Life is change. That’s why as life goals change, life insurance needs change as well.
Over time, the original need for coverage — like having young children or providing for income replacement — may no longer matter to clients after retirement. They may own policies they no longer need or can afford, especially if one of the policyholders is in poor health. What’s more, sustained low interest rates and the volatility of equity markets may have drastically affected older policies so that original premium funding levels cannot sustain coverage.
The best way to keep track of these changing client situations is through a regular policy audit or policy review, as discussed in our prior blogpost.
During the past several years, our Policy Analysis & Comparative Evaluation (PACE) report has uncovered many underperforming policies. However, before considering a reduction in face amount, surrendering coverage or transferring ownership, a serious effort should be made to determine the contract’s true value.
At first glance, the value would appear to be the policy’s surrender value. Yet that may be the worst way to determine valuation. Nor does it provide a method to assess a term life policy. In fact, our research indicates that most valuation methods are inadequate and outdated, use inconsistent data, and fail to consider the health of the insured(s).
So how should a life insurance policy be valued?