South Florida Estate Planning Q&A: Second To Die Life Insurance Policy

Dear Mr. Morris,

Years ago I purchased a "second to die" life insurance policy insuring the lives of my spouse and I. Lately, I've seen many advertisements prompting me to consider a full review of the policy. I thought I had taken care of everything when I purchased the policy. Is this review process worthwhile?

Sincerely,

Wondering Insurance Owner
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Dear Wondering Insurance Owner,

The benefits of an insurance audit are definitely worth your while and pursuing one is strongly recommended.

What would you say to your friend if he told you he secures his stocks, bonds and real estate portfolios in his safe and doesn't bother to review them for several years at a time? You would probably shake your head in disbelief. However, many people routinely and detrimentally handle their life insurance policies this way. It is critical to recognize that life insurance is an asset that must be audited, frequently evaluated and managed along with the regular updating of estate planning documents or families could suffer severe consequences.

Policies currently in-force that were written many years ago are priced based upon older, more expensive and outdated mortality tables. The actual cost of life insurance or the mortality cost rises each year.

When life insurance is first purchased, the mortality cost is less than the premium, allowing the insured to build cash value. As the insured ages, there is a point in time when the mortality cost is greater than the annual premium. At that point, the cash value of the policy begins to erode as it is used to pay the increasing costs of the policy.

For example, Mr. Jones is now 70 years old; he took out his life insurance policy 30 years ago when he was only 40. The cost of his life insurance is based upon his attained age of 70 with internal mortality charges based upon a 70 year-old, of 30 years ago, when a 70 year-old was not expected to live very long.

In many cases, a policy audit will help identify ways in which to:

• Avert Massive Underperformance and Related Risks: 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 origination will result in massive underperformance that can mean policy lapses even if premiums are paid.
• Dramatically Improve Insurance Portfolio Performance: By utilizing new policies with much lower insurance/mortality costs, the transfer of accrued cash value in an existing policy can provide the opportunity to:
• reduce the annual premium by as much as 70%;
• increase the death benefit by as much as 60% for the same premium;
• move to another carrier of equal or better ratings for the same premium with guarantees of annual premiums and ultimate death benefit that were not even available at the time the current policy was purchased;
• move to a carrier that writes policies for those up to 90 years of age and/or have pre-existing conditions such as diabetes or cancer.
• Avert Tax Ramifications: Many policies are owned incorrectly or many times even owned by the estate which could trigger a tremendous adverse consequence resulting in payments of thousands to millions of dollars in unnecessary tax.
• Ensure Proper Beneficiary Designations: Life changes, such as the death of a beneficiary, a divorce, or even a partnership dissolving, can make original beneficiary designations obsolete.

As life moves by very fast, you must reevaluate what is most important to you and plan accordingly. As always, the first step is to consult with an experienced South Florida Estate Planning Attorney.