For Financial Advisors and Insurance Agents
The Advisor's Guide to Life Insurance Policy Reviews and Audits
A life insurance policy review or audit is a structured evaluation of an in-force permanent life insurance policy that examines whether the coverage remains on track to meet its original objectives, whether the premium funding strategy is still sufficient, and whether the policy's carrier, product design, and beneficiary structure still align with the client's current financial plan. For financial advisors and insurance agents, regular policy reviews help identify lapse risk, uncover premium inefficiencies, and reveal opportunities to improve contractual features or reduce costs.
The Problem With Set-It-and-Forget-It Policies
Why Permanent Life Insurance Demands Ongoing Review
Many permanent life insurance policies are placed in force and then left unmanaged for decades, which can create a major blind spot in planning and present a potential risk. Failing to meet the original projections in the sales illustration does not just mean there is less cash value; it generally means there is a significant likelihood that the policy prematurely terminates.
Unlike many financial assets that receive annual reviews, permanent life insurance policies are frequently left unmanaged despite being influenced by changing interest rates, market conditions, options pricing, carrier performance, underwriting developments, and payment timing. The result is unmet expectations and a financial and/or estate plan that does not meet its objectives, such as creating liquidity for the federal or state estate tax, funding a special needs trust, or wealth replacement. All permanent life insurance policies have non-guaranteed projections that should be monitored.
A periodic performance evaluation can identify hidden risks, uncover opportunities for improvement, and help ensure the policy continues to serve the client's current goals. In many cases, a review can save a policy from lapsing, reduce premiums, improve contractual features, or provide greater value through current market alternatives. However, results depend on the specific policy, carrier, and client circumstances, and not every review will yield actionable improvements.
Lapse Risk
Identify and Prevent Premature Policy Lapse
Many permanent life insurance products were sold using hypothetical assumptions that seemed reasonable at the time but have proven difficult to achieve in reality.
Consider a hypothetical Indexed Universal Life (IUL) policy issued in 2014. The sales illustration may have projected an 8% annual crediting rate for the life of the policy. At that time, the carrier's cap rate may have supported those projections.
Today, those same IUL policies commonly have crediting caps that are at or near the hypothetical rate used in the original illustration. Because the cap represents the maximum amount of interest that can be credited in any given year, the policy has little opportunity to outperform the original assumption and recover from years of lower-than-assumed performance. Over time, achieving the originally illustrated performance becomes unlikely. The consequence is not simply less cash value than anticipated. Without corrective action, the policy may lapse years earlier than expected, despite the policyowner continuing to pay the originally scheduled premium.
Though credited differently, the same concern applies to Universal Life and Whole Life policies. Decades of declining interest rates heavily impacted performance and most clients are unaware that an underlying issue exists.
Variable Universal Life policies provide a good example of why policy reviews remain important even when investment performance has been strong. Many policies issued years ago were illustrated at aggressive hypothetical rates of return that created an expectation of future policy values and sustainability. A policy illustrated at 10% that ultimately earns an average annual return of 8% may still be significantly underperforming relative to the original projections, despite producing returns that most clients would consider excellent. The issue is not whether the policy performed well in absolute terms, but whether it performed well enough to meet the assumptions upon which the premium funding strategy was based.
When policies perform substantially below expectations, the client may outlive the coverage the policy was intended to provide, which means all of the premium dollars and the cash value created by those premium dollars are gone, as is the death benefit.
In all cases, policyowners and advisors should remember that the original illustration was based on assumptions that may or may not be realized over time.
Premium Funding
Determine the Premium Needed to Carry the Policy to Maturity
Recognizing that many permanent life insurance policies rely on dividend assumptions, interest crediting rates, or investment returns to achieve their intended results, it is reasonable to expect that underperforming policies may require additional funding to maintain coverage. But how is the policyowner to know when to increase the premium and by how much?
A common misconception among policyowners is that if they continue paying the premium shown on the original sales illustration or the annual statement, the policy will perform as expected, meaning it will pay a death benefit. And, of course, why would they not think that? Payment of premium is the condition for coverage for nearly every other type of insurance. Unfortunately, that is not always the case with permanent life insurance.
A necessary and critical part of an evaluation of a permanent life insurance policy is an in-force illustration. An in-force illustration provides a current projection using the policy's actual values. This allows advisors to determine:
- & Whether the current premium is sufficient
- & How long coverage is projected to last based upon the current premium
- & The premium required to maintain coverage to life expectancy or maturity
- & Potential corrective actions available today
Identifying a funding shortfall early often provides numerous solutions. Waiting until the policy is near lapse can significantly limit available options and increase costs.
Premium Optimization
Potentially Reduce Premium While Maintaining Contractual Guarantees
Not every policy review uncovers a problem. Sometimes it reveals an opportunity to save money.
Consider a client who owns a traditional whole life insurance policy and whose primary objective is a contractually defined death benefit. The client may be contributing substantial annual premiums to support cash value accumulation they no longer need or desire.
In some cases, that policy can be repositioned into a Universal Life policy with a No-Lapse Guarantee, which may offer:
- & A premium with a contractual provision to remain level for a specified period of time
- & A comparable or increased contractually defined death benefit
- & Contractual provisions extending to a specific age, commonly lifetime
- & Potentially lower premium requirements
- & Better alignment with the client's current objectives
A review helps determine whether the client is paying for features they still value or features they no longer need. Repositioning a policy may involve surrender charges, tax implications, and insurability requirements that should be evaluated carefully before any action is taken. A 1035 exchange may preserve the tax basis of the original policy but requires careful analysis of the existing policy's cost basis, surrender charges, and the new policy's terms. Not all clients will benefit from restructuring, and the decision depends on individual circumstances.
Carrier Monitoring
Confirm the Financial Stability of the Insurance Carrier
Life insurance promises are only as strong as the company making them. Carrier financial strength can change over time due to market conditions, investment performance, reserve requirements, acquisitions, or strategic shifts. While well-rated insurance companies generally remain financially sound, periodic monitoring is prudent, particularly for policies expected to remain in force for decades.
A policy review should include an assessment of:
- & Financial strength ratings from major rating agencies (A.M. Best, Standard and Poor's, Moody's, and Fitch)
- & Capital adequacy
- & Lapse rate trends
- & Recent rating agency actions
- & Changes in product competitiveness
Understanding the current stability of the carrier helps advisors and clients maintain confidence in the long-term viability of the policy. However, ratings are point-in-time assessments and do not ensure future performance or solvency.
Policy Inefficiencies
Identify Hidden Policy Inefficiencies
Many permanent life insurance policies contain inefficiencies that go unnoticed for years. A detailed policy review can uncover these hidden issues before they become major problems.
Term Blends Beyond Their Intended Duration
Some policies were designed with term insurance riders to reduce early premium requirements. As those term components become more expensive over time, they can create significant drag on policy performance. A review can identify whether the term blend is still serving its original purpose or has become a cost burden.
Unintended Policy Loans
Policy loans can quietly accumulate interest and compound over many years. Clients may be unaware that the loans exist because they did not directly take cash out of the policy. These loans generally come with interest that can compound quickly behind the scenes. Clients are often unaware of the impact these loans are having on policy sustainability. If a policy with outstanding loans lapses, the policyowner may face income tax consequences on the gain.
Dividend Misallocation
A dividend option selected decades ago may no longer be the most effective use of policy dividends. Redirecting dividends toward premium reduction, paid-up additions, or other policy enhancements may improve overall efficiency. The optimal dividend option depends on the client's current objectives and the policy's performance relative to original assumptions.
Insurability Reevaluation
Reevaluate the Client's Insurability
The life insurance marketplace has evolved dramatically over the past decade. Product design improvements, underwriting advancements, and increased carrier competition have created opportunities for many clients.
One of the most overlooked opportunities involves clients who received a less favorable underwriting classification due to their medical history when their policy was originally issued. Many health conditions are viewed differently today than they were years ago.
For example:
- & Cancer survivors with favorable follow-up results may qualify for significantly improved underwriting outcomes.
- & Individuals with a history of heart disease may receive more favorable consideration due to advances in treatment and long-term management.
- & Improvements in overall health, weight, blood pressure, or lifestyle habits may improve insurability.
- & Those who formerly used tobacco or nicotine products may be able to find significant premium reductions.
- & Individuals who previously paid higher premiums due to marijuana use may qualify for more favorable underwriting today, as many carriers have adopted significantly more flexible guidelines than in the past.
Additionally, every insurance carrier has its own underwriting philosophy and underwriting manual. A client who was table rated by one carrier years ago could potentially qualify as Standard, or even better, with another carrier today depending on the circumstances. BUI's team includes Chief Underwriter Chris Hooper, CLU, FALU, FLMI, who provides informal underwriting inquiries and guidance on complex cases.
A review of current market options can determine whether the client may obtain:
- & Lower premiums and/or shorter premium durations
- & Improved contractual features
- & Higher death benefits
- & Product features that better align with current objectives, such as a contractually defined death benefit or long-term care insurance
- & More appropriate ownership structure or beneficiary designations. BUI offers guidance on beneficiary designations for trusts and the "unholy trinity" ownership trap that can create unintended taxable gifts.
When restructuring coverage, advisors should be mindful of transfer-for-value rules and the potential tax consequences of policy exchanges. A 1035 exchange may preserve the tax basis but requires careful analysis of the existing policy's cost basis, surrender charges, and the new policy's terms. Restructuring is not appropriate for every client and depends on individual circumstances.
Key Takeaway
The Cost of Not Reviewing
Permanent life insurance should not be a "set it and forget it" asset. Clients should be encouraged to reassess their need for coverage to confirm that it still meets current planning objectives. When the need is still present, a proper evaluation of coverage is essential every few years.
Policies are influenced by changing economic conditions, carrier performance, product design, underwriting standards, and client objectives. Regular reviews help ensure the policy continues to perform as intended and remains aligned with the client's overall financial plan.
For advisors committed to delivering comprehensive planning, reviewing permanent life insurance policies should be a standard part of the client review process.
As many policyowners discover, the cost of reviewing a policy is minimal. The cost of not reviewing it can be significant.
FAQ
Frequently Asked Questions About Life Insurance Policy Reviews
What Is a Life Insurance Policy Review or Audit?
A life insurance policy review or audit is a structured evaluation of an in-force permanent life insurance policy that examines whether the coverage remains on track to meet its original objectives, whether the premium funding strategy is still sufficient, and whether the policy's carrier, product design, and beneficiary structure still align with the client's current financial plan. The review typically includes an in-force illustration, carrier financial strength assessment, and analysis of policy inefficiencies.
How Often Should Permanent Life Insurance Policies Be Reviewed?
Permanent life insurance policies should be reviewed at least every two to three years, and more frequently if interest rates, market conditions, or the client's financial objectives have changed significantly. Policies that are underperforming relative to their original illustrations may warrant annual monitoring. The appropriate review cadence depends on the policy type, funding level, and the client's overall planning context.
What Is an In-Force Illustration and Why Is It Important?
An in-force illustration is a current projection of a policy's future performance using the policy's actual values as of the date of the illustration. It is important because it allows advisors to determine whether the current premium is sufficient, how long coverage is projected to last, and what premium is required to maintain coverage to life expectancy or maturity. Without an in-force illustration, advisors and policyowners have no reliable way to assess whether a policy is on track.
How Can a Life Insurance Policy Review Identify Lapse Risk?
A policy review identifies lapse risk by comparing the policy's actual performance against the original sales illustration assumptions, requesting an in-force illustration to project future values, and evaluating whether the current premium funding strategy is sufficient to sustain the death benefit to the client's life expectancy. The review also examines whether crediting caps, dividend scales, or sub-account performance have shifted in ways that make the original assumptions difficult to achieve.
Can a Life Insurance Policy Audit Reduce Premiums?
Yes, a policy audit can sometimes identify opportunities to reduce premiums, such as repositioning a whole life policy into a Universal Life policy with a No-Lapse Guarantee that offers a comparable death benefit at a lower cost. However, any restructuring should be evaluated carefully for surrender charges, tax implications, and insurability requirements. Not every policy can be improved through restructuring, and the decision depends on the specific policy, carrier, and client circumstances.
What Carrier Financial Strength Factors Should Be Reviewed?
A policy review should assess financial strength ratings from major rating agencies (A.M. Best, Standard and Poor's, Moody's, and Fitch), capital adequacy, lapse rate trends, recent rating agency actions, and changes in product competitiveness. However, ratings are point-in-time assessments and do not ensure future performance or solvency.
How Has Underwriting Changed for Previously Rated Clients?
Underwriting has evolved significantly, with many carriers adopting more flexible guidelines for conditions such as cancer history, heart disease, and marijuana use. A client who was table rated by one carrier years ago may qualify for a better classification with the same or a different carrier today, potentially resulting in lower premiums, shorter premium durations, or improved product features. Each carrier maintains its own underwriting philosophy, so outcomes vary by carrier and individual circumstances.
Need Help With a Life Insurance Policy Review?
BUI's marketing team provides in-force policy analysis, informal underwriting inquiries, and carrier comparisons to help advisors evaluate existing permanent life insurance policies. Contact our team to discuss a specific case or learn more about our policy review support.