POLICY EVALUATION ‘With interest rates and other pricing factors fluctuating, the number of life insurance policies that don’t perform as originally projected is increasing, Since clients often look to CPAs for advice on how to make sure their policies continue to protect those, practitioners need to know what steps to take in evaluating an insurance policy. Here are some things CPAs should look at when assessing a policy’s merits. EVALUATE THE AGENT AND THE CARRIER ‘Qualifications and licenses. Make sure the agent has all the right licenses. Agents tend to sell what their licenses permit and not necessarily what the client needs. To sell variable insurance contracts in California, for example, agents with a regular insurance license need either a NASD series 6 or 7 general securities license plus a California variable contracts license. If they sell in more than one state, agents also need the NASD series 63 license. Longevity. About 98% of insurance agents don't make it past the first three years. The longer an agent is in business, the more stable he or she is and the more likely that person will be around to service the client in the future. Find out what will happen to your client if the agent leaves the insurer. Policy service. Determine the frequency of policy performance reviews the agent has promised. Ideally, reviews should be annual to ensure the policy continues to perform as the client had anticipated. Independence. 1s the agent truly independent? The more carriers an agent represents, the more objective his or her judgment. Otherwise, an agent may not recommend the policy that best suits the client’s needs, Some agents represent several carriers but promise the right of first refusal to one particular carrier on any application they take. Motivation, Does the commission structure drive the agent's recommendation? Many carriers allow agents to make policy changes, enhance benefits and reduce premiums. Explore the agent’s willingness to rebate part of the commission to the client (where this is legal), keeping in mind the potential tax consequences. Carrier rating. Ratings provide an indication of financial stability. The carrier must survive at least as long as the client. The carriers an agent recommends to the client should have minimum ratings of at least A by Standard & Poor’s and Moody’s and A+ by A.M, Best. Carrier risk profile. Check the carriers investment portfolio for undue concentration in a particular investment sector or exposure to high risk or extremely volatile investments. Carriers that also write property and casualty policies expose themselves to potentially devastating claims following natural disasters. REVIEW EXISTING POLICIES Compare “re-projected” policies. When the agent prepares a new projection for one of the client’s existing policies, be sure the policy terms are identical to the policy as originally written. Otherwise, you're comparing apples and oranges. Analyze alternative scenarios, Determine what the policy premium will be and the time over which it must be paid using scenarios of falling interest rates and rising mortality rates. Make sure clients can afford the higher premiums and continue to pay them for longer periods. Make sure the client gets the best deal. Some companies offer better policies for new buyers. Find ut if the client’s carrier or another carrier offers lower premiums, higher cash values or larger death benefits to new buyers than the current policy offers. If so, cancel the old policy and buy a new one. ‘Compare illustrations. Check the assumptions the insurance company uses in its policy illustration such as interest rates, mortality rates and expected longevity. Compare results such as premiums, length of time they must be paid and benefits the policy provides. Make sure to look at carrier ratings and financial stability.* Continue to assess carrier ratings and financial stability. Like any business, insurance carriers? fortunes change. Be certain the carrier’s situation has not exceeded your client's risk tolerance. If ithas, change carriers. Evaluating Life Insurance Policies Life insurance can be vital to protecting your family’s financial future and can also help you manage some immediate expenses. The most common goal for life insurance is to provide income replacement for a surviving spouse and dependents. However, life insurance can also be earmarked for paying estate tax settlement costs, shifting wealth to the next generation, or benefiting favored charities. Whatever the ultimate purpose, life insurance can be a ‘complex product. To get the best coverage, shop around and compare company quality, coverage and costs. Finding a reputable company A life insurance policy is only as good as the company behind it. That makes selecting the right company atleast as important as choosing the right policy. Rating agencies, such as A.M. Best and Moody's Investors, Service, grade companies based on their financial stability, the timeliness with which claims are paid, and the quality of customer service. Choosing term insurance or permanent coverage Life insurance policies generally fall into one of two broad categories: term insurance and permanent coverage. With term insurance, if the insured dies during the policy’s term, the beneficiary receives the policy proceeds. No benefits are paid if the insured lives beyond the term of the policy, and there is no investment or cash value feature. Term policies from different companies can be compared relatively easily, since there are few variables from policy to policy. Term insurance is significantly less expensive than permanent coverage. Permanent insurance covers you for your entire life. This type of insurance offers a set death benefit for a specific premium, but the policy doesn’t have an ending date. You continue to pay the premium for the rest of your life, unless you decide to cash in the policy and receive, as a lump sum, the policy’s accumulated cash value. Basic types of permanent insurance policies include variable life and universal life, in addition to whole life. Unlike term policies, permanent policies differ in substantial ways, including surrender charges; cash value projections, terms for borrowing against the policy’s cash value, and dividends paid by the company. Take these factors into account when comparing policies. Selecting the level of coverage It's difficult to apply a rule of thumb for determining how much life insurance you should buy. The level of protection you need depends on factors such as your age, total assets, health, and sources of income, ‘number of dependents, the extent of debt, and your lifestyle. If you have no dependents, or if you don’t ‘generate a significant percentage of your family's income, you may not need life insurance at all. On the other hand, if your salary is critical to supporting your family, paying the mortgage, and sending your children to college, life insurance can help meet these financial obligations should you die prematurely. Shopping for the best-priced policy Ifyou are interested in permanent life insurance, it's generally a good idea to confer with your CPA and a life insurance agent, Independent agents work with many insurers and often find the best policy at the best f there is a particular insurer you have in mind, you can work with an exclusive agent who sells for just that company. In some cases, you can purchase a policy directly from the insurance carrier. Remember that once you contract for a policy, there is typically a review period during which you can cancel coverage if you change your mind. Customer Evaluation Itis common knowledge that the premium depends on four factors. Age ‘Sum Assured Term of the policy Type of plan (e.g. term, endowment, money back etc)However, in addition to these four factors, a lot more goes into underwriting life insurance policy. In this article, we will discuss how life insurers evaluate the customer information provided in insurance proposal form, Details provided by you in the proposal form are not just for the sake of information. These details are used by the insurers to underwrite your life insurance policy. Insurers may charge additional premium or even reject your policy proposal based on the information provided in the proposal form, Personal Health Addiction to tobacco and alcohol adversely impacts your premium. Most insurance buyers are aware that smokers have to pay a higher premium compared to non smokers. In addition to disclosure regarding addiction to tobacco and alcohol, the insurance buyer may also have to disclose the duration for which he or she has been addicted. The insurer uses this information to determine the risk profile of the insurance buyer and hence the premium. Medical History of the insured Medical history is an important determinant of longevity and as such is an important consideration for the insurers, Your medical history will impact your risk level. If you have a history of minor ailments then it ‘most probably will not impact your premiums. However, in case of high risk diseases like cardiac conditions, chronic kidney disease, cancer etc, premiums are likely to go up. If you fail to disclose your ‘medical history accurately, the insurer may reject your death claim. Family Medical History In addition to your individual history, the insurers also look at family medical history because certain diseases are genetic, e.g. cardiac ailments, certain types of cancer etc. Ifa family member of the insured is suffering from a serious ailment, which is hereditary in nature, then the risk profile of the insured may be impacted adversely. Further if multiple members of your family are suffering from the same ailment, then the insurer will assign a higher risk to you. Occupation Certain occupations are considered to be more risky from a health perspective. If you have occupational hazards that may put your health and safety at risk, then your insurance premium is likely to go up. However, it is not just jobs with occupational hazards that impact your risk profile. Some insurers also associate desk jobs with a higher risk of cardiac diseases and assess the risk of the insured, as such. Income Why is your income important to the insurer? The reason is that, the insurers do not want you to be over- insured. What does being over-insured mean? It means that your cover should not exceed the loss of income in the event of an unfortunate death. Insurance companies use a concept called Human Life Value (HLV). In simple terms, HLV is the maximum amount of total sum assured you can get. Your HLV is determined by your income, whether from profession or business, and therefore your income is an important consideration for the insurers. Qualification ‘You may ask, "Why is qualification important for life insurance?” Thad the same question. Teart that life insurance companies view people with more education as being more health conscious and therefore at a lower mortality risk compared to people with less education. Therefore, it is important that you fill the details of your educational qualifications correctly in the proposal form. Existing Policies Insurance companies look at the total sum assured of your existing life insurance policies relative to your HLY before granting you life insurance cover, in order to ensure that sum total of the cover from all policies do not exceed the HLV. As discussed earlier your insurer would not want your total sum assured from all your policies to not exceed the loss of income in the event of an unfortunate death