How to Evaluate an Insurance Policy

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 them, 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.


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 . Is 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 AA by Standard & Poor’s and Moody’s and A+ by A.M. Best.

Carrier risk profile. Check the carrier’s 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.


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 out 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 it has, change carriers.

Source: Neil Alexander, CFP, CEO of Alexander Capital Consulting, LLC, Los Angeles, .


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