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Manage Life Insurance as You do Your Health


Treat your life insurance the same way you would advise your patients to treat their health: monitor it and manage it for optimum performance so you don't wake up one day and find yourself in the emergency room.

As a physician, you undoubtedly advise your patients on the importance of taking a proactive approach to their health — engaging in management activities such as eating right, exercising and de-stressing to ensure their body performs optimally.

However, many people become so busy that they fail to manage their health on a regular basis. These are the people who tend to wake up one morning and wonder where all their “sudden” chronic illnesses came from.

The same is true for financial matters.

Would you lock your stock, bond or real estate portfolios in a safe for several years and expect them to achieve optimum performance without being monitored or managed? While the answer is obviously “no”, that’s just what most investors do with an important, yet overlooked financial asset class — life insurance.

Yes, life insurance is an asset class that needs to be managed on a regular basis.

Cash value life insurance policies provide many advantages, including:

• Builds cash surrender values that are easily accessible

• Cash values grow on a tax-deferred basis and, when properly designed, may be distributed tax-free

• If structured correctly the death benefits are received income and estate tax free

• Historically, dividend rates of whole life policies have exceeded other fixed income investments with similar risk such as money market accounts and certificates of deposit

• Death benefits may be easily divided between heirs

• In many states, life insurance cash values and death benefits are protected from creditors by statute

• Beneficiaries receive a highly liquid asset (cash) when liquidity is needed the most

• Provides financial protection from the premature death of the investor, which protects the individual(s) the investments are intended to benefit

But for you to take maximum advantage of these benefits, you must manage your policies as you would any other asset class. If you don’t, the results might prove financially devastating.

Let’s say that you currently own an insurance policy that was issued many years ago. Were you aware that the internal cost of this policy is based on an outdated, more expensive mortality table used at the time you purchased the policy, which translates into a higher premium than it should be? To compound the issue, the actual cost of in-force life insurance increases each year, which means that your increases are based on the older, more expensive rate.

When you first took out your policy, the mortality cost was less than your premium, and the cash value of your policy began to grow. As you aged, however, there was a point where the mortality cost became greater than your annual premium. At that point, the cash value of your policy began to erode.

Let’s say you are 70 years old today and took out your policy 30 years ago, when you were 40. That means that today, your policy’s mortality cost and premium is based upon your current age of 70. But here’s the key: it is not based upon how insurance companies view and charge a 70-year-old today. It is based on how they viewed a 70-year-old’s life expectancy 30 years ago, when a 70-year-old’s life expectancy was not very long.

This is just one example of what can happen when you purchase life insurance, stick it in a drawer or safety deposit box, and forget about it. Managing your life insurance policy as a financial asset can also help you:

Avert massive underperformance and related risks

This relates back to the scenario we just discussed. Keeping an existing policy that combines expensive, older mortality costs with low interest and dividend rates that have trended well below the policy assumptions made at the time of origination will result in massive underperformance that can lead to policy lapses unless you increase your premium by five to 20 times its current rate merely to maintain coverage — even if you had been systematically paying the premium that your agent told you to pay. A recent article in Forbes placed the blame on Bernanke for depressing interest rates.

Dramatically improve the policy’s performance

Transferring your policy’s cash value to a newer policy with a much lower cost of insurance provides you with opportunities such as reducing your annual premium by as much as 70%, increasing your death benefit up to 60% for the same premium and moving to another carrier of equal or better ratings for the same premium.

By doing so, in most cases, your new policies will include guarantees of annual premium and death benefit that were not available at the time you purchased your current policy.

Avert adverse tax ramifications

Many policies are owned incorrectly, which could trigger significant adverse estate tax consequences, resulting in the payment of thousands or even millions of dollars in unnecessary taxes.

Ensure proper beneficiary designations

Life changes, such as the death of a beneficiary, a divorce or a dissolved partnership can make the original beneficiary designation obsolete.

Ensure proper coverage despite a pre-existing medical condition

Insurance carriers used to view pre-existing medical conditions such as diabetes, cancer or heart disease as strong red flags that could negate the ability of an individual to purchase life insurance.

However, because of today’s medical advances and treatment plans, insurance carriers do not consider these issues as important, and you should no longer assume you are uninsurable if you have a chronic medical condition.

Protect your estate from creditors

Life insurance receives protection from creditors under the federal bankruptcy code and many state laws in both bankruptcy and non-bankruptcy cases. Federal bankruptcy laws exempt the death benefits of a life insurance policy (and a small portion of cash values) from attack from creditors, as long as the insured is the debtor, the debtor’s spouse or a dependent of the debtor. Some states prohibit the use of federal exemptions, requiring you to use the exemptions provided by state law instead.

However, state laws are typically more extensive, affording more protection than the federal laws. In addition to the bankruptcy exemptions, many states provide protection for the cash value and death benefit of life insurance in a non-bankruptcy context. This makes life insurance a valuable asset to own if you are concerned about protecting wealth from future creditors. It is important to work with qualified legal counsel to fully understand the protection afforded to policy death benefits and cash values in your particular state and under your particular circumstances.

In some states, the exemption for life insurance only covers the family members of the insured, in other states the laws protect against claims against the insured and/or owner of the contract. The exemptions afforded life insurance generally do not apply to the extent premiums were paid to defraud creditors.

Your agent

If life insurance is indeed an asset class to be managed, then why hasn’t your insurance agent, CPA, estate planning attorney or wealth manager advised you of this? In the case of insurance agents, older policies are more profitable and contribute more to the agent and carrier’s bottom lines. Career agents are those who work directly for carriers. These agents would be negatively affected by an insurance audit because they are compensated based upon the continuation of existing policies and are penalized for moving in-force policies to another carrier.

Many wealth advisors are unable to step in and guide their clients on this topic because they are unaware of the intricacies of life insurance and the ramifications of failing to properly manage these policies.

Chances are they, too, have stuck their own policies away and have forgotten about them, believing that the very act of owning life insurance protects them. Little do they realize that this protection is built on a foundation of quicksand. When structured efficiently by engaging your life insurance professional with the other members of your financial team (e.g. CPA, attorney and financial advisor), your life insurance will form a rock-solid foundation upon which all other financial plans stand.

When it comes to your life insurance, the best advice is to treat it as you would advise your patients to treat their health: monitor it and manage it for optimum performance so you don’t wake up one day and find yourself in the emergency room.

Richard Newman, CPA, PFS, AEP, CAP is founder of Life Audit Professionals, LLC in Boca Raton, Fla. He can be reached at or (561) 948-2421.

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