Applying Prject Management Principles t Life Insurance Kenneth W. Gdfrey, CLU, ChFC, CFP President & CEO Life Insurance Financial Evaluatins, LLC Octber, 2012
Applying Prject Management Principles t Life Insurance Cpyright 2012 Life Insurance Financial Evaluatins, LLC All rights reserved. N part f this publicatin may be reprduced, stred in a retrieval system, r transmitted, in any frm r by any means, electrnic, mechanical, phtcpying, recrding, r therwise, withut the prir permissin f the cpyright wners. Published by Life Insurance Financial Evaluatins, LLC Octber 2012 Any cmments relating t the material cntained in this dcument may be submitted t: r by email t: Life Insurance Financial Evaluatins, LLC 5113 3 rd Street Nrth Arlingtn, VA 22203 Ken.Gdfrey@LIFEInsReviews.cm www.lifeinsreviews.cm E v a l u a t i n s, LLC 2
Applying Prject Management Principles t Life Insurance Table f Cntents Executive Summary 4 Intrductin t Prject Management 5 Expected Benefits and Outcmes 6 Critical Success Factrs 6 Issues, Risks, and Mitigatin Strategies 7 Creating a Plan/Rles and Respnsibilities 8 Lessns Learned 9 Summary 9 Abut the Authr 10 Abut Life Insurance Financial Evaluatins, LLC 10 www.lifeinsreviews.cm E v a l u a t i n s, LLC 3
Applying Prject Management Principles t Life Insurance Executive Summary Life insurance is ne f the mst imprtant assets available tday t manage risks and create wealth. Hwever, it is ften ne f the mst cmplicated, misrepresented, and misunderstd assets. As a result, many insurance plicies are nt prperly managed and the expected benefits and utcmes are ften nt achieved. The next generatin f life insurance plicy design, service, and prduct administratin shuld incrprate Prject Management disciplines and best practices t mre effectively and efficiently manage life insurance plicies t achieve desired financial utcmes and attractive return n investment cntributins (i.e. premiums paid). www.lifeinsreviews.cm E v a l u a t i n s, LLC 4
Applying Prject Management Principles t Life Insurance Intrductin t Prject Management Prject Management best practices include: 1) cnducting baseline and pst implementatin measurements f the benefits and utcmes f the prject; 2) identifying critical success factrs; 3) identifying ptential issues, risks, and mitigatin strategies; 4) creating a plan and assigning rles and respnsibilities t the varius parties invlved; and 5) capturing and disseminating lessns learned. The next generatin f life insurance plicy design, service, and prduct administratin shuld incrprate Prject Management disciplines and best practices. Unfrtunately, this is currently a missed pprtunity in the life insurance industry since Prject Management tenets are rarely applied t designing and managing these prducts and financial plans. Crpratins ften emply Prject Managers wh are well versed in the disciplines f Prject Management best practices fr prjects invlving significant expenditures and multiple stakehlders and vendrs (such as fr purchasing and implementing new IT sftware systems). Withut the guidance f Prject Managers, crprate prjects are at risk f failing t achieve the desired results. Prject Management best practices include: 1) cnducting baseline and pst implementatin measurements f the benefits and utcmes f the prject; 2) identifying critical success factrs; 3) identifying ptential issues, risks, and mitigatin strategies; 4) creating a plan and assigning rles and respnsibilities t the varius parties invlved; and 5) capturing and disseminating lessns learned. The life insurance industry wuld be wise t brrw these same Prject Management tenets t ensure that life insurance plans result in similar successful financial utcmes and return n investments. Just as many large scale crprate prjects need the guidance f a Prject Manager t succeed; many permanent life insurance financial plans are cmplex and can als benefit frm n-ging management services. Withut it, the insurance plan risks failing t achieve the expected benefits. This is witnessed by the alarming rate f plicy lapses and plicy replacements currently prevalent within the industry. Purchasing permanent life insurance ften invlves significant expenditures, since premiums paid ver the life f the plan can becme substantial. Fr high net wrth families, crpratins, and banks, the insurance plan may include numerus plicies and the ttal premiums paid ver the life f the plan can easily reach hundreds f thusands, if nt, millins r billins f dllars. In additin, these plans may include multiple stakehlders and vendrs, such as the plicywner, insured, insurance cmpany, trustee, trust grantr, insurance agent, lender, and ther trusted advisers (i.e., attrney, accuntant, insurance cnsultant). By applying the principles and best practices f Prject Management t the design and management f life insurance plicies, the plicywner can significantly increase the likelihd f financial success by ensuring the plicy is prjected t prvide the desired benefits and utcmes. www.lifeinsreviews.cm E v a l u a t i n s, LLC 5
Applying Prject Management Principles t Life Insurance Expected Benefits and Outcmes Sme f the expected benefits frm buying permanent life insurance include: 1) the expected death benefit t be paid at mrtality, and 2) the ptential living benefits f accessing the cash values within the plicy. Evaluating and measuring the expected benefits and utcmes is an imprtant cmpnent f Prject Management. Individuals and cmpanies purchase permanent life insurance fr a variety f different reasns; hwever, what is similar t all purchases is the expectatin f a lucrative financial benefit and a psitive return n investment. Sme f the expected benefits frm buying permanent life insurance include: 1) the expected death benefit t be paid at mrtality, and 2) the ptential living benefits f accessing the cash values within the plicy. A Prject Manager specializing in life insurance can identify the expected benefits and utcmes, ensure that perfrmance is cntinually measured, and thereby verify that the expected benefits are within acceptable ranges (i.e., attractive rates f return at mrtality). Permanent life insurance plicies are designed using cmputerized illustratin prgrams. The hypthetical prjectin f premiums, cash values, and death benefits included in the As Sld life insurance illustratin is cnsidered the baseline measurement f the expected benefits and utcmes. Life insurance illustratins are based n assumptins f future perfrmance and actual results are dependent upn a number f factrs such as assumed plicy interest r dividend crediting rates. Therefre, actual results will likely differ frm the as sld illustratin, vary ver time, and need t be cntinually measured. Active mnitring f plicy perfrmance is critical t future success, just as mnitring a prject is imprtant t reach the prject gal. Tw f the mst imprtant critical success factrs include: 1) cnservatively designing a plicy with premium levels that the plicywner can cmmit t fr the life f the plicy and 2) cnducting peridic plicy reviews. An Infrce illustratin is a re-prjectin f the insurance plicy values based n actual results t date and future assumptins. Infrce illustratins are ften a majr cmpnent f a peridic life insurance plicy review. Once purchased, an Infrce illustratin can be analyzed t measure the variatin f actual plan perfrmance t riginal expectatins. Infrce illustratins highlight whether r nt the plicy is still n curse t meet the desired results, and can assist with determining the necessary mdificatins required fr the plan t achieve the financial gal. Critical Success Factrs Identifying critical success factrs is anther cmpnent in Prject Management that can be applied t life insurance. There are several critical factrs necessary fr a successful life insurance plan. Tw f the mst imprtant critical success factrs include: 1) cnservatively designing a plicy with premium levels that the plicywner can cmmit t fr the life f the plicy and 2) cnducting peridic plicy reviews. Mst life insurance plicies are lng term cmmitments, since death may nt ccur fr many years. Plicies such as whle life insurance require premiums t be paid every year. Universal life insurance plicies ffer flexible premiums, althugh there is still an inherent level f necessary www.lifeinsreviews.cm E v a l u a t i n s, LLC 6
Applying Prject Management Principles t Life Insurance premiums t achieve the desired results. Fr bth whle and universal types f plicies, the plicywner shuld purchase an amunt f insurance cverage that they can affrd and can cmmit t paying the scheduled premiums ver the life f the plicy, even during tugh ecnmic times. When a trust is utilized, anther critical success factr is chsing a cmpetent trustee wh understands bth life insurance prducts and the fiduciary respnsibilities f serving as a trustee. The initial plicy design and inherent assumptins are critical t lng term success. By chsing cnservative financial assumptins in the plicy design, the plicy has a greater chance f meeting r exceeding the expectatins. Hwever, if aggressive financial assumptins are used, the plicy may require significant mdificatins in the future t achieve the desired results r it may be set up fr failure. Cnducting peridic plicy reviews is als a critical success factr t achieving the desired benefits and allw fr cntinuus imprvement t the plicy and plan. Plicy reviews permit the plicywner t examine hw the plicy is perfrming and identify the necessary plicy mdificatins. If a plicy review is nt cnducted, the plicywner will nt knw the current status f the investment, will be blind t pssible pitfalls f perfrmance, and wn t pssess the knwledge t enact mdificatins t bring the plicy back n track. Withut plicy reviews and withut the resulting mdificatins, the plicy is at substantial risk t significantly steer ff curse and ptentially lapse, which may create unwanted r unfreseen tax cnsequences. When a trust is utilized, anther critical success factr is chsing a cmpetent trustee wh understands bth life insurance prducts and the fiduciary respnsibilities f serving as a trustee. The trustee has an bligatin t manage the trust assets (i.e., insurance plicies) fr the benefit f the trust beneficiaries. If nt managed crrectly, the plicy may nt prvide the expected benefits t the trust and the trustee may becme liable. Issues, Risks, and Mitigatin Strategies Anther imprtant aspect f applying Prject Management best practices t life insurance is identifying issues, risks, and ptential mitigatin strategies. There are a number f issues and risks that may impact the verall success f a life insurance plan. Such issues and risks may include: The insurance cmpany becmes inslvent The insurance agent exits the business and the plicy becmes an rphan The plicy des nt perfrm as expected and lapses prir t mrtality, ptentially creating unwanted tax cnsequences Premiums paid int the plicy are less than riginally anticipated Premiums are paid late, impacting the plicy guaranteed values www.lifeinsreviews.cm E v a l u a t i n s, LLC 7
Applying Prject Management Principles t Life Insurance Interest r dividend rates received are less than riginally anticipated Plicy charges are higher than expected Plicy lans are utilized and may grw t substantial amunts ver time The designated trustee des nt have the necessary knwledge and abilities t apprpriately manage the life insurance plicy Mst industry practitiners suggest reviewing the plicy at least every tw t three years, r upn significant life changes such as marriage, new children, divrce, etc. Fr variable life insurance, plicy reviews shuld be cnducted mre frequently, since plicy perfrmance can be significantly impacted by swings in the equity markets. Frtunately, there are als a number f mitigatin strategies fr these issues and risks. These may include: Using cnservative assumptins in the riginal design f the plicy Cnducting peridic plicy reviews and making the necessary plicy mdificatins Paying additinal premiums r reducing the death benefits Fr whle life plicies, taking the plicy reduced paid up Fr universal life plicies, switching the death benefit ptin (i.e. level r increasing) Switching between fix and variable lan rates (if available) Exercising an Overlan Prtectin Rider (if available) Cnducting a plicy replacement r Sectin 1035 exchange The trustee delegating insurance management respnsibilities t a qualified, independent life insurance cnsultant r administratr As discussed earlier, using cnservative assumptins and cnducting peridic life insurance plicy reviews are critical success factrs. T effectively identify many f these mitigatin strategies, it is imprtant t cnduct these peridic life insurance plicy reviews. Mst industry practitiners suggest reviewing the plicy at least every tw t three years, r upn significant life changes such as marriage, new children, divrce, etc. Fr variable life insurance, plicy reviews shuld be cnducted mre frequently, since plicy perfrmance can be significantly impacted by swings in the equity markets. Creating a Plan/Rles and Respnsibilities Creating and dcumenting a plan with assigned rles and respnsibilities is als an imprtant part f Prject Management. When making a life insurance purchase, it is imprtant t set the prper expectatins upfrnt fr www.lifeinsreviews.cm E v a l u a t i n s, LLC 8
Applying Prject Management Principles t Life Insurance the nging management f the plan. This includes determining apprpriate timelines and assigning rles and respnsibilities t the varius parties invlved. This is ften dne by creating a Prject Schedule and a Rles and Respnsibilities Matrix. These items identify the varius nging respnsibilities fr each party and are used t avid cnfusin in the future. Fr instance, these items help t ensure that critical success factrs, such as cnducting peridic plicy reviews, are perfrmed and designating wh is respnsible fr crdinating these effrts. A Prject Manager specializing in life insurance can assist with creating prject schedules, assigning rles, and managing the nging requirements necessary fr achieving the desired benefits and utcmes f the life insurance. Lessns Learned Particularly fr life insurance plans, it is always better t learn abut bth psitive lessns and mistakes made by thers rather than learning first hand. Capturing and disseminating lessns learned is als an imprtant best practice within Prject Management. Particularly fr life insurance plans, it is always better t learn abut bth psitive lessns and errrs made by thers rather than by learning first hand. Therefre, it is imprtant t wrk with experienced Prject Managers, agents, and life insurance cnsultants wh are knwledgeable abut the intricacies f life insurance and wh are fcused n these areas befre they becme prblematic. In the life insurance market, it is with alarming frequency that prblems with plicy perfrmance are nt identified until they becme t cst prhibitive t make necessary adjustments, and therefre, t late. The keys t financial success include knwing the prjected perfrmance f the life insurance plicy, understanding the ptential ptins t make any necessary mdificatins, and practively making these adjustments. Summary Life insurance is a very imprtant financial asset used t manage risks and create wealth. Plans ften invlve substantial financial cmmitments in the frm f premium payments ver the life f the plicy. Many purchasers f life insurance d nt realize the expected benefits and utcmes because either the initial design was flawed r nging management respnsibilities were nt prperly set. By applying the principles and best practices f Prject Management, plicywners can significantly increase the likelihd f a successful and lucrative life insurance plan. www.lifeinsreviews.cm E v a l u a t i n s, LLC 9
Applying Prject Management Principles t Life Insurance Abut the Authr Prir t establishing Life Insurance Financial Evaluatins, LLC in 2010, Kenneth W. Gdfrey (Ken) spent ver thirteen years in the life insurance industry, fcused n the specialty areas f executive cmpensatin/benefits and wealth transfer/estate planning. Thrughut his career, Ken has managed teams f financial analysts respnsible fr benefit plan prjectins and the advanced case design, implementatin, and service f individually wned, trusted wned life insurance (TOLI), crprate wned life insurance (COLI), bank wned life insurance (BOLI), and split dllar life insurance plans. Ken has a keen understanding f life insurance prducts, their use and design in cmplex financial plans, and strng Excel and PwerPint skills t summarize and present results in an understandable fashin. Ken's prfessinal designatins and certificatins include Chartered Life Underwriter (CLU ) and Chartered Financial Cnsultant (ChFC ) frm The American Cllege and the CERTIFIED FINANCIAL PLANNER TM certificatin frm the CFP Bard f Standards. He graduated frm Nrth Carlina State University in 1996 with a B.A. in Business Management and a Minr in Statistics. Ken recently published his first bk, Navigating the Cmplex Wrld f Life Insurance, in May 2012. Abut Life Insurance Financial Evaluatins, LLC Life Insurance Financial Evaluatins, LLC (LIFE, LLC) is a specialty insurance cnsulting cmpany fcused n assisting crpratins, banks, high net wrth families, and trustees maximize the value f their life insurance plans. Life Insurance Financial Evaluatins, LLC is 100% independent. Our services are fee-nly ; therefre we d nt sell r receive cmmissins n any insurance r ther financial prducts. By incrprating Prject Management disciplines and best practices, Life Insurance Financial Evaluatins, LLC helps life insurance cnsumers evaluate, establish, and manage the value, expectatins, and nging respnsibilities fr administering insurance prducts. Depending n the scpe f the engagement and bjectives f the custmer, LIFE, LLC cnsultants may serve as a Prject Manager, Life Insurance Cnsultant, r bth. We have significant experience and expertise reviewing and managing life insurance plans such as Split Dllar, COLI, BOLI, Private Placement, Premium Financing, and ther estate r crprate uses f life insurance prducts. LIFE, LLC cnsultants may be engaged at any pint during the design r administratin f a life insurance plan. Cnsulting engagements may be fr bth shrt and lng term prjects. Further infrmatin n Life Insurance Financial Evaluatins, LLC can be fund at www.lifeinsreviews.cm. www.lifeinsreviews.cm E v a l u a t i n s, LLC 10