Life: A rebalancing act

Why clients should treat their life insurance policies like investment portfolios.

Life insurance is and should be a substantial asset for many Americans, but it is often ignored when it comes to portfolio allocation. The reason is partially because of the way life insurance is purchased. Buying a life insurance policy, unlike a mutual fund, involves a medical underwriting process and a thoughtful, long-term commitment on the behalf of beneficiaries, whether they are family members or business partners. The process tends to be viewed one-dimensionally — you buy it, put it in a fireproof safe and hope your beneficiaries don’t need to look for it for a long time to come.

This buy-it-and-leave-it-alone approach, however, can leave the policyholder with a false sense of security. The reality is that life insurance is a dynamic asset. It should be suitable for your circumstances and periodically reviewed over time, much as an investment portfolio is monitored and adjusted.

Monitoring matters
Advisors can help clients understand that, like other asset classes they may own, life insurance comes in many forms. Term, whole life, universal life and variable life insurance are types of coverage that can make sense for certain people in certain situations. Working with a financial professional enables the matching of the right product to the right person to address his or her needs, wants and desires.

A common case, for example, may be pointing out how a 20-year term life policy purchased at a child’s birth may not completely cover college funding in the event of a premature death of a parent. A policyholder needs to make sure the policy doesn’t terminate before college completion and that the face amount has kept pace with rising inflation and other cost increases. A family might also need to consider how it might continue to grow; that the parents may take on other obligations, such as a mortgage; or that they may need to save additional dollars to help supplement retirement income.

Clients with closely held businesses often buy term insurance to fund a buy-sell arrangement. They may also benefit from having their advisors show them how the term insurance charges may increase dramatically before death occurs, leaving the client to choose between potentially unattractive alternatives for funding the buyout. Where a policy is owned by a trust, trustees are increasingly called upon to monitor all of a trust’s assets, including the life insurance policies. Over time, policy performance may have veered away from an illustration created a decade ago with overly optimistic assumptions. In many cases, trustees may find they can achieve coverage with features that better meet the trust’s purpose or obtain a better price in today’s competitive environment.

When allocating life insurance assets, clients also need to consider risk exposure to carriers. A policy’s death benefit guarantee depends on the financial strength and claims-paying ability of the carrier. For permanent policies, the cash values can be allocated to the carrier’s general account, which subjects a policyholder to additional credit risk, or to a carrier’s separate account, which is not subject to carrier credit risk (as in the case of variable life insurance). A carrier’s financial strength must be relied on for years to come. Depending on one’s level of comfort, purchasing life insurance from multiple carriers can help reduce the potential risk to any one carrier.

Check in periodically
As life changes, so do protection risks. Periodic policy check-ups at least every three years confirm coverage remains sufficient and beneficiary information is current. Successful advisors check in regularly with their clients to evaluate any changes since the last review and assess whether the client’s existing policy remains the best possible coverage to meet present and future needs.

Planning ahead and regularly reviewing the plan can avoid costly gaps. A regular policy review can bring to light factors that may impact protection already in place, such as funding patterns, changing market conditions or new product developments. Approaching life insurance as a dynamic investment category that needs to be regularly reviewed for current conditions and product updates helps prepare clients for both the expected and unexpected.

A policy review may result in helping a client to create a diversified life insurance strategy that layers different products over time to address specific or future coverage needs. Just as a client wouldn’t want to risk putting all her retirement savings into one domestic mutual fund, she might not want to protect all her beneficiaries with one type of policy.

A layered product strategy might include, for example, a short-term policy to help cover children through their college years, plus a permanent universal life policy to help ensure a spouse is financially secure for the rest of his life. The cash value build-up in a universal life policy can simultaneously serve to diversify a couple’s retirement savings. In some cases, a layered product approach might also help contain costs, as only enough insurance is purchased for a specified timeframe, rather than one large policy that is later reduced. Working together at different times, a layered product allocation strategy can offer the protection and mental comfort one expects from owning life insurance.

The perception that life insurance is a static, inflexible product is a myth. Advisors can help clients understand this and demonstrate how life insurance can, and often should, change over time to address life’s evolving needs. Changes may include increasing or decreasing death benefit coverage, changing funding patterns, or even dropping coverage that may no longer be needed. Like other important financial investments, life insurance is also a dynamic asset that should be reviewed and, perhaps, diversified over time.

Written by David O’Leary for Life Insurance Selling Magazine.  David is an executive vice president for AXA Equitable Life Insurance Company and head of its financial protection division.

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