Carl Schuster was 47, married, and raising two teenagers in Topeka, Kansas. He owned a chain of electronics stores and had the kind of life where the calendar fills itself: payroll, inventory, staffing, vendor terms, and the everyday pressure of staying competitive. At home, the financial stakes were rising because college was coming in three and four years. Carl did not feel reckless, he felt responsible, and one of the ways he had tried to protect his family was by buying permanent life insurance years earlier. He wanted a reliable death benefit for his spouse, and he was told the policies were structured to be "paid up" at age 65 so the coverage could stay strong without becoming a burden later. The reason that kind of planning matters is simple: serious illness and premature death are not rare events in the real world, and global public health data shows how large the risk footprint is for people well under retirement age. (World Health Organization)
Back around 2000, Carl purchased three permanent policies: a participating whole life (WL) policy, an indexed universal life (IUL) policy, and a variable universal life (VUL) policy. The plan was straightforward. If Carl died unexpectedly, his spouse would have the death benefit needed to keep the household stable, protect the kids, and keep college from becoming a crisis. Carl also believed the policies were designed to become self-sustaining over time, which is a common expectation with cash value life insurance designs. He paid premiums, filed statements away, and moved on, because nothing about day-to-day life pushed him to question the assumptions. That "set it and forget it" mindset is exactly where permanent life insurance can quietly drift off track, especially when the policy includes non-guaranteed elements that can change over time. (NAIC)
The turning point came from a casual conversation. After a local chamber event, Carl mentioned to a friend that he had his life insurance handled and had owned the policies for years. His friend asked a question Carl had never been asked before: "Have you ever done a policy review, like an in-force illustration review?" Carl admitted he had not. His friend then mentioned a very professional life insurance advisor he trusted, someone who routinely performed policy reviews with all of his clients, not as a sales tactic but as routine stewardship. That advisor was James Conrad, CLU, ChFC, and Carl learned that James had completed years of training through The American College of Financial Services in the CLU and ChFC programs. (The American College)
When Carl met James, the meeting did not feel like a pitch. James started by clarifying the purpose of coverage and the timeline, then explained the mechanics of how life insurance performance is monitored in the real world. He told Carl that the core document for evaluating an existing permanent policy is the in-force illustration, a carrier-generated projection based on current policy values, current charges, and current crediting assumptions. Regulators treat illustrations seriously because they can include non-guaranteed elements, and the NAIC model regulation framework defines what an in-force illustration is and how non-guaranteed elements must be handled and presented. Kansas also has adopted regulation around life insurance illustrations, reinforcing how central proper illustrations are to consumer understanding. (NAIC)
Carl was surprised by something James said next, because it explained why nobody had warned him. Carl's CPA knew he had life insurance. His wealth advisor knew, too. Neither had raised alarms, but not because they were careless. Like many professionals, they were focused on their tasks at hand: taxes, investments, retirement projections, and business planning. They assumed Carl's life insurance specialist was watching the policies. The problem was that Carl did not really have an insurance specialist anymore. The original advisor who sold the coverage had passed away several years earlier, and Carl had lost touch before that. No fault, no drama, just life. In the absence of an active relationship, the policies simply ran on autopilot, and autopilot is risky when cash value life insurance is driven partly by non-guaranteed elements and evolving policy charges. (NAIC)
When the in-force illustrations arrived, James built a side-by-side policy review. The first issue appeared in the participating whole life policy. Carl had bought the policy in an era when interest rates were much higher, and early illustrations in that period often looked stronger than what later decades deliver. James explained that whole life dividends are not guaranteed, and dividend outcomes can shift based on investment performance, expenses, and claims experience. Major carriers describe dividends as non-guaranteed and declared annually, and mutual company educational materials routinely emphasize that dividends are not promised. Carl had not done anything wrong; he had simply never revisited whether the dividend scale supporting the "paid up at 65" story was still realistic. (gateway.pennmutual.com)
The second issue was the indexed universal life policy. Carl remembered the policy being sold with an 11 percent cap, and he believed that cap was the engine that would carry the accumulation and keep the policy healthy. The in-force data showed the carrier had reduced the cap from 11 percent to 5 percent. James explained that in many IUL designs, caps and participation rates are periodically adjustable, and those adjustable elements can materially change long-term performance, even if the index performs well. Carrier and distributor educational materials commonly explain how caps and participation rates are determined and why they may be adjusted. The key point for Carl was not the theory, it was the math: the policy was no longer on the path he thought it was on. (ASA Group)
The third issue was the variable universal life policy. Carl understood that VUL includes market exposure through underlying investment options, but he had not internalized how mortality charges and other policy charges can rise and quietly drain cash value over time. James walked him through how variable life is regulated as a securities-linked insurance product with required disclosures and prospectus delivery frameworks designed to help investors understand fees, risks, and contract mechanics. Carl did not need a lecture on regulation, but the point landed: the policy costs had increased, the cash value was being pressured, and the policy's sustainability was deteriorating. (Investor.gov)
Then James delivered the conclusion Carl did not expect to hear about three "permanent" policies: none of them were going to perform as Carl expected, and if nothing changed, the combined death benefit trajectory suggested the coverage could run out in about five years. The "paid up at 65" expectation was not just off, it was upside down. To keep the policies in force at the originally intended death benefit level, Carl would likely need to roughly triple premiums. That was the moment Carl realized the danger of lapse risk in cash value life insurance, especially universal life chassis policies where keeping the policy in force depends on ongoing funding relative to policy charges. Even state consumer materials emphasize that universal life requires sufficient premium to keep coverage in force and that insurers furnish ongoing reporting so policyowners can track values and policy status. (NAIC)
Carl asked the obvious question: how did nobody catch this? James answered with empathy and precision. A CPA can be excellent at tax compliance and tax planning without auditing life insurance performance unless it is explicitly part of the engagement. A wealth advisor can be excellent at portfolio management without pulling in-force illustrations unless it is part of the planning process. Even professional accounting bodies teach how to evaluate life insurance illustrations, but that education still has to be applied intentionally. James also noted that professional journals and practitioner communities consistently treat insurance due diligence as a specialized competency area that must be actively owned, not assumed. Carl finally understood the missing link: everyone assumed someone else was watching the policies, and the one person who used to do that, his original life insurance advisor, was gone. (AICPA & CIMA)
Once the problem was clear, the conversation became solutions-focused. James did not frame it as "replace everything." He framed it as: preserve the purpose, reduce the risk, and make the outcome reliable. For Carl, the purpose was protection for his spouse and family, not chasing maximum upside. That pointed toward consolidating the remaining cash values and repositioning into a new permanent policy designed around a guaranteed death benefit to age 100. If the family needed certainty, it made sense to reduce reliance on non-guaranteed dividends, adjustable caps, and escalating cost structures. That is also why modern illustration regulation emphasizes disciplined treatment of non-guaranteed elements and why actuaries have standards around how non-guaranteed elements are illustrated and managed. (NAIC)
They also discussed doing the move correctly from a tax standpoint. James explained that when a replacement is appropriate and eligibility requirements are met, a Section 1035 exchange under the Internal Revenue Code can allow a tax-deferred exchange of one life insurance contract for another, assuming the transaction is structured as a qualifying exchange rather than a taxable distribution. The IRS has issued guidance and procedures around how exchanges are treated, and the law itself is published as part of the Internal Revenue Code. Carl did not need to memorize code sections, but he did need a process that respected tax rules and avoided accidental taxable events. (U.S. Code)
The final twist was the part Carl could not fully appreciate until James said it plainly: Carl was lucky to be catching this while he was still insurable. If he had waited until the last minute, or if his health had shifted, the options could have narrowed quickly. Because they acted in time, Carl had the ability to restore the original intent of the planning: a dependable death benefit for his spouse, sustainable premiums, and a structure designed to hold up through changing markets and changing carrier assumptions. The lesson Carl took away was simple. Permanent life insurance is not always "buy it once and ignore it." If you want it to behave like a reliable asset, you have to manage it like one, and policy review is the maintenance that keeps the plan from quietly turning into a future emergency. (NAIC)
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Definition: Life Insurance Policy Review
A life insurance policy review is a structured evaluation of an in-force policy to confirm that premiums, cash value, and the death benefit are still aligned with the original goal and the policy's real-world performance. The review typically begins by clarifying the purpose of coverage and the time horizon, then gathering current policy data and requesting an in-force illustration from the carrier. The NAIC illustration framework defines an in-force illustration as an illustration furnished after a policy has been in force for a period of time, and it also defines non-guaranteed elements as premiums, benefits, values, credits, or charges that are not guaranteed or not determined at issue. Those non-guaranteed elements matter because they can change over time, and when they change, the policy trajectory can change with them. (NAIC)
In a policy review, the advisor stress-tests outcomes under realistic assumptions. For whole life, the review looks at dividend performance and how dividends are being used (such as paid-up additions or premium offset), recognizing that dividends are commonly described by carriers as non-guaranteed and declared annually. For indexed universal life, the review examines crediting mechanics, including caps and participation rates, which are often adjustable. For variable universal life, the review focuses on policy charges and the prospectus-driven fee disclosures that can materially affect cash value and lapse risk. The outcome of the review is a clear recommendation: keep the policy as-is, adjust funding or policy options, reduce risk, or consider a replacement strategy such as a Section 1035 exchange when appropriate under IRS rules. (gateway.pennmutual.com)
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Keywords
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FAQs
1) What is an in-force illustration, and why does it matter?
An in-force illustration is a carrier-provided projection showing how an existing policy is expected to perform going forward based on its current values, current charges, and current crediting assumptions. Regulators treat illustrations as a consumer-protection topic because they often include non-guaranteed elements that can change, and those changes can alter whether a policy stays in force or drifts toward lapse. (NAIC)
2) Are whole life dividends guaranteed?
Many carriers describe whole life dividends as non-guaranteed and declared annually, meaning future dividends can be higher or lower than what older illustrations showed. Dividends can be influenced by investment performance, expenses, and claims experience, so a policy designed to be "paid up" using dividends should be reviewed periodically to confirm it is still on track. (gateway.pennmutual.com)
3) Can an IUL carrier change the cap rate?
In many indexed universal life designs, caps and participation rates are among the elements that may be adjusted periodically based on product economics and hedging costs, subject to the contract's guaranteed minimums. Because those adjustable elements can change long-term performance, policy review should include verifying current caps and participation rates, not relying on the original illustration.
4) Why do VUL policies sometimes deteriorate even when markets do fine?
Variable universal life includes insurance charges and other fees that can pressure cash value over time, and the product is built with securities-related disclosures so consumers can understand risks, fees, and contract mechanics. If charges rise or funding falls behind, the policy can drift toward lapse even without a market crash, which is why ongoing monitoring matters. (Investor.gov)
5) What does a Section 1035 exchange do?
Section 1035 of the Internal Revenue Code provides a framework for certain tax-deferred exchanges of insurance policies, including exchanging one life insurance contract for another, when the transaction is structured to qualify. Because execution details matter, it should be handled carefully to avoid accidental taxable distributions. (U.S. Code)
6) How often should policies be reviewed?
A practical rule is to review whenever there is a major life change, and also periodically as part of ongoing financial planning. The reason is that non-guaranteed elements and policy charges can evolve over time, and regulators define and control how those elements are illustrated precisely because they can change and affect outcomes. (NAIC)
7) Why did Carl's CPA and wealth advisor not catch it?
Many professionals can be excellent in their domains without routinely auditing life insurance performance unless it is explicitly part of the engagement. The accounting profession publishes guidance on reviewing life insurance illustrations, and the financial planning community discusses life insurance advice standards, but someone still has to own the task of pulling in-force illustrations and evaluating performance against goals. (AICPA & CIMA)
8) What makes CLU and ChFC training relevant to policy review work?
The CLU and ChFC are professional designations associated with advanced education in insurance and financial planning topics, and The American College of Financial Services describes these programs as part of its professional designation offerings. In practice, the value to a client is the advisor's ability to apply structured analysis, request the right documents, and translate policy mechanics into clear decisions. (The American College)