The many core attributes of life insurance have long ensured its foundational spot in financial planning. Such characteristics as tax-deferred cash-value growth, immediate financial protection far in excess of current premiums, the ability – when properly structured and owned – to pass large amounts of wealth untaxed to younger generations, and backing by established, well known and financially strong companies have all contributed to life insurance's important role.
It is important to comprehend how shifting economic conditions – now additionally amplified by the current coronavirus crisis – have sharply degraded the ability of elder insured individuals [insureds] to rely on the benefits that they've been purchasing for years or even decades. Further, the economic feasibility of continuing to have policies in force is being severely curtailed by a number of name-brand and well known insurance carriers.
Before a life insurance policy is purchased, the insured and the policy owner [who may be different parties] are always provided with ledgers of projected policy values, coverages and costs. The projections are based on economic assumptions. As you understand, the prevailing interest rates over the past decade are dramatically lower than in previous years. And that means that earnings at a number of insurance companies are lower than they had forecast. Therefore, the amount of growth credited to certain insurance contracts as well is lower than had been forecast. A discussion of the impact of lower insurance company earnings will follow later in this article. A drop in the growth credited to specific policies is directly detrimental to the policy owners and beneficiaries.
Impact of Aging on Policy Values
Year by year as we age, the insurance companies' cost of insuring us for the coming year rises. In later years, the annual rises are large. If there are insufficient cash values in a policy, the amount of supportable coverage cannot be sustained, and additional premium payments may be required.
The Problem Can Compound
Certain types of policies contain provisions which allow an insurance company to add various other cost items to the annual cost of insurance. Some insurance companies are leveraging this provision to dramatically raise premium costs – some well over 100% – to the point where a significant number of policies insuring the lives of individuals over 75 years of age are being lapsed or surrendered for very small cash value.
Such policy discontinuances effectively waste the decades of saving value that may have been nurtured in that particular policy. Not only does such a policy lapse or policy surrender undermine the financial and business plans which the policy supports, it may deprive the owners and beneficiaries of the significant capital value that may still be intrinsic to the policy in spite of the tremendous increasing costs.
Back to the Earnings Question
The question arises: Why are certain insurance carriers fostering an environment wherein some of their eldest and most loyal insureds are being placed in such jeopardy? It is simple: If earnings have been depressed, then they may look to improve their financial outlook by either harvesting large premium increases or by forcing lapses and surrenders at nominal value. Forcing lapses and surrenders of large death benefit policies greatly improves the reserve position of insurance companies. This helps make up for lackluster performance brought on by the low interest environment over the past several years.
Who is Affected
Surrendering or lapsing a policy without knowing other economic alternatives can be very expensive. It is vital for all policy owners who are 75 or over to immediately have their policies properly evaluated. It is just as vital for beneficiaries or business partners of policy owners 75 or over to do the same. As a matter of good financial stewardship, all policies, regardless of the age of the insured, should be reviewed at least every two years. This advice is frequently given and seldom followed. Let the owners and beneficiaries beware!
An alternative to lapsing or surrendering policies is often available. There are many cases where the net cash that can be provided to the owners or beneficiaries can be three to five times higher than the amount of cash that can be realized through a policy surrender. Some situations increase the benefit ratio even more.
How to Determine the Proper Strategy for Your Policies
In a significant percentage of situations, it will be possible to salvage insurance policies. In other cases, an alternative policy settlement alternative will be viable. Ideally, your policies will be evaluated by a seasoned firm that has many institutional partners from whom to chose to arrange the best strategy to either keep your policies in place, properly size them, or arrange the most favorable economic exit.
If you would like to find out how your policies can be evaluated as fitting your current needs, contact your attorney or the author and we will provide you with the information, so that you can obtain objective, third-party evaluations and guidance to the most prudent strategies for your policies.