Avoiding Insurance Errors

Mistakes happen, but a diligent CPA can take steps to prevent them.

ecause of their often complex nature, insurance transactions provide fertile ground for mistakes. When reviewing these transactions, CPAs have a golden opportunity to protect clients from making potentially costly errors. With care, patience and knowledge of what to watch for, you can be a hero to both your clients and their insurance advisers.

Most insurance blunders occur on one—or both—ends of the transaction. Often agents are so focused on closing the deal, they forget to look at the big picture; that’s where CPAs can help. Here are a few of the most common insurance errors and some recommended solutions.


Even before the insurance company issues a policy, there are several errors that can creep into the process.

Disclosing unnecessary information. As in any legal process, a client should provide information only if it has been specifically requested—without first hedging your bets. For example, say a client has offers from two insurance carriers. Company A gives a firm offer at a high price. Company B offers a lower price but asks for medical information company A has not requested.

The solution. Accept company A’s firm offer and advise the client to pay the first premium, locking in the policy and the premium. Then provide the medical information company B requested. If B issues a policy at a lower price, even in light of the additional medical information, cancel company A’s higher priced policy and go with B. If company B declines the business, the client still has company A’s policy.

Carrier selection errors. Insurance companies must be solvent when the time comes to pay customer claims. Discourage clients from buying from a company that fails to meet the fiduciary standards of creditworthiness. Rely on the same rating standards for selecting an insurance company that investors use when they are choosing a safe, secure stock. Look for insurance companies with these ratings from recognized rating services:

A.M. Best ( www.ambest.com ): A++ to A+.

Standard & Poor’s ( www.standardandpoors.com ): AAA, AA+ and AA.

Moody’s ( www.moodys.com ): Aaa, Aa1, Aa2 and Aa3.

Fitch/D&P: AAA and AA+.

Many insurers have some lines of business they really don’t support. Most insurance professionals should know which companies support which types of business. By ignoring this fact and applying to such a company anyway, clients run the risk of being rejected or receiving an unacceptable offer. This is more than just a waste of time. Insurance companies report all applications and offers to the Medical Information Bureau (MIB). A client could needlessly be flagged as an unacceptable risk at the MIB. This was the case with a client who applied for a $5 million term insurance policy to an insurer that wasn’t really in the business of writing large term policies. The carrier’s excuse for rejecting him was that he had once taken the drug Fen-Phen. A different insurer later approved the client as a preferred risk (the highest rating). However, the rejection is now part of his permanent MIB medical record and will follow him to every carrier in the industry.

The solution. Be sure the insurance company the client applies to actually wants the type of business the client represents.

Timing errors. Tax benefits and the client’s overall insurance strategy can be ruined without proper attention to dates. For example, the insurance application cannot predate the creation of the trust that owns it. While this is common sense, if the insurance agent and the attorney do not coordinate their efforts, date errors can happen. For such unfortunate clients, the insurance proceeds may be included in their estates, causing a potentially disastrous taxable event for the beneficiaries.

The solution. Check the dates of both the insurance application and the trust or other legal entity that owns the policy. If the dates are incorrect, advise the client to do one of two things:

  1. Cancel the policy and acquire a new one showing the proper owner and reflecting the correct dates.
  2. Apply for a change of ownership. Note, however, that this potentially taints the incidence of ownership (the previous owner) and will take three years to disappear. Such policies may be in the deceased’s estate for three years from the date the insured last had an incident of ownership. The policy proceeds would then be subject to estate tax, negating the reason for the purchase.

Misunderstood policy terms. Insurance companies can change terms and conditions throughout the policy life without policy owners understanding the financial impact. These changing terms include the interest or dividend rate credited to the policy as well as the mortality expense (the fee charged against policy reserves to fund the eventual death benefit).

The solution. To protect yourself from clients claiming they never saw the policy terms and conditions, be sure they receive a full copy of the insurance illustration at the time of policy issuance and any time policy terms and conditions change. Ask the client to initial and date each page. Keep this initialed copy showing the client reviewed and accepted all materials as part of the client’s permanent file for the entire time he or she owns the policy.


Some of the most common and embarrassing insurance errors occur after a policy is issued, sometimes even several years later. Here are the two most common mistakes insurance professionals make that CPAs are uniquely positioned to prevent.

Recordkeeping errors. At the time of policy issuance, the parties involved sometimes fail to recognize what is necessary to manage and maintain the costly financial instrument the client just acquired.

The solution. The simplest way to prevent this problem is to compile a checklist at the time of closing that covers everything needed to keep the policy functioning as intended. This includes things such as premium payment and policy payoff dates. We use a list showing the action item, the due date, the individual responsible for the item and exactly where the resulting document or payment should go. Enter each action item as a tickler into an electronic calendar system. (Proper use of this method requires a calendar that goes out 30 years or more.) Over time, as the due date for each action item approaches, follow up with the person responsible to ensure it gets done and is properly documented.

Failure to create a comprehensive closing document. Insurance closings can be complex affairs. Yet often no single person undertakes responsibility to document the entire transaction, as the buyer’s attorney would do at a real estate closing.

The solution. CPAs should take the lead on their client’s behalf and prepare a comprehensive closing document. It should cover

The intent and purpose of the transaction.

Compliance documents and filing dates.

A list of action items categorized by responsible person, date and recipient.

An appendix containing signed copies of all related legal agreements, such as trusts, collateral assignments, loan and financing documents, payment schedules, tax due dates, tax opinions, the insurance policy itself and the illustration.

Once created, this document should remain in the client’s permanent file with copies going to the client, his or her lawyer and the insurance agent.


Insurance policies, along with the laws governing wealth transfer and estate planning, will continue to get more complicated. Over time, new types of errors will undoubtedly creep into insurance transactions. In an effort to be responsive to client needs, CPAs should fully understand what can go wrong with such complex transactions and take steps to minimize mistakes.

Neil Alexander, CFP, is founder and president of Alexander Capital Consulting, LLC, in Los Angeles. His e-mail address is nalex@alexcap.com .


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