owner makes a “minimum continuation
premium,” the policy will not lapse.
Clients who can no longer sustain premium payments might also choose to purchase a single-premium, guaranteed ul
policy using the accumulated cash value
of an existing contract. Paul lang, a financial advisor at edward Jones, st. louis,
Mo., says he suggested this option for a
retired client who needed to fund a special
needs trust for a child.
“With a minor reduction in death benefit, we were able to provide [the client]
with a new single-premium guaranteed
ul policy that would cover what he needed for his son without the additional premiums,” says lang.
For many, the appeal of chucking an
old policy for a new one may hinge on the
appeal of superior features and benefits.
Competition and among carriers has intensified in recent years. and that has led
to many new product innovations. among
them: more generous accelerated death
benefits for the terminally ill, long-term
care benefits, as well as return of premium
and no-lapse protection riders.
Increased life expectancy, a concurrent
decline in mortality costs, plus technol-
ogy gains that have reduced underwriting
and policy administration costs, have also
yielded policy benefits, experts say.
at times, the argument for a 1035 ex-
change may be overwhelming. games
cites one case involving a policy that was
due to reset in 20 years with a signifi-
cantly higher premium. Because the pol-
icy owner was in good health, games was
able to buy with the policy’s cash value a
new contract that doubled the old policy’s
death benefit, but carried a guaranteed,
level premium.
More often than not, however, games
argues against replacing a policy. the case
for retaining a policy is especially strong,
he says, where the policy is more than
seven years old. the reason: the insured
is much older, and thus any new policy is
likely to carry a higher premium than on
the old contract.
sampson also warns of a temporary
loss of earnings: the cash value of a per-
manent policy does not grow in the initial
years after inception because the agent
commission, underwriting and marketing
expenses first have to be paid.
Hartford, Conn., is a new policy’s sur-
render charge (the fee levied on a poli-
cyholder upon cancelling a policy); and
the contestability period (generally the
first two years of a contract, during which
the insurer may deny coverage, void a
contract or question the validity of a death
claim).
as an alternative to a 1035 exchange,
Kimbrough notes also that premium
contributions to an existing policy could
potentially be restructured to allay client
concerns (as for example, about the sensi-
tivity of a variable’s contract’s cash value to
market gyrations).
“Instead of replacing the policy, the cli-
ent could reallocate all or a portion of the
premium from the variable subaccounts
to a fixed or general account,” he says.
“that might allow the client to feel greater
peace of mind about holding the policy.”
also to be considered in a policy re-
view, say experts, are changes in tax law.
sampson points to legislation enacted by
Congress in december that extended the
Bush-era tax cuts and raised the lifetime
gift tax exemption level to $5 million from
$1 million. an existing or new policy, she
says, might be ideal for gifting purposes.
life insurance might also be the solution for tax-efficiently transferring to heirs
required minimum distributions from
an individual retirement account. rather
than take mandatory rMds after age 70
½, which many clients don’t need because
they have other retirement assets, the distributions can be reinvested in a life insurance policy, thereby providing an income
tax-free death benefit for heirs.
doing due diligence
Whatever the policy recommendation for
the client, insists games, it needs to be
supported by proper due diligence: a comprehensive review of the client’s financial
situation; a full accounting of the pros and
cons of proposed solutions; documentation of items discussed; and, not least,
disclosure of potential conflicts.
“advisors need to be transparent with
clients,” he says. “they may recommend
products from only one carrier because
they’re captive agents. there is nothing
wrong with that, but they must disclose
the reason to the client.” NU
