Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Focusing On Things You Can Control-Part 1: Life Insurance

December 2008

(In describing our investment philosophy to clients we often tell them to not worry about things they can’t control (e.g., stock market gyrations) and instead focus on things they can control: fees, taxes, etc. The same thing goes for other areas of managing wealth. Over the next few months I will explore some areas of wealth management that clients’ DO have control over.)

(Note: Capital Directions does not sell insurance products.)

Most people don’t enjoy talking about life insurance and, as a result, have not looked at their policies in years. When I ask clients about the need to review their policies it’s usually an item that is pushed down their priority list UNTIL the day they get a notice from their carrier that the policy they haven’t paid on in years will lapse unless a hefty premium is paid each year. What surprises many of these clients is that with a tweak here and an update there we can often help them avoid these problems.

The reason is that the life insurance industry is constantly changing. Over the past few years a tremendous amount of change and innovation has occurred in the way life insurance is designed, priced and sold. Changes in product features, underwriting technology and mortality assumptions have created a large discrepancy between the performance of new policies and policies that have been in existence for more than 3 years. Some of these changes are positive, some negative. They include:

• Increased life expectancies: People are living longer due to medical advances and better lifestyle choices and insurance companies have updated their pricing based on more current life-expectancy statistics.

• Interest Rates / Policy Dividends: Like the overall market, interest rates have been on a steady decline over the last ten years. At the same time, many of the dividends credited to policies by old mutual companies have decreased as a number of insurance companies converted to stock companies. Both of these factors have caused many policies to not perform as illustrated when the policy was originally issued.

• Fee Pressure: The pressure on companies to perform by Wall Street has driven some companies to change the way they manage their money and the way they manage their customers. This has resulted in increases in fees and expenses charged to policies.

• Changes in underwriting classifications: Most insurance companies have expanded their underwriting classifications and are offering much better rates to clients with great health.

In recent insurance reviews we’ve uncovered a number of opportunities that enabled clients to buy more coverage for the same cost or to reduce the face amount to a level that still covers the need but doesn’t require additional cash outlay.

In these difficult economic times we encourage you to get an audit of your insurance polices to make sure they are doing what was intended and that you’re getting the most bang for your buck. That is something you can control.

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