Vol 2 No 3		August 2000

Katt & Company is a fee-only life insurance advising firm. We work with clients throughout the U.S. - primarily by phone, mail, email and telecopy. Typically, we assist clients buying life insurance, those who need existing policies reviewed and managed, and in support of litigation. For references please contact us.

Alert

(Information about specific life insurance companies is obtained during our work with clients and as such is ad hoc and not based on a systematic analysis of all life insurance companies. Although we believe the information presented is accurate, it is possible that it doesnít apply to all such policies identified because of different ages, ratings or policy structures).

Security Life of Denver's Joint Survivor Preferred II uses unique pricing that makes its replacement with another policy or surrender until the later of the 20th policy year or the first death an enormous economic mistake. I recently reviewed this policy for a new client and discovered that its surrender cash value is only its guaranteed cash value for five years, and that its real value (asset share) is much higher than its surrender value until the early of the first death or the 20th policy year. The agent sold this policy in 1995 and by 1998 was sending out frequent letters baderging his customer to allow him to replace it with a new policy for reasons that were really quite undefined. Had my client, in his ignorance, followed this ridiculous advice unseen losses would have been some $80,000 this year (the difference between the current surrender value and the policy's real value).

Tip

In Vol. 2 No. 1 (January 2000) of this Bulletin I noted that some clients and their advisors ignore significant adverse health histories when addressing life insurance planning thereby treating existing policies with less importance than they should. The opposite situation also occurs - clients who are in excellent health (and with longevity in their family) who intentionally underfund permanent life insurance policies because they assume they will pass away by the time they are, say, in their early 90s. Clients 81 and 79 years old are insured with a survivorship policy with a current premium pattern that will cause the policy to terminate in 15 years (ages 96 and 94). They are both in excellent health. They have a joint life expectancy of 16 years (ages 97 and 95), meaning there is a 50% probability that at least one of them will be alive in 16 years, and there is a 37% probability that one of them will be alive at ages 100 and 98. By underfunding their survivorship policy, if one or both are alive when the cash values are approaching zero, they will have to pay the equivalent of term insurance rates for the policy to continue. That is, the premiums for a $1,000,000 survivorship policy whose cash values have gone to zero when the insureds are age 95 are approximately: $177,000; $187,000; $198,000; $210,000; and $222,000 through age 100. A premium pattern that will cause a policy to become paid-up at maturity should be maintained as long as insureds remain in good health with a reasonable prospect of living to policy maturity, usually age 95 or 100. Unfortunately, in this case my clients have declined my suggestions to initiate more robust premium payments. (For a more complete explanation of the proper premium management of permanent life insurance refer to my November 1999 AAII Journal column.

Information

The two most common client situations I see are: 1) thirty-, forty- and fifty-something clients who have dual needs for family protection life insurance and investing beyond what they can contribute to their qualified plans; and 2) fifty-, sixty- and seventy-something clients who have acquired more wealth than they want for their own needs who wish to transfer wealth to their children in an estate tax wise fashion. My July 2000 AAII Journal column presents an extended analysis comparing the use of variable life insurance with conventional investing for these client needs. This analysis considers various factors not previously looked at. They are: different levels of investment yields; different investment allocations; and alternative methods of obtaining income from a variable life policy for the thirty-, forty- and fifty-something client. As you will see, these factors must be taken into account if a client is to make the most appropriate investment decision.