Insurance advisers say policies must be reviewed often

Given loss in wealth and asset value over the past several years, more emphasis is being placed on reviewing life insurance policies to see if they are accruing interest and dividends as cash value as expected, or if policyholders need to adjust their coverage to adapt to life changes as part of long-term wealth management and financial planning.

"You may find that you've been paying in all these years and you have nothing," said Ralph Heiman, principal at SMF Financial Advisors LLC, the wealth management subsidiary of accounting firm Sax Macy Fromm & Co. P.C., who works in Clifton.

"So it's important to understand the performance of a life insurance policy, because you can make adjustments along the way."

Heiman said in about 70 percent of the reviews he does, changes are needed to coverage or policies, and he estimated that 85 percent of policies sold before 2000 - specifically, whole life and universal life policies that build cash values - need to be replaced or canceled.

"These are instruments that are dependent on earning interest and dividends on the premiums that are put into the policy and the build up of any kind of cash values. And in today's environment, these policies have not performed as well as they were projected to perform," Heiman said.

When policies are structured and sold, assumptions are made about the internal returns the policy will earn by the insurance company and insured or person who bought the policy, said Michael Dranoff, a principal of New Jersey Life and Casualty Associates. "So many people get their policy, put it in the drawer and expect that it is a million dollars of insurance forever, and they kind of forget the underlying assumptions," Dranoff said. "If you're banking on a 6 percent interest rate and they're (the insurance company) only crediting 4 (percent), you will not accrue enough cash value to keep the policy in force forever."

Dranoff said underperforming policies that depend on using the cash value to pay premiums or other costs associated with policies can lapse if owners don't pay close attention to the value of their product and where it might be headed in this low-interest environment. Sometimes, policy reviews can uncover high-priced products that can be had at a lower price, Dranoff said.

Life insurance can serve a number of purposes for individuals, families or businesses, industry professionals say. Often, parents buy life insurance when their first child arrives to protect against the loss of income, should one of the earners die and leave behind children or a spouse who would suffer without a policy's cash payout. Later in life, people buy coverage to ensure they have money for their retirement, especially for a surviving spouse, or for legacy purposes. And in rare circumstances, policies are solely investment or savings vehicles that generate tax-free earnings and solve both the need for life insurance and the desire to save.

But with life-changing events or health issues, the need for life insurance and the functions of policies change, as well. Coverage or policies that might have been useful at a younger age might not fulfill that need to replace a father's or mother's income, and as parents age, their own needs for the cash value stored in some policies might diminish, said Tyler Vernon, CEO of Biltmore Capital Advisors, in Princeton.

"There's just so many things changing, from their personal situation to tax law around this, to their kids to their parents to their net worth and the markets - at least every two years they need to revisit this, and every year makes sense, too," Vernon said.

Vernon said rapid changes in insurance provide an opportunity for policyholders.

"The industry has changed dramatically over the last 10 years, and there's a lot of competition and as such you're seeing in some cases premiums come down dramatically," Vernon said. "We've seen a lot more companies enter the space, a lot more interesting product come out."

But it's not only individuals and families that need to review their coverage. Businesses that hold insurance on their key people or as part of certain shareholder agreements need to be mindful of how their policies are doing, Dranoff said.

Many business owners take out life insurance policies on their partners, since they don't want to end up in business with a surviving spouse or family member, and need to review those policies to ensure they will have enough cash to buy out the interest in the business of a deceased owner, Dranoff said.

Likewise, life insurance is important to consider on people key to a company's success, such as a top-producing salesperson, Dranoff said.

The company should be the owner and beneficiary on the policy, rather than a family member or other individual, so that the business can endure the financial loss and minimize the financial impact of losing a key person, Dranoff said.

"It isn't just a review of the performance, it's a review of the title and the tax impact." Dranoff said.

Ralph Heiman, principal at SMF Financial Advisors, says it is important to review life insurance policies because the policyholder may not be accruing interest as previously projected.

U.S. INSURANCE

70

Percent of U.S. households with life insurance

53

Percent of Americans who own some type of life insurance

39

Percent of men who do not have life insurance coverage

43

Percent of women who do not have life insurance coverage

2*

Percent increase in life insurance policies sold

6*

Percent change in annualized premiums

* Represents change between 3Q 2011 and 3Q 2010.

Source: LIMRA

"So many people get their policy, put it in the drawer and expect that it is a million dollars of insurance forever, and they kind of forget the underlying assumptions."

Michael Dranof

Principal, New Jersey Life and Casualty Associates

Tyler Vemon, CEO of Biltmore Capital Advisors, says policyholders should revisit their insurance plans every year or so to consider life changes.

"The industry has changed dramatically over the last 10 years, and there's a lot of competition and as such you're seeing in some cases premiums come down dramatically."

Tyler Vernon

CEO, Biltmore Capital Advisors

E-mail to: ktarbous@njbiz.com

On Twitter: @KenTarbous