As seen in Physician's Money Digest

Life Insurance Requires Active, Ongoing Management
By Donald T. Cohen, CPA
Newman + Cohen Financial Management

After the tragic events of last September, life insurance has regained its status as one of the most important components of estate and financial plans. With all of the renewed interest, it is important to remember that life insurance requires active monitoring by the policyholder just like any other component of an investment portfolio.

For physicians in states where annuities and life insurance policies are creditor protected, investments in the right type of life insurance make a great deal of sense. However, too often the physicians and their advisors neglect to review and update the annuities and policies after they are acquired.

Many policies carry risks that require them to be evaluated as to their performance and outlook on a regular basis. Take, for example, the universal life policies written in the 1990s that did not contain guarantees as to premiums and death benefits. Now that fixed-income rates have dropped dramatically, the long-term expected cash values of these policies have fallen to the point where the policies are in jeopardy. Furthermore, carriers' increases in the costs of insurance can severely impact the performance of these policies and may cause lapses.

Universal life policyholders and their advisors should review the performance of these policies to determine the toll that today's market conditions have taken. It is often possible for individuals whose states of health have not significantly changed since purchasing their policies to switch to ones that are fully guaranteed and carry lower premiums for the same amount of death benefit.

The combination whole-life and term policies also face similar dilemmas if they are not properly managed. The whole-life portions of these policies offer guaranteed premiums and death benefits, but the term portions are not guaranteed. Insurance companies have dramatically reduced their dividend scales for the whole-life portions during the last few years, and they have not grown enough to offset the burden on the term portions. Many policyholders who have not properly managed their insurance contracts now need to add to the premiums to maintain the original death benefits.

Variable-life contracts require the most management because they can lose money due to investments in an under-performing stock market and the cost of the insurance can also increase. In today's bear market, many variable-life policies that have not been properly managed have been devastated, and policyholders have either lost their investments by letting them lapse, which may cause significant tax consequences, or have added premium to maintain them.

Physicians should rely on their trusted financial advisors for much more than the initial guidance in determining what types and amounts of life insurance make the most sense given their age and their insurance and estate-planning needs. As an important component of an investment portfolio, life insurance must be assessed and managed on an ongoing basis to ensure that it is as financially rewarding as possible.

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Donald T. Cohen is a founder and director of Newman + Cohen Financial Management (www.newman-cohen.com). He has more than 20 years of experience in certified public accounting, advanced financial strategies and business management with physicians and high-net-worth individuals. He welcomes questions or comments at (800) 966-9306 or via e-mail at donald.cohen@newman-cohen.com