Respondents use products with transparent pricing and built-in flexibility, such as universal life, variable life and private placement less often. This surprises us, considering the apparent conflict between families’ stated goals and the type of coverage they own, as well as the pricing transparency lacking in certain more widely used products.

Ownership Structure
Sixty-two percent of family offices use irrevocable life insurance trusts to own insurance, and 21 percent of products are owned by an individual other than the insureds. Both strategies enable families to avoid including death benefit proceeds in an estate. However, the survey revealed that 80 percent use either a family member or family office executive as trustee, which raises liability issues.

Typically, people enter a trustee role with limited concern over and little or no strategy for active review, management or benchmarking. They are usually surprised to learn the extent of their liability if they are ever faced with a family upset by underperformance or claims that they could have received millions more in benefits by using a different product design. Nearly half reported personally owning at least a portion of their life insurance, which will result in the death benefit being included in their taxable estate, thus being taxed upon death.

Keeping Tabs
We are encouraged that 71 percent of family offices report having completed a life insurance policy review in the past 12 months. The areas most commonly examined include ongoing coverage suitability (100 percent); policy performance to date (86 percent); premium adequacy to maintain coverage in the future (83 percent); and reprojection of future performance at current pricing (82 percent).

Ninety-two percent of those doing reviews examine the guaranteed duration of the insurance coverage, yet only 6 percent reported utilizing no-lapse guarantee coverage, a form of universal life that provides guaranteed premiums and death benefits, largely at the expense of reduced or eliminated policy cash-value accumulation. Although 44 percent reported owning at least some whole life, which can provide guaranteed coverage, the survey doesn’t reveal how many of them use nonguaranteed dividends to reduce premiums or support nonguaranteed term riders. Thus, a number of respondents may believe they own a guaranteed product, but have lost those guarantees through product design changes they don’t fully understand.

One in five respondents does not continue to review the financial strength of a carrier or the impact of mergers in the insurance industry. Would one in five respondents ignore the financial position of firms in a stock portfolio when reviewing investments? Once again, it appears life insurance is treated with less diligence than other assets.