Is Your Life Insurance Policy at Risk?
One of the biggest risks and opportunities in the marketplace right now is life insurance policies that have not performed as illustrated. The biggest reason this is happening is that we’ve seen over a decade of historically low interest rates. Those low interest rates have created a lot of pressure on insurance companies.
Why? The vast majority of insurance company assets are held in general accounts, which are put in some form of bond investments. Low interest rates put downward pressure on the returns insurance companies can realize from their bond portfolios. The result of this is: (1) pressure on the insurance companies financial performance; and (2) difficulty covering declared interest rates within their policies, often requiring use of cash reserves or other financing methods. The ultimate result of more than a decade now of this challenging dynamic being faced by the life insurance industry is policies not performing as illustrated and, more importantly, as policyowners anticipated.
That’s pretty significant information. Yet many life insurance policyholders are unaware of it. That’s largely a result of how people get and manage their life insurance policies.
Too many policyholders are standing on the tracks, unaware a train is coming
The majority of insurance professionals in the marketplace should technically still be called “agents” as opposed to “professionals”. They “sell” a policy to someone, make a commission, but then more often than not they fail to service it. The problem is, the market has really matured over the past decade. Experts in the advisory marketplace will tell you that life insurance is really another asset class and needs to be managed like you would manage a more traditional investable asset portfolio. Unfortunately that’s not what usually happens.
The result is a lot of people are currently standing on the tracks and they don’t realize a train is coming. You have people contributing and transferring significant capital into these policies over a lot of years, planning to get a certain return on investment for their families. With this protracted interest rate reality we are describing, there is the risk that these valuable life insurance assets are not going to materialize as expected. In the worst case scenario, you have policies that are at risk of crashing altogether and not paying out any associated death benefit in the end.
Working with fiduciary life insurance professionals to reduce your risks
At Wealth Impact Partners, we have a comprehensive suite of life insurance management processes in place to to manage these valuable and complex assets better, mitigate associated risks, and uncover strategic opportunities to solidify or modify a previous design as may be necessary.
On the policy design side, we have a process called Life Assurance 360. That’s our process for optimally designing a life insurance policy for a client based on their specific objectives. Because there are a lot of different ways you can go in designing life insurance, the best of all approaches is to design your life insurance in the context of a holistic and comprehensive plan.
On the policy management side, we utilize our Policy Management Company for all of our life insurance policies. What they do that’s incredibly valuable is, once a year, they do a deep dive audit that includes a real-time comparison of what was originally illustrated to how the policy is currently tracking. If that audit turns up any warning signs they highlight them, along with any changes they think might be in order or things that might be considered. They give us a detailed recommendation, and we review that with our clients. That insight helps us stay in front of policies to insure the promise that was made to these folks is going to actually be fulfilled.
In cases where risks or opportunities are identified with life insurance policies, we work with the client to make any necessary adjustments. Maybe that’s decreasing the death benefit or shortening the guarantee, or changing the focus of a policy from death benefit to primarily cash value or vice versa. In some cases people come to us with existing policies and we can leverage our Policy Management Company to help them redesign, replace, or terminate the policy, or even consider a life settlement (depending on what makes the most sense in each individual scenario).
The bottom line: Life insurance policies are not set in stone
With the interest rate pressure of the past decade, life insurance policies are more at risk than ever. That’s why it’s important to have a confident framework for managing your life insurance policy over time with a trusted life insurance professional. If you don’t have this important person and resource, it may be time to rethink your strategy.
Need help managing your existing life policy (or policies) or setting up an ideal policy for your family? Contact the life insurance professionals at Wealth Impact Partners today.
The material contained herein is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as insurance professionals and investment advisors.
Neither Wealth Impact Partners, Valmark Securities nor its affiliates and/or its employees/agents/registered representatives offer legal or tax advice. Please seek independent advice, specific to your situation, from a qualified legal/tax professional.
Securities offered through Valmark Securities, Inc. Member FINRA/SIPC. Investment advisory services offered through Valmark Advisers, Inc., a SEC Registered Investment Advisor. 130 Springside Drive, Suite 300 Akron, Ohio 44333. (800) 765-5201. Wealth Impact Partners is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc. BSW Inner Circle and AES Nation LLC are separate entities from Valmark Securities and Valmark Advisors.