Is your permanent life insurance policy’s cash value still what you think it is?

Current market conditions can impact your life insurance, giving you a different outcome than you might have expected.

Recent volatility has impacted nearly every aspect of investment portfolios. But you may not be thinking about how it impacts your permanent life insurance policy. While a decline in your investment portfolio can be worrisome, those same investment losses in certain permanent life insurance policies can lead to issues that can affect how much you pay in premiums or how long your policy will last.

In this article, we’ll look at how market changes can impact your policy and some steps you can take to help ensure that your life insurance policy will continue to meet your needs. And even if you don’t have this kind of policy, it is good practice to conduct an annual life insurance policy review to make sure it aligns with the rest of your wealth planning strategy.

Why and how does the market impact my life insu­­rance policy?

Back when you purchased your life insurance policy, you were presented with an illustration showing how your policy’s cash value, death benefit or other benefits would grow based on certain assumptions, such as how much premium you’ll pay and an expected growth rate based on interest rates or market performance. But over time, the market conditions that drive your policy’s growth may not act as expected. Equity markets don’t always perform as anticipated, interest rates can go up or down, and volatility can cause disruption. In short, life insurance policies are predicated on assumptions, and actual performance can vary.

How do those assumptions affect a policy?

According to the Life Insurance Marketing and Research Association (LIMRA), ~75% of all life insurance policies issued in 2022 were variable, indexed or whole life policies, which are types of policies with performance that is based on underlying assumptions

Regardless of the type of life insurance policy you have, the premiums you pay and ­­­how many years the policy remains in force can be affected by these assumptions. Specifically:

• Whole life policies are based on dividends that are loosely tied to interest rates. Over the past 20 years, many life insurers have seen reductions in their dividends by 20–30%. Lower dividends can impact how long you have to pay premiums, how much cash value will accrue, and potentially how large your death benefit will be.
• Indexed universal life policies are based on index returns that include both a cap (limiting your upside potential) and a floor (limiting your downside risk). These assumptions are predicated on options’ pricing and stock market index returns. Lower interest rates typically reduce the carriers options budget (how the cap and floor are determined), which can result in lower cap rates, which further limit your growth potential. In addition, market volatility has caused some investments to underperform, resulting in lower cash values.
• Variable universal life policies are based on stock market returns, which can be volatile. Because variable universal life policy illustrations assume static returns, they do not account for volatility. This means the illustration you saw initially may not line up with stock market reality.

How different might reality be than the assumptions used in the illustration? 

John*, a 45-year-old male, received an illustration for a permanent life insurance policy with a $1,000,000 benefit, and a planned annual premium of $13,200 for the first 10 years of the contract. The illustration assumes an 8% straight-line return over the life of the product. Accordingly, the estimated cash value of the policy at certain ages is as follows:

However, we know from history that markets don’t work like clockwork. When you add variability in the return sequence, the estimated cash value will vary over time, increasing the likelihood that the cash value could be depleted over time. And here’s why that matters: When the cash value is depleted, the policy will lapse if no additional premiums, often significant, are made.

If we use the same assumptions for John’s illustration, but simply vary the return year-to-year, the impact on the estimated cash value is quite different:

The graph is based on J.P. Morgan Long-Term Capital Market Assumptions (LTCMAs) for AC World Equity as of January 2024 to most closely match the annualized compound return of 7% used in the straight-line analysis above. We overlayed the LTCMAs AC World Equity volatility assumption and simulated over 5,000 different potential market experiences to determine the likelihood of the cash value of the policy being greater than $0 over time. 

A policy review can help alleviate these types of issues

Having your J.P. Morgan team conduct a life insurance policy review can help you evaluate if your policy is performing up to expectations and if it still works in harmony with the rest of your wealth plan. For example, a policy review can:

• Help you see if aspects of your current policy may be impacted by market volatility or interest rate changes, such as cap rates and policy duration.
• Stress test your policy against various market conditions and assumptions to ensure your policy can hold up in different environments.
• Encourage you to work with your provider for recommendations to get you back on track, such as increasing your premiums to offset performance issues or exchanging your policy to prevent a shortfall of cash value and the subsequent lapse of the death benefit.
• Allow you to explore other policies in the market today, as features, benefits and costs change over time.
• Help you to see if it may be wise to exchange your policy for a different one if there is one that better meets your goals.

You don’t need market volatility to conduct a policy review

Even if you don’t have a policy with performance that is tied to the market, an annual life insurance policy review is a good practice. That’s because a policy review can help you:

• Ensure that your policy still aligns with your goals. When your goals change, your policy may need to change as well. Or sometimes the reason you bought life insurance simply doesn’t exist anymore.
• Adjust as the insurance industry evolves. As life expectancies increase, underlying costs of insurance have decreased, so there may be an opportunity for you to lower your premium. This, in conjunction with new policy types, can lead to improvements in contracts that may be more efficient for different types of planning that may not have existed when you bought your policy.
• Evaluate the health of your policy. Is your policy performing as expected? For example, if you thought you’d have a certain death benefit amount at this point in time and market declines have cut into those gains, you may need to make adjustments.
• Make changes sooner rather than later. If your policy isn’t performing as expected, you can reallocate assets or make other changes to get it back on track.
• Confirm that the policy’s ownership and named beneficiary are correct. People often purchase life insurance for estate tax purposes, but how the policy is set up can affect your taxes. So it’s wise to make sure your policy’s ownership is set up so that you don’t accidentally create a tax liability.

We can help

You’re not alone in navigating the markets and evaluating how different factors might affect your life insurance policy. Your J.P. Morgan team can conduct a life insurance policy review to help ensure your policy continues to meet your goals. In the best of circumstances, a policy review can confirm that your policy is performing as you thought it would. This means you can relax, knowing it continues to align with your goals.

* All case studies are shown for illustrative purposes only, and are hypothetical. Any name referenced is fictional, and may not be representative of other individual experiences. Information is not a guarantee of future results.

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