CPAs Should Evaluate Clients’ Life Insurance Policies

Filed under: The Advisor's Blog

As your clients’ most trusted advisor, they may turn to you for advice on all of their financial dealings. When it comes to your their life insurance portfolios, you should be aware of some important changes in the industry that may impact many of your clients.

Headline of Life Insurance for background

More and more, we need to view life insurance policies as an asset to buy and manage, not one to buy and hold. Insufficient cash value can cause your clients’ life insurance policies to be canceled prematurely. On the other hand, some may be holding more cash value than is really needed. Your clients may be realizing that their life insurance policy must be actively managed, just as they manage their stock and bond portfolios.


If your clients purchased their life insurance policies between 1983 and 2003, there is a good chance that the contract was not guaranteed. The coverage is completely dependent upon the premiums paid and the interest rate earned, and we have seen a drastic decline in interest rates over the last 25 years. In other words, your clients’ life insurance policies may not be worth what they were expecting.

To make up for the reduced interest rate earnings, owners of these policies should have been paying increased premiums. But many of them didn’t know they should be taking this preventive step, and their policies are expiring years earlier than they had expected. As a result, many families are left without the life insurance coverage they had expected.

Your clients could be faced with some difficult decisions with regard to their life insurance policies. Should they continue the coverage, protecting what has already been paid? They will need to weigh that option against the amount it will cost to keep the policy active. The other option is to lapse on the coverage and lose all premiums previously paid, if the new, increased premiums are too much to bear.

As a CPA, you may discover that your client is subject to taxes on gains above what they paid in premiums. Or, they may be interested in a “life settlement”, in which a buyer in the secondary market will purchase the life insurance policy. But since this prevents policies from lapsing, you won’t receive much help or input from your client’s life insurance agent.

So what should you do?

First, inform your clients that there may be a problem. Many aren’t even aware of this situation!

Second, a life insurance consultant should perform a performance evaluation of the life insurance policy. In some cases, it might make sense to allow the client to accumulate excess cash on a tax-deferred basis. Then, tax-free loans may be distributed to the client throughout their retirement, provided the underlying life insurance policy is never allowed to lapse.

Whichever path your client chooses to pursue, partnering with a financial advisor could be the key to unlocking new financial opportunities. As your clients’ most trusted advisor, it benefits both of you to offer them the opportunity to re-examine their life insurance policy and optimize it to their advantage.

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