What does an Insurance Checkup look like? Case Study #1

For those interested in how life insurance checkups work, I thought I’d provide some case studies. The first one is on Brenda, a physical therapist in New Jersey. She came to me after her recent divorce with doubt about whether her current life and disability policies were optimal and would do what her agent said they would (be paid up after ten years). I spoke twice with the agent who had some strong ideas, and she wanted an objective opinion. She had nine policies with four companies, more than most clients.

The first thing we did was assess her overall financial picture and need for insurance. It was simple and straightforward: one daughter almost through college, a small mortgage, healthy 401k and income. She had been sold policies at major life events, mostly with Metropolitan: birth of her daughter, purchase of a home; bought an ING term policy to replace the voluntary payroll deduction term at work; individual disability policies with Unum, Paul Revere, Provident.

Base on her stated goals and in light of an almost independent daughter, low debt, and healthy 401K, she needed about one third the amount of life insurance she had. Interestingly she didn’t realize how much she had until I totaled it up. She described herself as a “worry wart” and had collected along life’s way more policies than needed. The agent had done a good (or poor, depending on which side of the fence you’re on) job regularly promoting the cause. A heart murmur that developed since the purchase of most precluded her from getting better policies (Met is not the best, but not the worst either), so from there it was a matter of discerning which to keep or jettison.

After studying my Life Insurance Needs one page summary/overview, she wanted to keep $100K-150K ongoing, and an extra $100K until her daughter was totally independent, about three more years max. That was more than needed from my assessment (because of other assets- she is really well-managed), but that decision is more emotional than most folks recognize and she’s a mom, not a businessman. I state my case, but then respect the emotional aspect of the decision and help the client figure out how to best achieve their wishes.

I obtained in-force ledgers from Met to see how the premiums, dividends, and cash values of each of her three permanent Met policies grew: one universal life, one variable universal life, and one whole life policy. The whole life was best and the mortality costs within the UL were lower than within the variable UL. It was also lower than within the ING term policy which is rare, but the heart murmur made the ING (the most recent purchase) rate her, skewing those costs.

We dropped the ING term and Met variable UL; kept the whole life (indefinitely) and the Met UL (for three years). The UL was underfunded and on schedule to expire well before her normal life expectancy, a common problem among those type policies (which many don’t recognize, but need to). We reduced its death benefit from 150K to 100K and the death benefit option (from increasing to level) in order to reduce internal mortality costs. After these changes it will serve well as a three year term policy.

Her disability policies were both good, but she has group disability through work, so we dropped the poorest value of the two (and the smallest) today, and the other as soon her primary mortgage is paid in 13 months. They were only 1100/mo and 300/mo benefits anyway.

She now knows her whole life will not be paid up as soon as she had thought. This was due to dividend rate declines which have occurred industry wide. I encouraged her to accelerate paying off her 7% mortgage (only 13 months left; too little to justify refinancing) and we came up with several sources to do so. As a financial planner and investment advisor, it’s rare I don’t come up with additional recommendations beyond the scope of insurance.

She should recover the fee she paid me in 9.5 months and then save it again each year for the next 15 years, over a 125% annual after-tax return on her fee. She was under no pressure to buy anything. She now has peace of mind things are optimized and simplified. For a worry wart this is important.

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