Life Insurance As An Asset Class And The Importance Of Strategic Fiduciary Reviews

The reunification of Estate and Gift Tax exemptions has created new opportunities for fiduciaries to shore up potentially problematic assets. Changes appear to be certain after 2012 so this is the year to review and act as necessary.

For many families, life insurance death benefits have become one of the four major asset classes in their financial portfolios.

Unfortunately, life insurance has been treated as a stagnant asset — once purchased, it is only given cursory reviews.

For the affluent family, this is not only ineffective, but also financially imprudent.

A portfolio of life insurance assets needs a fiduciary level review. Families deploy capital into their life insurance strategies and have the expectation of strong future performance.

As with other family financial assets, many factors contribute to the opportunity for "better or worse than expected" performance.

In the absence of regularly scheduled reviews, an under-performing policy may go undetected, and to a point where "rehabilitation" of that policy becomes problematic.

Creating the opportunity for better performance lies in the professional management of the life insurance portfolio and a planned review strategy.

Successful life insurance portfolios are managed to the specific goals and expectations of the client family.

These are found in the family's insurance policy statement, which outlines what the family expects to accomplish with their life insurance. This is of particular importance when life insurance policies are owned in a trust vehicle. Trustees have a duty to exercise prudent fiduciary responsibility in managing the assets of the trust. This includes understanding and evaluating life insurance assets.

Unfortunately, a large number of trustees (particularly in the family and friends arena) do not have stated guidelines and procedures for managing and maintaining life insurance assets.

This not only leads to under-performing policies, but also missed opportunities to increase death benefits, reduce premiums and improve overall performance of the life insurance assets.

2012 — A Year Of Opportunities
The reunification of Estate and Gift Tax exemptions has created new opportunities for fiduciaries to shore up potentially problematic assets. Changes appear to be certain after 2012 so this is the year to review and act as necessary.

As with any part of the financial services sector, the life insurance industry is experiencing changes in products pricing and performance. There are four critical scenarios where a fiduciary review should be a priority:

Variable Universal Life Insurance — Market based investment assets are what support the performance and the long-term viability of this type of life insurance. The interplay of investment results, premium pattern and policy expenses can create, in difficult market times, a very "fragile" policy. This is particularly true where the insureds are age 55 and older. Careful review of policy options, projected premiums and performance assumptions is necessary in all market environments and particularly now.

Policies 10 years and older — Many product enhancements have not been automatically passed onto existing policyholders. Oftentimes a request to the current insurer will cause improved performance and possibly lower premiums. Additionally, underwriting policies has become much more sophisticated. Policies may have only had three classes (preferred, standard, smoker); while today there are as many as five underwriting classes with some insurance companies.

Changes in Lifestyle and Health — In the past, hobbies such as flying or scuba diving may have caused an increase in premiums. The cessation or change in a hobby may allow for a premium reduction. The same is true for many health conditions. Improvement in weight management, cholesterol or blood pressure all can lead to reduced premiums.

Industry Changes — Certain types of polices, some with significant guaranteed elements, are being "pulled" from the market. Life insurance companies are also consolidating, which can cause a block of policies to become effectively a wasting asset pool. This leads, ultimately, to under-performance for the policyholder.

The Review Process
In most situations engaging an independent third party to prepare a review of an existing portfolio of life insurance assets is the Trustee's best course of action.

A fiduciary level review of a life insurance portfolio should examine the following elements:

  1. Suitability
    1. What are the needs of the family today versus "at issue" or since the last review?
    2. What is the family's financial situation? c. What changes have occurred in health or other insurability factors?
  2. Product & Industry Opportunities
    1. What changes have occurred in the design of life insurance products?
    2. Are there opportunities within the portfolio to consider?
    3. Are there improved underwriting opportunities?
  3. Current Portfolio Performance
    1. How has the existing portfolio performed relative to expectations?
    2. How is it projected to perform?
  4. Life Insurance Company Stability
    1. Have the current providers had changes in their financial strength?
    2. Are they continuing to support life insurance as a core business?
    3. Are there other factors that need to be considered relative to the current carriers?
  5. Tax Law and Federal Regulations
    1. What changes have occurred which could impact the life portfolio structure?
    2. What changes are proposed and/or pending?
    3. Are there new and/or proposed Federal regulations of life insurance that could impact the portfolio?
  6. Observations and Recommendations for the Portfolio
    1. Financial Strategy
    2. Death Benefits
    3. Premiums and Premium Payment Methods
    4. Cash Values
    5. Product Strategy
      • Current
      • Alternative

By establishing a fiduciary review strategy for life insurance portfolios, clients gain peace of mind that they are maximizing performance opportunities. Trustees can feel comfortable they are honoring their obligation to the trust beneficiaries.

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