With over $3 trillion in cash values, life insurance ranks second only to the mutual fund industry in magnitude. And though its use has expanded dramatically, particularly in sophisticated planning scenarios, it is rarely evaluated once put into place. Most people consider it a "static asset" that requires little maintenance. Nothing could be farther from the truth.

Life insurance is a significant financial asset, providing valuable protection and planning flexibility. But as with any important asset, policies must be monitored to make sure they continue to meet their intended objectives. With both fixed-interest and investment yields having fallen over time, the performance of existing policies simply has not met the assumptions made at the time of purchase. With lower-than-expected market returns, most life insurance policyholders will face increased premiums, reduced benefits or both. This often comes as a surprise to affected policyholders, who turn back to the life insurance market in search of an updated solution.

The life insurance industry continues to evolve in favorable ways. People live longer as a result of improvements in health, fitness, medical procedures and technology, which has resulted in better pricing of life insurance products. In addition, innovative product design provides greater flexibility while delivering superior, lower-cost guarantees. However, existing policies are not always updated due to the focus on new products, industry consolidation, economics and new regulations. Independent studies have indicated that the majority of policies could be improved by reduced premiums or increased death benefits with newer products.

A NEW KIND OF AUDIT

We developed the forensic life policy audit process to provide clients depth beyond the basic suitability of a life insurance policy and to address whether it meets their specific personal or business planning goals. It is essential to employ a level of sophistication that matches the client's needs and delivers solutions that take into account their overall financial plan. This requires a less linear and more inclusive planning approach than the traditional insurance review, which typically just considers the underlying product's performance and whether the existing policy can be upgraded.

The forensic life policy audit consists of an objective evaluation and comprehensive inventory of the client's life insurance portfolio that considers all aspects of their personal, business and charitable needs and provides specific recommendations on the most secure and effective methods to meet those needs. It is designed to demonstrate exactly where the client stands today, and counsels the adjustments necessary to ensure that product performance and planning goals are aligned.

Here's an example: A 69-year-old business owner, who was in good health, had two variable universal life policies on his life. He and his wife, who was 66, had a net worth just shy of $20 million and reasonable liquidity. He owned one policy with a death benefit of $1.28 million and cash values just over $500,000. No additional premiums were needed and the death benefit would have potentially grown to $1.575 million by age 100. Because it was inside his estate, the proceeds would have been exposed to estate taxes at an effective rate of 45 percent. An irrevocable life insurance trust owned another $1 million policy with $70,000 of cash values and projected premiums required of $49,000 to keep it in force to his age 100. A second ILIT owned a $2 million survivorship variable policy. It had cash values of $60,000 and would require $41,000 of premiums to stay in force to their joint age 100. All projections of premiums and values were based on proposed assumptions and were not guaranteed, and none of the policies were in a taxable gain situation if they were to be surrendered.

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