Interest rates have been declining in the U.S. for the past 20 years, and while this may be great for your client's mortgage, it is not so great for their permanent life insurance policy.

When the industry unbundled whole life insurance in the early 1980s and created universal life insurance, it gave the agent and client the opportunity to design individual products. The drawback to this, however, is that life insurance illustrations assume the current interest rate will remain the same over the life of the contract.

As life insurance products are built on interest rate assumptions, the policy reserves often aren't being adequately funded in today's low-interest environment. Twenty years ago, it was reasonable to assume an 8% rate of return on a life policy. But today, those policies are getting a 3% return.

It could take three to four times the premium to fund the policy to life expectancy. And since insurance companies don't provide automatic review processes with in-force illustrations, we must help clients gauge if they're putting in sufficient premium to maintain their policy. Otherwise, we risk it lapsing before a client's life expectancy.

Ask clients with an in-force life insurance policy why they originally bought the insurance. If it still aligns with their current needs, request an in-force ledger from the insurance company to determine if the policy is in good standing. You'll get an idea of what the performance projection looks like going forward and how it will perform if the client continues to pay what they're currently paying.

If it's not sufficient, help the client determine how much they should increase premiums in today's lower interest environment. If paying more premium is not a viable option, consider reducing the death benefit to match their current premiums.

Also, conduct a similar review process every three to five years. If they need to increase their premium to adequately fund their policy, walk them through why. Show them what the numbers look like if they want to keep their policy in effect through their lifetime.

One of the worst mistakes a client can make is holding onto an inadequately funded policy for 10 or 20 years. By that point, they're vastly underfunded and have decades less compounded interest to build that shortfall. If you establish a review process with any new clients and an ongoing monitoring process with existing ones, you'll help ensure your clients' policies are adequately funded throughout their lifetime.

James D. Pittman is founder of Insurance Consulting Services Inc. and served as the 2018 MDRT president.

This article was published in the December 2020 issue of Independent Agent magazine.