in today’s marketplace, and some other insurance professional is the one to inform them of better options. So be proactive and review your clients’ life insurance policies today.
Lillian Vogl, J.D., CFP, is director of advanced sales at Crump Life Insurance Services.