Why Your Permanent Life Insurance Policy Needs a Checkup

Most people purchase a permanent life insurance policy, whether whole life, universal life, or a variation of either, with the expectation that it will quietly provide coverage for the rest of their lives. Premiums are paid, coverage remains in place, and eventually, the policy pays a death benefit. For many years, that assumption may hold true.

But permanent life insurance is not a “set it and forget it” financial product. These policies are built on a variety of assumptions, including interest rates, investment or market performance, the cost of insurance as you age, and the amount of premium being paid. Over time, those assumptions can change.

When they change enough, a policy that once appeared fully funded for life can become underfunded, potentially putting the policy at risk of lapsing years, or even decades, earlier than expected.

Why Permanent Life Insurance Policies Can Drift Off Course

Several factors can cause a permanent life insurance policy to perform differently than originally anticipated:

• Interest Rates and Investment Performance: Universal life and indexed policies may credit interest based on current rates or market performance. If actual returns are lower than the rates illustrated when the policy was purchased, cash value may grow more slowly than projected. This can leave less money available to cover the increasing internal cost of insurance as you age.

• Increasing Cost of Insurance: The internal cost of insuring you generally increases as you get older. In the early years of a policy, premium payments may comfortably cover these costs. Decades later, those costs can increase significantly, potentially drawing down the policy’s cash value more quickly than expected.

• Missed or Reduced Premiums: A skipped payment, reduced premium, or policy loan taken years earlier can have a significant impact on a policy’s long-term performance. The consequences may not become apparent until years later.

• Outdated Assumptions: The illustrations provided when you purchased your policy were projections, not guarantees. If the policy is never reviewed, there is no way to know whether those original projections are still realistic.

The danger is that these issues often do not appear as an immediate problem. You may not notice anything wrong in year one, five, or even fifteen. Instead, the problem may surface decades later when an insurance company sends a notice stating that the policy is projected to lapse unless you make a substantial, unexpected premium payment.

A periodic review can help identify potential problems years in advance, while you still have time and options to address them.

What Does a Periodic Policy Review Actually Do?

A policy review, ideally conducted every two to three years or after a significant change in interest rates, your financial circumstances, or other relevant factors, can help answer an important question: 

Is your policy still on track to provide the coverage you need for as long as you need it based on the premiums you are currently paying?

A comprehensive review typically examines:

• Your current cash value and death benefit compared with the policy’s original projections

• Whether your current premium payments are sufficient to keep the policy in force through your expected lifetime (and beyond), if you want coverage guaranteed to a specific age

• Whether the policy still serves its original purpose, such as providing estate liquidity, replacing income, supporting business planning, or funding a trust-owned policy

• Whether other, potentially more cost-effective options are now available based on your current age, health, and financial circumstances

The Key Tool: The In-Force Ledger

One of the most important documents in a policy review is the in-force ledger, sometimes called an in-force illustration. This report is generated by the insurance carrier and shows how your policy is projected to perform going forward based on its current, actual values—rather than the hypothetical assumptions used in the original sales illustration.

An in-force ledger typically provides a year-by-year projection showing:

• Current cash value and death benefit

• Projected cash value and death benefit at your current premium level

• The internal cost of insurance and how it is expected to change over time

• The interest or crediting rate assumptions being used

• The age at which the policy is projected to lapse if you continue paying the current premium

• The premium that would be required to keep the policy in force to a specific age, such as 90, 95, 100, or beyond

Because it is based on your policy’s current values rather than the assumptions made years ago, an in-force ledger provides a much clearer picture of where your policy is headed today.

It can also be run under different scenarios, such as continuing your current premium, stopping future premiums, or increasing your premium, to help illustrate the potential tradeoffs and options available to you.

The Good News: A Review Can Reveal Opportunities

An in-force ledger isn't only useful for identifying potential problems. It can also reveal when a policy is performing better than expected.

If a policy has outperformed its original assumptions and accumulated substantial cash value, it may have reached a point where the existing cash value can cover some or all of the policy’s future internal costs. In certain circumstances, this may allow the policy to continue with reduced premiums or potentially operate on a “premium offset” basis, depending on the policy’s terms and performance.

That is another important reason to conduct a periodic review. The goal isn't simply to find problems. It is also to determine whether your policy is performing well enough that you may have opportunities to adjust your premium strategy.

The Bottom Line

A permanent life insurance policy is a significant, long-term financial commitment. Like any important financial asset, it deserves periodic attention.

Requesting an in-force ledger every few years—and having a knowledgeable professional help you understand what it means—can help ensure that the policy you purchased to protect your family, business, or estate plan remains on track to accomplish its intended purpose. Most importantly, a review can help you identify potential problems before they become expensive surprises.

If you have a permanent life insurance policy and aren't sure whether it is still performing as expected, contact our team of experienced estate planning professionals today. We can help you evaluate your policy, understand your options, and ensure your life insurance continues to work in coordination with your overall estate plan.