Policy payoff: practical steps to reviewing existing life insurance.

• Author: Hollinger, Dana
• Position: Investment management

There is $3 trillion in neglected wealth management--the amount of money held inside life insurance policy account values. The cash values held inside life insurance policies totals more than hedge funds, separately managed accounts and exchange traded funds. Yet, when it comes to life insurance policies, policy owners typically buy and hold--and the policy is never to be looked at until death do us part. However, most insurance policies don't stay in force long enough to pay a death benefit.

Life insurance proceeds pay an integral role in the financial well-being and wealth of many of your clients. Imagine you're the trustee of an irrevocable life insurance trust and you receive a notice from the carrier that the trust's 85 million death benefit policy is going to lapse in 12 months, the insured is 82 years old and the premiums paid to date exceeds 81 million. An insurance trust can have a 40- to 50-year time horizon. Does the beneficiary have cause to sue if the policy does not pay off?

The Moving Parts

Most people don't realize that permanent life insurance has several moving parts. The cash value has an investment element to it and the type of permanent policy will dictate what the cash value is invested in. The initial premium projection is based upon the following variables in underwriting: the mortality expense factor, the carrier's administrative fees, the medical class offer and the projected earnings (interest rate) on the cash value. The cash values of identical policies issued by different carriers can vary with the performance of the portfolio of assets held by the respective insurer to underlie the policy.

Two main moving parts are interest rate risk and mortality expenses, which are based upon actuarial life expectancy tables in effect when the policy was issued. Those tables are updated periodically. They were last updated in 2001 and did not become mandatory for the carriers to be put in full force until 2007. People are living longer, causing mortality rates to go down significantly over time. It appears counter intuitive as people get older that they can actually save money on their life insurance by exchanging to a new policy that is being issued at an older age; but, they can.

The cost per $1,000 of insurance for a male age 50 based upon 1980 CSO Tables (used to price contracts today) was $6.71. The cost per $ 1,000 of insurance for a male age 50 based upon 2001 CSO is $3.91--a 42 percent savings. The only way to take...