Efficient Solutions for a Sophisticated Marketplace

Policy Blending:

When the Combination Fails

The Life Insurance Policy Audit Case Study

How a Policy Audit helped a trustee obtain client coverage to age 100 at no additional cost.

The Opportunity:

A financial advisor came to us and requested an analysis of his client’s $5 million survivor-ship life insurance policy; the client’s husband had died two years earlier. The policy was a 50/50 blend of universal life and term insurance with ever-increasing premiums and an anticipated 50% reduction in death benefit when the client reached age 77.

The Situation:

The client and her late husband owned a medical software business in Southern California; they had seven children and five grandchildren. More than 20 years earlier, they had purchased a $5 million universal life survivorship policy. The policy was intended to help meet estate-tax liquidity needs and was owned by an ILIT; their longtime CPA was trustee.

When the advisor came to KBM, the husband had been deceased for two years, but the trustee continued to pay annual premiums of $50,758, although there was now only one insured.

In addition, the term rider on the policy was scheduled to drop off at age 77, halving the death benefit and creating a projected $2.5 million shortfall in proceeds needed to cover the estimated $5 million in estate taxes. The term policy premiums were also increasing as the client got older.

The Solution:

The financial advisor faced three challenges: maintaining the full $5 million death benefit, extinguishing the term coverage and avoiding substantial premium increases. We delivered recommendations to the financial advisor that:

  1.    Allowed the client to obtain a $5 million policy with a secondary no-lapse guarantee provision, which was funded in whole by a section 1035 transfer of surrender value from the existing policy.
  2.    Reduced policy charges with a single life contract.
  3.    Reduced the internal cost of insurance with a more efficient contract through an insurer with greater financial strength and claims-paying ability.
  4.    Guaranteed the full $5 million to age 100 with no additional premiums.

The client, now 65, was still in excellent health, worked part-time and played tennis four times per week, thus she qualified for a preferred underwriting class. Replacing the term insurance was an integral component of this case, and although term blending can be an appropriate strategy for a client, it needs to be done right and with an end goal in mind.

Typically, term blending is done with a whole life policy and an inclusion of an additional paid-up additions rider (small paid-up policies purchased each year that are added to the base policy). Annual dividends are used to purchase these and serve to gradually replace the term portion of the insurance.

These facts saw the use of a term rider on a universal life policy, with no plausible strategy to replace the $2.5 million of term insurance with a permanent policy. The rider was added to this policy at the time of sale to reduce the premium in a game of “beat the illustration” competition amongst several agents.

The Result:

The client’s long-term objectives were met without any additional cash outlay. Our process enhanced the credibility of both advisor and trustee by providing a superior, value-added strategy that fulfilled the best interests of the client as well as their respective fiduciary duties.


We’re in the midst of an uncertain tax environment, faced with low interest rates and a volatile stock market. These economic conditions have prompted most financial professionals to review their clients’ existing investment portfolios, retirement plans, and mortgages, but not their life insurance policies.