John Simms* bought a $1,000,000 life insurance policy in 1990 to help his children pay possible estate taxes when he died. He remembers the company projection showing him 10 payments of $15,000 would be due and the policy would be “paid up”.
Today, John is age 73 and now realizes that that the 1990 projection of 10 payments has fallen vastly short of paying up the policy. This is largely due to the fact that interest rates have fallen to all-time lows. In 1990, the assumed interest rate for the policy was 8%. Today, his policy is being credited at 4%. The effect of this decline in rates is that the policy will not last to “maturity” (generally age 100 with older polices). John’s policy will now last to age 87 based on the current interest rate of 4% and no further payments.
The ramifications of the above are:
A) John may die before age 87 so everything worked out okay.
B) Interest rates may rise again and “extend” the number of years past age 87. Although it is doubtful it would extend more than a few years.
C) John could decide to start paying premiums again to extend the death benefit back to age 100 or some other later age. The later he waits, the higher the costs to extend the years.
D) John may find that a new policy with better mortality charges and better guarantees may enable him to roll over the cash value via a 1035 tax free exchange and pass less than other alternatives.
John’s story exhibits all the reasons why a life policy review is critical. The insurance company was originally told to bill the insured (or owner) 10 payments of $15,000. Unless the owner or agent ask this to be changed, no further bills will be sent and a big surprise would await John at age 87!
Many clients we see today have relocated to Southwest Florida from somewhere else and have not seen or heard from their agent in years and just assume all is okay as the insurance company would tell them if there were a problem. The insurance company does not have the ability to know what every policy owner’s game plan is so the burden falls on you (or your agent).
Fortunately, in my 27 years in the life insurance business more than 70% of the people I meet with such problems described above end up in a better situation than when we met them. It is not uncommon to also be able to reduce your current premium costs by 25%+.
Insurance companies continue to reduce costs of new policies because people are living longer. However, these lower costs are for new polices sold and the existing business continues to be billed at the current mortality rates at the time of purchase.
Step 1 is to write the insurance company (policy owner should send a letter) and ask for an inforce illustration reflecting the current premium being paid. This is simply a new snapshot of what the carrier projects going forward based on today’s interest rates. A second illustration should be ordered asking for a projection of what premium is needed to carry to maturity. (I do this for people I meet but you could do it yourself too).
This will give you current data to know whether you have a problem or not. Regardless of the outcome, we can use this information to see what other options are available with your current company as well as the rest of the top companies in the industry.
Step 2 would be to take a brief medical to enable us to shop and negotiate for the best rates possible. It is vital that all the top carriers bid on the case. This process is free and takes a couple of months. Once all the bids come back you can see a clear summary of options whether they be to keep your existing coverage as is or to consider changing companies and policies.
It is never too late to go through a policy review. It is not uncommon to meet insured’s over age 80 who still have plenty of options.