Making sure insurance is up to snuff

Starting in 2002, I began to get a lot of inquiries about life insurance from the financial services community.

Having been a financial adviser for years, I found it odd that these questions suddenly were becoming more common.

Our industry faces a tsunami of potential lawsuits due to the poor performance of many types of life insurance products that were sold earnestly over the past 25 years. To make matters worse, the Uniform Prudent Investor Act, which has been adopted in most states, now demands that trustees be subject to defined standards regarding the management of trust assets.

Contrary to what many trustees think, life insurance is, in fact, an asset. Indeed, it is often the largest asset held within a trust.

Yet much to the surprise of trustees, these assets often underperform.

In the most recent and comprehensive study of trust-owned life insurance policies, National Underwriter Life & Health magazine evaluated more than 500 policies — owned by 300 trusts — promising a total of $425 million of death benefits.

The results showed that 27% of policies had problems. In this group, a large percentage of the problems were due to factors such as the underperformance of equity markets and/or the plummeting of interest rates.

I wonder whether now, in 2012, has that percentage been magnified due to the economic downfall?

Advisers who take proactive steps to begin educating their financial services professionals, as well as their clients, on the obligation that the UPIA mandates will certainly be viewed as heroes. They will be taking swift action in an environment where most are sticking their heads in the sand.

Our practice has established a process to handle this issue. Using our knowledge of the strengths and potential pitfalls of policies, we have developed a formal process.

First, we recommend that the adviser obtain a letter from the owner of the policy — usually an individual or a trustee — to authorize him or her to gather information about the policy in question directly from the insurer.

Once you have this letter, you can ask the insurance carrier for an in-force illustration. This is a forward-looking diagnostic tool that projects the policy’s future performance under stated sets of assumptions.

Beware that these sets of assumptions are critical to the accuracy of the audit.

What is the rate of return you are assuming? What are guaranteed, versus nonguaranteed, values? What is the assumed premium being paid going forward?

Work with your client’s attorney to create an investment policy statement, a written agreement of what the policy is supposed to provide to the trust.

Provide your client with a written analysis of the policy.

Make sure to cover such areas as particular risks, insurance company ratings, longevity of policy and other specific items that merit attention. Also, show solutions to any underperformance that can be made within the coverage.

If the policy can’t be efficiently remediated, I think it is fair to suggest potential alternatives. At the end of the day, I actually love the cases needing remediation that can be done within the existing policy, as it gives all these potential referral sources (clients and their advisers alike) the chance to get a firsthand glimpse of our extensive knowledge on the subject matter without skepticism that comes from a product sale.

For my clients, that breeds a trust that gives them confidence to refer their friends and family to our practice. For accountants and attorneys that serve these clients, we become the go-to resource for any and all insurance-related questions.

When these questions come about, it further enhances their view of our financial advisory practice, which makes them comfortable recommending our wealth management practice to their clientele.

By helping the potential victims in getting their regular checkup of their life insurance policies, you will reap the reward of having satisfied clients.

Tom Henske (thenske @lenoxadvisors.com) is a partner at wealth advisory firm Lenox Advisors Inc.

Related Topics: Practice Management