Is Your Life Insurance Any Good? Probably Not!

May 20, 2013  | By Kevin Smith

Most life insurance policies don’t do what they were intended to do, and most policy holders are unaware of this problem. Amazingly, almost 65 percent of in-force life insurance policies are inappropriate for the policy holder, priced incorrectly, or are generally under-performing (according to Ash Brokerage).

Here’s The Deal…

People Living Longer = Lower Life Insurance Premiums

The life insurance industry uses a standardized table to help them determine how much to charge on a new insurance policy called the Commissioners Standard Ordinary Mortality (CSO) table. The most recent table available was the 2001 CSO, prior to that it was the 1980 CSO and well before then insurance companies used the 1958 CSO. Because of advancements in technology, medicine and healthier lifestyles people are living longer and to remain competitive, life insurance companies have lowered the cost of insurance on new policies. According to Accuquote, insurance costs are near historic lows down 75% since 1990.

What the insurance company is not telling you is that your older policy may be cheaper today even though you are older. Think about it. If you are an insurance company and someone is sending you a payment of $300 per month for $250,000 of death benefit, would you want to tell them that they could buy that same $250,000 death benefit and only send you $200 per month – I think not. Ultimately, incentives drive behavior and the insurance company has no incentive to go back and help you fix your old life insurance policy.

One other point of consideration is that the insurance companies didn’t immediately switch to the new tables. They weren’t required by National Association of Insurance Commissioners (NAIC) to switch to the 1980 CSO table until January of 1989 and to the 2001 CSO table until January of 2009. This means that if you bought a policy in 1986, you policy may have been priced based on the 1958 CSO table or if you bought a policy in 2006, it may have been based on the 1980 CSO table. The point is that just because you are older doesn’t mean a new policy today won’t save you money and we can help.

Click Here To See If You Can Start Saving Money Today

Low Interest Rates = Policies Lapsing (Dying)

Years ago when you bought your policy, the prime interest rate was probably much higher than it was today. In the early 80s, it was as high as 21.5% and in the 90s, it was as high as 10.5%. Today, the prime interest rate is at a record low 3.25%. The agent who sold you your insurance policy may have assumed rates at 7-8% or higher and based on those rates told you how much money you would have to pay every month or year to keep the policy in-force. However, as interest rates decreased at the federal level, your insurance company probably reduced rates down to 3-4%. If that’s true, then you would need to pay a much higher premium to keep your insurance in-force. Without the additional assumed interest and as your costs go up with your age, there may not be enough excess cash value to cover the cost of the insurance.

Most policy holders may be in for a rude awakening when their insurance company sends them a large bill to cover fees after the savings balance runs dry. Imagine paying $250 per month on the policy you bought in 1994 only to get a bill that says you need to put in $850 per month to keep the policy in-force. You want to call someone, but you haven’t talked to the insurance agent that sold you this policy in 15 years who probably isn’t even in the business anymore. If you don’t know if your policy is working correctly, you should know and we can help. Click here to learn more.

You May Have Too Much Insurance = You are Wasting Money

When you are young, you may not have a need for life insurance. However, as you take on more responsibility and your family grows, your life insurance needs increase. Your needs may then decrease after your children are grown. You should periodically review your needs to ensure that your life insurance coverage adequately reflects your life situation. According to the Insurance Information Institute, 32 million US Households own insurance policies that may not be appropriate for them. Your life insurance needs change as your life changes.

Since the extra money that you spend on premium could be used for other things, such as saving for retirement or college, you should buy only as much coverage as you need. It’s wise to periodically review your insurance coverage – especially as you undergo a significant life event (e.g., divorce, birth of a child, change in your financial situation) – to make sure that have just the right amount of coverage and aren’t over insured or under-insured. The amount of life insurance you should have depends on several factors, including your income, assets, debts, expenses, and financial goals. Email or call us if you would like some help in determining if how much life insurance you should carry.
When you take action to fix your insurance policies, the insurance company loses a substantial amount of revenue from YOU. That means you win.

Even cell phone and cable bills need to be periodically reviewed so that the services provided meet the subscriber’s current needs. Life insurance is no different. A life insurance audit today can save thousands in the future.

To determine if an existing life insurance policy is appropriate, we conduct an audit. Our life insurance audit provides a comprehensive evaluation of current coverage:

  • Review of the in-force policy relative to current needs
  • Analysis of whether existing coverage still meet your needs or if funding should be adjusted
  • Investigation into possible improvement in your medical underwriting class, based on current health and recent medical
  • Underwriting classifications, ensuring proper policy expense management
  • Analysis of your policy’s performance, compared to illustrations provided at the time of sale
  • Assessment of the financial stability of the current life insurance carrier
  • Review of new products or riders that may enhance coverage

Lastly, we create an easy to understand list of options such as:

  • Do nothing. The policy is still appropriate and the insurance company is strong.
  • Make adjustments to the current policy by extending coverage duration
  • Make adjustments to the current policy by lowering the death benefit and reducing the premium costs
  • Issue a new policy and lower premium costs
  • Issue a new policy and increase death benefit

To view samples of our Life Insurance Audit Facts and Findings Report, Click Here.

To view samples of our Life Insurance Audit Market Analysis Report, Click Here.

Posted in: Insurance
Kevin X. Smith, CFA
  |  [email protected]

Kevin is responsible for advising clients for whom he is the lead financial advisor. He also manages the operations and development of the firm, and oversees all of the investments of Austin Wealth Management clients. Kevin is on a mission…Read More

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