This article was co-authored by Eric Donner, senior financial advisor at Hewins Financial Advisors.
Introducing the Policy Audit and Review (PAR) Process
Imagine you own a collection of valuable, classic cars worth hundreds of thousands of dollars (well, imagine it if you don’t already own one!). Will you take precaution and implement protections to ensure the cars aren’t affected by the elements? Will you inspect the cars regularly — perhaps even drive them — to make sure they are in top condition?
Of course, the answer is probably a resounding “yes!” I think most people would agree that a classic car collection is a valuable (and fun!) asset, one that deserves the utmost care and protection. But the truth is that many of us do have an equally, or perhaps more, valuable asset just like this — but unfortunately, it often doesn’t receive the same level of attention.
The problem with the “set-it-and-forget-it” philosophy
Cash value life insurance can be one of the most important elements of a sound, long-term financial plan; it can protect you, your business (if you own one) and your loved ones against the unexpected. But the reality is that many people don’t manage or review their cash value life insurance policies as often as they should — and that’s a mistake, because these policies can become a problem over time if left unattended. One of the top risks today’s owners face is substantially lower dividend- or interest-rate returns on the policy’s cash value, compared to the rates they expected when they first purchased the policy.
Just how big of an impact can this decline have on a policy? Let’s take a quick look. The following chart illustrates the dividend-crediting rates of four, major mutual life insurance companies, with the yellow line representing the average of their respective dividend rates. The light-blue line at the bottom of the chart tracks average annual AAA corporate-bond yields, as reported by the Federal Reserve Bank of St. Louis.
Historical Dividend Scale
As you may expect, dividend-crediting rates have declined significantly over the past two decades, as the yields on high-quality bonds — the primary investments of life insurance carriers — have declined.
What does this mean for policy owners?
If you hold a policy that receives dividend- or interest-crediting rates set by the issuing insurance company, take note — this decline could mean your policy is not performing as well as you originally expected.
The result? You may need to pay more premiums — or larger premiums — to maintain the policy’s expected death benefit. And if you fail to pay the additional premiums now, you could face unexpected and unwelcome news down the road, such as the need to arrange major cash infusions to avoid a policy lapse.
There is a bright side to this news: though interest- and dividend-crediting rates have declined, the underlying cost of providing insurance protection has actually improved over time, as average life expectancy has increased. This improvement is most apparent in the term life insurance market, in which we have observed coverage prices drop by 10-15 percent over the past decade.
Due to these “cost-of-insurance” improvements, a cash value life insurance policy issued today may have lower internal cost structures than a policy issued 10-20 years ago. Plus, the number of cash value life insurance options has exploded in recent years, thanks to advances in technology and financial engineering.
So what should you do?
At this point, you might be thinking, “Is my policy up to par? Will it require more premium payments than I expected? How does it stack up against policies issued today? What steps should I take to ensure I’m getting the coverage I need for the long term?”
First, put the questioning on pause and take a deep breath. Next, determine whether you and your cash value life insurance policy could benefit from a checkup. Is your policy more than 10 years old? Does it hold $100,000 or more in death benefit? If so, then your policy is probably due for a review.
Fortunately, this is an area where our advisors can help. Our Policy Audit and Review (PAR) Process is designed to help clients evaluate and answer important questions about their cash value life insurance policies, after a disciplined, professional analysis.
Want to learn more about the benefits of the PAR Process and how to address key risks to your life insurance assets?
Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431, 1-800-765-5201. Investment Advisory Services offered through Hewins Financial Advisors, LLC, d/b/a Wipfli Hewins Investment Advisors, a separate entity from ValMark Securities, Inc.