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3 Things Advisors Overlook When Reviewing Clients’ Life Insurance Policies

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What You Need to Know

  • Orphaned or unassigned policies may no longer fit within a client’s overall financial portfolio.
  • Lower interest rates and higher insurance costs could lead older policies to lapse early and not be there for the client.
  • If clients skip premium payments or make them late, the future performance of the policy can be adversely affected.

Whether you are working with a client or preparing for a discovery meeting with a prospective client, it is imperative to have current and complete information on their financial holdings. These financial holdings often include older life insurance policies.

As with any other type of financial vehicle, older life insurance policies (particularly permanent, cash value policies) should be reviewed regularly. It ensures that your clients have coverage that is in unison with their goals as well as the planning strategies you set forth on their behalf. 

Whether you are the one providing the life insurance policy review or you engage an insurance firm that specializes in reviews, three issues are often overlooked with older policies.

1. Orphaned Policies 

Orphaned or unassigned life insurance policies are policies that were written on the client by an agent who is no longer with the insurance company or in the business. The challenge with orphaned policies is that the policy might not have been reviewed for some time. The client may not fully understand the type of policy they have. They may assume that if they are paying the premium, the coverage will remain in force as intended. 

A number of factors can negatively affect an older, orphaned life insurance policy. This is why it is imperative for financial advisors to have a current snapshot on the inner workings of the specific type of policy. Regardless of who wrote the policy, it is essential that everyone understands the type of policy, its current status, and if it still fits within the client’s overall financial portfolio. 

2. Lower Interest Rates and Higher Insurance Costs

It is no secret that interest rates are at historically low levels today and have been for several years. While this can be beneficial for borrowing money, it could be detrimental for life insurance policies that were illustrated assuming higher interest rates to help carry coverage for the life of a policy. 

In fact, it was not unusual for a policy sold in the 1990s or early 2000s to be run with a “conservative” rate of 8%. In today’s market, that figure would be closer to 4%. This results in less cash value building than was originally projected, and it can reduce the number of years the coverage is assumed to be in force.

What about the cost of insurance charges? A few life insurance companies have chosen to raise the internal cost of insurance in these plans, because the lower interest rates have made the policies unprofitable. If you have lower interest rates and higher cost of insurance, this is a direct double hit on these in-force policies. If these older policies are not being reviewed, they could lapse early and not be there when clients need them.

3. Skipped and Late Premium Payments

One of the most attractive aspects of a permanent life insurance policy is that they are designed to build cash value. The cash value helps offset the higher costs of life insurance as a client gets older. The cash value can also serve as a supplement for later cash flow needs, retirement expenses or college funding expenses — if the policy is structured correctly in the beginning. 

The cash value, however, can also give clients a false sense of security when they notice the annual growth. At times, clients assume that they can “skip” premiums or not pay the premium on time. When that happens, the future performance of the policy can be negatively affected. 

A proper insurance policy review includes running a current in-force ledger from the original insurance carrier showing how the policy will perform for the life of the contract. Without this, neither the client nor you, the financial advisor, has a real picture of how this policy will function over time.

Overlooking these key issues during a life insurance policy review can prove disastrous for the client as well as the financial plan you are setting forth as their advisor.

When preparing a complete financial plan for a client, life insurance — and the review of any current coverage — is often an essential part of risk management. If your client dies prematurely, this can have resounding effects for their loved ones, their business, or their financial and estate planning strategy.

A correctly structured life insurance policy needs to perform as intended; therefore, proper reviews are an essential part of comprehensive planning and can prevent costly mistakes for your clients and their future.


Since 1988, John W. Felton IV, LUTCF, has served as an insurance consultant and case management specialist for wealth advisors, insurance professionals, and estate and tax planning specialists. He has been the president of Tennessee Brokerage Agency since 1996 and has served as past president of NAIFA-Tennessee and NAIFA-Knoxville, past chairman of the National Association of Independent Life Brokerage Agencies (NAILBA), and former board member of LIFE Foundation and LifeMark Partners Inc. He can be reached at [email protected]