During a life insurance policy review, an advisor evaluates and analyzes an existing policy to assess its suitability, coverage, and effectiveness in meeting an individual's financial goals and needs. It involves reviewing the policy's terms, conditions, benefits, and premiums to ensure it aligns with the policyholder's current circumstances and objectives.
It is important for an advisor to conduct a life insurance policy review with their clients for several reasons:
A major component of a policy review should be discussing any issues around policy ownership or designating new beneficiaries. There are two main options for life insurance policies when it comes to ownership:
In the first scenario, it’s easy for the insured to make beneficiary changes by contacting the insurance company and filling out a change of beneficiary form.
In the second scenario, changes may be more complicated. If, for example, a wife owns a policy on her husband, only she can make changes to the policy. In the event of a divorce, the husband may wish to change the beneficiary to the children. This would not be possible unless the husband owns the policy. Therefore, ownership would need to change from the wife to the husband, which could be difficult under certain circumstances.
Life insurance policies have a built-in cash value that can help individuals reach their financial goals. For example, a policyholder may wish to access the cash value of their policy for retirement income or use a portion of the money for a college fund for their children. Conversely, once children graduate or move out, the policyholder may require less cash value.
The life insurance underwriting landscape continues to evolve. For example, a policyholder who admitted to being a regular marijuana user may have received smoker rates on a policy written 5+ years ago. However, as underwriting becomes more liberal, that same client may now get preferred nonsmoker rates.
Advances in medicine and technology have not only improved the quality of life for individuals with chronic conditions, such as diabetes, but in many cases, these individuals may also be eligible for better rates.
A policy review is perfect for re-evaluating products and exploring new policy rates.
A 1035 exchange refers to a tax code provision that allows policyholders to transfer funds from one life insurance policy, annuity, or endowment policy to another similar policy without incurring immediate tax consequences. In essence, it is a tax-free exchange of one insurance contract for another.
Here are key points to understand about a 1035 exchange:
There’s no set timeline for a policy review. The best time to conduct one is when an individual anticipates any of the aforementioned life changes. Generally, it’s good practice for an advisor to check in with a client annually or semi-annually.
When preparing for a policy review, it’s important to gather policy-related documents, the most important of which is the in force ledger.
An in force ledger refers to a document or statement that summarizes the current status and details of an in force (active) life insurance policy. It offers a comprehensive snapshot of the policy's key information, including:
The time it takes to obtain an in force ledger from an insurance carrier can vary. Sometimes, it may take a few days; in others, it could take several weeks. We recommend that the policyholder or their advisor contact the insurance carrier directly to inquire about their specific timelines and requirements for obtaining an in force ledger.
John Smith is a 45-year-old married man with two children. He has worked with a financial advisor, Sarah Johnson, for five years. John purchased a whole life insurance policy ten years ago and wants to review its performance and relevance to his current financial situation.
John's whole life insurance policy has a $500,000 death benefit and a cash value of approximately $50,000. He has been making premium payments of $2,000 annually. Since purchasing the policy, John has experienced several significant life events, including the birth of his second child and an increase in his overall net worth. He is interested in exploring options to increase the death benefit, optimize the policy's cash value growth, and potentially reduce premium payments.
Sarah requests that John gather all relevant policy documents, including the in force ledger with the insurance company. She also asks John to provide updated financial information, such as his current income, debts, assets, and any changes in his financial goals.
Sarah thoroughly examines the policy contract, premium payments, and current cash value. She assesses the policy's performance, comparing it to the original benefit illustration and analyzing its projected growth based on the current premium payments.
During their policy review, Sarah discusses various policy optimization options with John. This includes evaluating potential riders or endorsements that could enhance the policy's coverage, reviewing any available policy loan provisions, and assessing the potential impact of adjusting premium payments.
Based on John's objectives, Sarah researches alternative policies available in the market. She compares various insurance products, considering term life insurance policies, hybrid life policies, or potentially a combination of different policies to meet John's specific needs.
Sarah presents her findings and recommendations to John. She discusses potential adjustments to the current policy, such as increasing the death benefit, modifying premium payments, or considering a partial 1035 exchange to optimize cash value growth.
John decides to change his policy, and Sarah assists him with the necessary paperwork and facilitates communication with the insurance company.
Through the policy review process, John now feels more confident in his insurance coverage and appreciates Sarah's ongoing support and guidance as his financial advisor.
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