Vol 8 No 7		December 2006

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.

Huge Sums to be Saved Through Policy Management

The great savings we can legitimately offer clients is very unprofitable for life insurance companies who operate much better when policyowners and many of their advisors maintain customary ignorance. It is astounding how much we can save policyowners by paying attention to important policy management factors.

The most common service we provide is reviewing and managing existing life insurance. An important factor in astute policy management is knowing the health of insureds. Universal life (UL) policies have considerable premium flexibility that combined with monitoring insureds' health will potentially save huge sums.

Because of this premium flexibility the lowest amount of cash value upon the insured's death, the better the policy's value. That is, a $1,000,000 UL policy with $1,000 of cash value upon the insured's death pays the same death benefit as one having $500,000 of cash value. Having the least amount of cash value is almost always a matter of dumb luck, but it can be intentional as well. Two examples will explain this. John is 72 and in excellent health with a $2,000,000 UL policy that matures at 100. John's life expectancy is 90 and there is a 10% probability he will live to 100. Most UL's maturing at 100 will continue beyond 100 until death, but the death benefit becomes the cash value at 100 so target premiums should be set up to create a $2,000,000 cash value at 100. For John they are $52,000 a year. Ongoing review of this policy will keep resetting the target premiums based on the cash value account, current interest crediting rate and John's health. Let's say in two years the crediting rate has gone up 25 basis points and John still enjoys excellent health. We would reduce the premium to $50,000, the amount needed at the new crediting rate for the policy's cash value to be $2,000,000 at 100. At age 80 John has a stroke and is diagnosed with prostate cancer. His life expectancy is now 87 and there is practically no chance he will make it to 100. We would adjust the premium down to $40,000, the amount for the policy to stay in force until 96 when there is a 3% probability of his survival. We would recommend that additional amounts be gifted to the trust and placed in a side-fund in case more premiums are needed if John's health appears to have stabilized and perhaps even improved. At 82 John has another stroke and weakened considerably. It is now nearly conclusive he won't survive another five years. The decision is to stop all premiums because the policy is adequately funded for another nine years. John dies in four years. This kind of premium management compared to blindly continuing the $52,000 premium saves John's family about $185,000 in premiums.

Sam is 78 and in very poor health with significant vascular disease. His life expectancy is about two years. He has a $6,000,000 UL policy. His agent recommended that he pay premiums of about $230,000 a year for the policy to last to age 86. Instead we recommended a just-in-time premium strategy that only pays the premiums needed to keep the policy in force. No premiums are needed for three years. The amount of premium savings max-out at $631,000 in four years and this strategy has a positive outcome for nine years. There is a 6% probability that Sam will make it nine years. If Sam survives more than 10 years this strategy would turn decidedly negative because of the large premiums, but our approach if Sam survives 10 years is to offer the policy for sale in the life settlement market - depending on Sam's mortality prospects at the time.

In pursuing astute premium management of level death benefit UL we don't mean to be insensitive about insureds' health and mortality prospects, and we appropriately raise the issue before rushing into calculations, but we haven't yet had a client reject this kind of strategy due to being squeamish about the subject. The great savings we can legitimately offer clients is very unprofitable for life insurance companies who operate much better when policyowners and many of their advisors maintain customary ignorance. It is astounding how much we can save policyowners by paying attention to important policy management factors.