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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 and those who need existing policies reviewed and managed. We also assist clients with disability income and long term care insurance. 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. "Having only to fund for $1 instead of $3,000,000 over the next 24 years… provides the client with a present value savings of some $340,000." Until quite recently I could refer to universal life (UL) without first distinguishing between market-priced and static-priced policies. Static-priced are relatively new ULs with very exaggerated guarantees. The premiums and level death benefits are guaranteed with little concern for the cash values. No premium management is needed. Just pay the premium on time and if the insurance company is still solvent the death benefits will be paid. Static-priced ULs, known as No-Lapse Premium Guarantee policies, was the subject on our May 2003 newsletter. Market-priced UL policies' pricing depends on future interest rates and to a lesser degree mortality. They have considerable premium flexibility that allows the policyholder to design the premium flows based on some determined funding goal. This causes huge problems when UL policies aren't expertly managed because most of them are horribly underfunded. But flexible premium management can also provide very significant opportunities in an expert's hands. In the old days (about two years ago) market-priced ULs needed premiums that would cause the cash values to equal the death benefits at maturity, usually the insured's age 100. This is known as the policy being paid-up. If an insured reaches age 100 with, say, a $1,000,000 UL policy but a cash value of $10,000 the policy would become paid up for $10,000. This is only of concern if the insured reaches 100, but from a premium management standpoint as long as the insured is in reasonably good health it is imperative that the funding goal be to have a cash value equal the death benefit. But, in the past couple of years many life insurance companies have done some actuarial slight-of-hand by extending death benefit coverage beyond policy maturity until the insured's death (known as lifetime extension). These policies don't need funding to create a cash value equal to the death benefits at age 100. They only need funding to keep the policy in force until age 100. I recently reviewed a market-priced $3,000,000 UL (second to die policy with insureds of 77 and 76) with a lifetime extension. The seller of the policy didn't get the memo and had set the target premium of $46,000 for paid-up ($3,000,000) at age 100 and the client was faithfully paying it. But this policy only needs $1 at age 100. Having only to fund for $1 instead of $3,000,000 over the next 24 years reduces the needed target premium to $18,100! This change provides the client with a present value savings of some $340,000. My friends, this is the potential savings when you have your client's life insurance policies reviewed by fiduciary experts. Please see my report on this case. What Price Neglect Unfortunately, we aren't always able to take care
of life insurance problems in time. Because an insured's sub-standard
rating was not removed on a timely basis the present value life insurance
costs will be $200,000 higher than they should be. A Texas client,
who I will call Mr. Jones, executed an irrevocable trust in 1991
and it purchased a $3,000,000 second-to-die policy. Mr. Jones was
rated standard but Mrs. Jones was given a sub-standard Table D
rating because of her treatment for alcoholism in 1988. This treatment
was successful with Mrs. Jones not having had a drink since 1988 but insurance
companies require a longer period of sobriety before they will remove
sub-standard ratings for recovered alcoholics. Application for complete
removal of the Table D rating could have been made in 1993 and because
both Joneses were in excellent health then the change would have been
approved and their insurance costs would have been dramatically reduced.
But no one noticed this and the Joneses didn't know to do anything. In
1998 Mr. Jones was diagnosed with prostate cancer and developed
some heart problems. He is no longer a standard risk. Because this
insurance company requires reconsidering both insureds on a second-to-die
policy when application is made to remove the sub-standard rating for
just one the Joneses can't end up with a policy with them both rated
standard as they would have if the request had been made before in 1998.
If the Joneses live to their joint life expectancy the additional
costs to achieve the same policy values if both were standard are around
$200,000. The agent that sold the policy remained an acquaintance
and occasionally tried to sell them new insurance, but didn't think to
remove the rating. The Joneses have a top flight attorney and CPA but
they didn't know to have the sub-standard rating removed. Permanent life
insurance must have regular expert reviews.
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