Too Much Of A Good Thing

Life insurance can be a very useful tool for the wealthy, one that plays an instrumental role in wealth planning, especially in the hands of talented life insurance agents. Yet sometimes the insurance policies, which might have been purchased to address a particular set of needs, have outlived their usefulness.

Thus, a meaningful percentage of wealthy individuals and families are discovering they have more—sometimes a great deal more—life insurance than they need. Sometimes it’s because their lives have changed, and sometimes it’s because they have discovered that too much was sold to them in the first place.

Clients might have purchased life insurance exclusively or primarily for the death benefit or built up large cash values in the policies. And it might well be time for them to re-evaluate those needs, examine the policies they currently own, and decide if they are still necessary.

Is their death benefit enough? Too much? These questions have become even more pressing with the passage of the Tax Cuts and Jobs Act.

Consider a scenario in which life insurance agents project the size of somebody’s estate. They might come up with a plausible growth rate for it, but there are times they don’t. It’s potentially unrealistic to set a compound growth rate and project years, and sometimes decades, forward.

If the wealthy indeed have too much life insurance for their needs, there are a number of things they can do to correct this, and one of those things is to convert the insurance into investable assets.

Situation Analysis

To analyze the situation, there are three things advisors must do with their clients (in order of complexity):

• Life insurance product analysis: First, they must understand how the policies are performing and determine whether they are doing what they are supposed to. Wealth advisors must also identify the cost of the present structure. This is a very easy step, since all that is required are in-force illustrations.