When high-net-worth individuals buy life insurance, they often mistakenly view it as something that’s been taken care of once they’ve signed the contract. Even their loyal financial planners, lawyers, and accountants may have a similar perception. But nothing could be further from the truth. Life is constantly changing, and those changes can impact insurance needs—sometimes quite significantly. People get married and divorced. They have children, change jobs, buy a house, sell a business, care for aging parents, inherit substantial dollars, increase their wealth, and so much more. The best way to ensure that a client’s insurance needs are being accommodated is to conduct an annual audit of their policies.
What is a life insurance audit?
An independent audit of a life insurance policy takes into account the client’s entire financial picture and should be conducted in collaboration with their entire advisory team. To be effective, it requires a holistic approach that involves the financial advisor, tax attorney, accountant, and life insurance professional. Life insurance should be viewed as a tool that complements everything else in the client’s financial portfolio.
To conduct a true audit, a specialized and proprietary process is used to examine the structure of a policy. The software scans and analyzes the life insurance market for the best available solutions regardless of carrier. The goal is to provide a fair and accurate assessment, showcasing a side-by-side comparison of the current policy with other options. More often than not, there is a better, more cost-effective solution—one that reduces the cost of coverage or significantly increases the benefits.
Heightened need for an audit
The annual audit may be more important now than ever, given current stock market volatility and rising interest rates. That’s because permanent life insurance falls into both interest-based and market-based categories. Currently, a client with a policy based on market returns has been negatively impacted by the market, and the value of their policy could have substantially decreased.
On the other hand, now may be an excellent time to consider a more conservative policy that’s not driven by market returns. Today’s higher interest rates have not only created more life insurance parity, but some products have actually become less expensive. In either case, all in-force policies should be reviewed.
Addressing those life changes
But let’s back up a moment. Regardless of economic conditions, insurance should always be audited annually or whenever significant life changes occur. Even in the best of times, priorities and needs change from year to year. And many of these changes are beyond the client’s control.
It’s important to keep in mind that people are living longer. Individuals with term life insurance can’t afford to keep it after a certain age because it becomes astronomically expensive. Plus, term insurance does not make sense for most high-net-worth clients because it’s a temporary solution to a permanent need. When a term insurance policy is reviewed, it’s essential to determine if it’s a policy that can be converted into permanent insurance and to make sure the conversion date does not go unnoticed. This feature varies dramatically from one insurance carrier to another.
Overall, most people don’t take the time to shop for the best insurance. They don’t understand what’s available to them, and they may work with an insurance agent who only represents one company and therefore, one product. A better approach is to work with an independent advisor who can obtain offers from a majority of insurance companies.
Another issue is taxation. Tax laws change all the time, so it’s important to ensure that taxation does not erode the value of the insurance coverage. A seasoned life insurance professional can work alongside the client’s financial team when strategies are needed to create liquidity. This will become even more pressing after December 31, 2025, when the $25 million estate tax exemption is cut in half.
Long-term care is another issue to consider, given that it is so costly. However, with the right planning and expertise, a life insurance policy can be designed to obtain life insurance death benefits as a pool of funds available for the insured to use while still living if the need arises for long-term care benefits. Life insurance can also be used to maximize the effect of a client’s philanthropic contributions through a combination of income and estate tax strategies. Using debt to secure life insurance coverage can also be an efficient strategy for high-net-worth families.
These are all examples of the numerous ways life insurance can be used, but it takes a knowledgeable professional to work with the client to determine the right approach.
Keep in mind the many life changes that can trigger the need for an insurance audit. Many of these changes are simply part of life, such as changing jobs or getting a promotion, borrowing money to buy a house, or adapting to the needs of a growing family. Other changes are not so ordinary but occur all the same, such as inheriting money or taking on a philanthropic role.
Above all, health issues can dramatically impact a person’s financial picture, whether someone in the family has serious health issues or a child has special needs. Any change in health can trigger the need for new coverage.
The right approach
A proper life insurance audit takes everything into account and looks at the big picture to identify the best option for the client. It’s important not to overlook that the process is most effective when the client’s financial, legal, and tax advisors work in unison. To properly structure a client’s life insurance, everyone must work together. The insurance strategist can make a recommendation that will help the client in the long run, but that recommendation should also come with the approval of the client’s tax attorney, accountant, and investment advisor.
Finding the right approach and the best insurance solution for high-net-worth clients requires a deep understanding of the current insurance market and related legal framework. When auditing the client’s policies, the insurance professional must have a level of expertise that makes it possible to identify the right approach. They must know what to look for and what questions to ask. Without that knowledge, the right approach could easily be overlooked.
About the Author
Richard K Newman
Richard is a well-known life insurance expert who works with CPAs, attorneys, Registered Investment Advisors and nonprofits. For more than 35 years, he has guided clients with their estate planning, wealth transfer and tax-related matters.