The in-force life insurance review: what to request and check

An in-force illustration can show a life insurance policy lasting to the age the client needs, with premiums the client is not actually paying. Until the payment schedules are reconciled, that projection leaves an important part of the review unanswered.

The distinction is easy to miss if the conversation starts with the year coverage ends. The premium amount, timing and duration used to produce that year belong in the same conversation. If the illustration assumes higher payments, the advisor needs to know whether the client can and intends to make them.

That is where a review can change direction. A funding shortfall may call for an adjustment to the existing policy. A policy that still supports the client's need may be worth keeping. Replacement becomes a useful comparison once it is clear what the existing contract can do and what each alternative would require.

The payments behind the projection

The current policy, its riders and the latest annual statement establish the starting position. The statement shows where the policy stands today; the original sales illustration records what was expected at purchase. Neither, by itself, establishes how the client's present payment plan will work from here.

For a policy that supports illustrations, ask the carrier for an in-force illustration using the client's actual premium schedule and showing current and guaranteed assumptions. Availability and request requirements depend on the policy and applicable state rules. The request should also say how much coverage the client still needs and for how long. Coverage purchased for young children may now have a different job; coverage intended for lifelong support may still need its full original benefit.

If that payment schedule does not support the intended coverage age, ask the carrier to show what additional funding, if any, would. Keep the two illustrations distinguishable: one tests the current arrangement, and the other describes a possible change. A revised premium solves nothing in the client's plan until there is a decision to fund it.

The NAIC's explanation of life insurance illustrations distinguishes guaranteed benefits and values from elements that can change. Those assumptions need their own review. Matching the premium schedule makes the projection relevant to the client; it does not make non-guaranteed values certain.

Term coverage follows a different path. The important dates are the end of the level-premium period, the renewal terms and any conversion deadline. Those dates may differ. The article on term conversion rights explains what to request while that option remains open.

What the illustration needs beside it

Some policies have a separate no-lapse guarantee that may keep the death benefit in place when payment and other conditions are met, even with little cash value. The carrier should confirm whether that guarantee is satisfied today, how long it lasts and what payments are required to maintain it. The cash-value column alone does not establish its status.

An outstanding loan also belongs in the funding analysis. Obtain the balance and interest rate, and have the carrier show how the loan affects projected values and coverage. Request the policy's tax basis and whether it is classified as a modified endowment contract, which affects the tax treatment of loans and distributions.

The amount left after repaying a loan may differ from the amount used to calculate taxable gain. Before a surrender, exchange or funding change, have the client's tax professional review the proposed transaction using the carrier's figures. A surrender value alone is not enough to determine what the client could spend after taxes.

Duration needs a contract check, too. Find the policy's maturity age and ask what happens if the insured is still living then. Confirm whether coverage continues or the policy pays a maturity benefit. If a payment is due, have the client's tax professional review its treatment.

Riders can end before the policy does. Record what each attached benefit provides, its separate charge if any, and its expiration. Ownership and beneficiary records also need to agree with the client's current estate and family arrangements. A trust, business agreement or legal change may require the relevant professional's review even when the funding is adequate.

Keeping, adjusting or replacing the policy

Keeping the policy is reasonable when its coverage still fits the need and the client can support the required funding, with the guarantees and projection risks understood.

Cost can strengthen that recommendation. If a client has developed a health condition since the original approval, new coverage may be substantially more expensive. When the existing policy still meets the need, a higher premium needs a clear benefit to justify it. Compare the actual underwriting offer and policy terms; a preliminary quote may not be the price the client ultimately receives.

For term coverage, the extra years also need a purpose. Consider a client five years into a 20-year policy whose advisor's plan reasonably supports having enough assets to cover the family's needs by the end of the remaining 15 years. A new 20-year policy would add five years beyond that point. If those extra years materially increase the cost, keeping the current policy may fit better. The advisor still needs to test the assumptions behind that expected ability to self-insure and revisit them as the plan changes.

The review should leave a record of the premium schedule, assumptions and guarantee status behind the decision. Include the loan information, unresolved questions, next review date and who will follow up. That gives the next reviewer something specific to test.

If the funding or benefit no longer fits, the carrier can identify the changes available within the existing contract. Different funding or a reduced benefit may be possible, depending on its terms. The advisor can then compare what the client would pay and retain with what the plan actually needs. A lower benefit is only useful if the remaining coverage is sufficient.

Replacement adds another set of costs and conditions: new underwriting, surrender charges, lost benefits and the new contract's applicable contestability and suicide provisions. Those belong beside the proposed improvement in the comparison. Keep existing coverage in place while the replacement is evaluated and its effective coverage is confirmed.

If the recommendation depends on a higher premium, document whether the client agrees to pay it and who will arrange the change. Until that is settled, the review has identified a funding requirement that still needs a decision.

This is general information, not financial, tax, or legal advice. Policy provisions and tax outcomes vary with the contract, the carrier, and how the policy is owned and funded, so any decision about existing coverage should be checked against the policy documents and the client's tax advisor.