In a recent blog discussion, we mentioned the danger that old policies assumed to be “permanent” are on course to “lapse” (i.e., terminate) before the deaths of those they insure. Wasted premiums are not the only disastrous consequence. For policies with loans, usually because premium payments stopped, the borrowed cash value and unpaid interest that exceeds premiums paid is all taxable income – and at ordinary income tax rates. With loans well over a million dollars, such as with two of our recent clients, this poses a real dilemma.

If there is a danger that a policy with a loan will implode before the insured dies, steps need to be taken to avoid or at least minimize that risk. Agents often assume a willingness on the part of clients to pay off these loans. Even when loans ballooned, they did not suggest ways to reduce them or at least to prevent them from growing.

This common problem is only the most compelling reason for a periodic review of existing policies. Do you know how your policies are doing or, if you are a professional advisor, those of your clients? It may be time to find out.

The recent adoption of sweeping life insurance commission disclosure rules by the New York State Insurance Department has agents up in arms, not only in New York but across the country.

Often the trend-setter in the adoption of regulations designed to protect consumers, the New York Department’s new regulation is already drawing fire from the various trade associations representing life insurance agents.

Regulation 194, as it is known, requires agents to disclose that their compensation from the sale of a policy can vary depending on a number of factors and to inform the consumer that information about compensation is available both about the product being purchased and others that were considered during the sales process.

In a provision with certain big-time agents in mind, it also requires the disclosure of any material ownership interest that the agent has in the insurer issuing the policy.

This is a real break-through for consumers of life insurance. Both the adoption of the regulation and the vehement opposition and likely litigation coming from agent groups – and probably also life companies – will draw lots of attention.

All of it will help to alert consumers to the fact that there are unbiased sources of advice about life insurance and frequent opportunities to substantially reduce or even avoid commissions and thereby lower premiums or buy more protection and cash value for the same premium.

This may be the dawn of a new day for life insurance consumers. One can not only hope, but now perhaps believe it is so.

A Wall Street Journal article last Saturday discussed the “new lease” on “long derided” whole life insurance due to what can be competitive risk-adjusted returns on certain policies.

Space limitations prevented the insightful author, Leslie Scism, from discussing in detail how the cash value and death benefits from some of the best policies can be significantly enhanced by structuring them to minimize sales commissions. She was kind enough, though, to cite figures I gave her noting how, in one example, with the typical agent-sold policy, the cash value would not equal the premium outlay until year 12; whereas, by designing the same policy with minimized commissions, the cash value almost equals cumulative premiums by the third year.

These cash value differences in the first and early policy years are magnified over time and substantially increase both cash values and death benefits in the efficiently designed, commission-minimized policy.

The article did not mention a key point – that the consumer will not hear about low or no commission alternatives from agents, and inquiries about such possibilities will be met with a range of reasons why it’s not possible or desirable to pursue them.

The Journal article is at least part of a slow trend among more conscientious and independent journalists covering personal finance to let out some of the most closely guarded secrets within the life insurance industry. That development is certainly long overdue.

The unforeseen financial shock of the last year has forced many individuals to curtail their spending dramatically, including spending on investments. Those hit most severely by the economic downtown who own cash value life insurance have often found they can no longer afford the premiums. In a large percentage of these cases, they feel the need to drop these policies and switch to term insurance if they continue their insurance at all.

The typical commission structure of permanent insurance causes a substantial, and often total, loss when this happens. The commissions are heavily “front-loaded,” leaving little or nothing to show in the investment component (cash surrender value) of the policy in the first year in exchange for the premium paid. Because of this commission structure, even decent cash value policies generally won’t show the surrender value exceeding the premium outlay for ten years or more.

Avoiding or minimizing commissions – an option insurance agents don’t mention – not only enhances the immediate and long-term value of permanent life insurance but guards against the drastic investment consequences of a policy lapse in the early years of a policy.

The possible future need to change course with a policy is a compelling reason to choose one that maximizes the amount of cash building up immediately within a policy. Even those who think they are only interested in a policy’s death benefit may not anticipate the circumstances (e.g., financial hardship, divorce) that will force them to drop or change a policy during their lives. I have seen these things happen to clients often enough to counsel them to think long and hard about the need to build in future flexibility when selecting a policy. Minimizing or avoiding sales commissions quickly boosts the savings value of a policy. Policy holders can then deal with unforeseen circumstances, such as those of this past year, without incurring an additional heavy investment loss when a policy is surrendered or modified.