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January 27, 2022 at 05:42 PM
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.
