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Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us. Hidden Opportunities One category of client I frequently encounter is wealthy and elderly with a collection of life insurance policies that have not been reviewed in a long time or ever, and may not even be needed. These clients easily have the ability to pay full premiums but may have stopped paying anything but minimum premiums. Life insurance should be treated as the sophisticated financial asset it is to determine how it should be handled. Essentially, we want to determine what financial return clients can obtain on their policies and compare that to other investments or strategies they may otherwise make. Two recent cases demonstrate this. Bob is 78 and in good health. He has a life expectancy of 12 years. His wife passed away last year. Bob has two trusts with two life insurance policies. One is a single-life policy on Bob. It is participating whole life. The contract premiums are $47,268. They are no longer being paid. Instead dividends have been used to pay them. Bob can elect to pay the premiums via gifts (gifting is not considered in this piece, see March 2008 Perspectives). The question is what rate-of-return can Bob expect (based on current dividends) if he does pay the $47,268 premiums. Taking the premium as a payment, the amount of additional death benefits produced as the future value and life expectancy as time period, I calculated that the IRR at life expectancy is 6.49%. This is income tax free, having a pre tax equivalency of about 11%. There is no doubt that Bob should resume paying premiums on this policy. Bob's other policy is more interesting. It is a survivorship VUL. The pricing is dominated by his younger deceased wife's mortality from when it was purchased. It has what is known as Frasierized pricing that means the mortality doesn't change after the first death. This makes the pricing excellent. So good that the illustrated IRR at life expectancy is 12% with cash values invested in the fixed account. That is there is no reason to continue taking a chance investing in equity sub-accounts with pricing that produces 12% using the fixed account. The other case involves Helen 82 in great health with a life expectancy of 12 years. When I was first hired the family knew about five policies insuring Helen. During my review Helen found five more policies in a box that everyone had forgotten about. The policies have a wide range of illustrated IRRs at life expectancy, from 6.1% to 0.4%. (Again, IRR is determined using cash value as present value, premiums as payments, life expectancyas time period and death benefit as the future value). The family decided to retain policies with an illustrated IRR of more than 4.0% and gift to a charity policies with a weaker performance. (Almost all charities terminate gifted life insurance policies for the cash values). Life insurance needs to be reviewed. This piece focuses on two wealthy and elderly clients who really don't need their life insurance. The key to reviewing such policies is to calculate what financial return they provide and compare it with other investment or alternative actions.
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