Year-end tax planning usually pays off in future savings, and that may be especially true now that taxes are widely expected to head north in the future. When clients are sitting across the desk, financial planners might find that this is a good time for a comprehensive insurance review. Life insurance policies may be underfunded, health insurance probably is in for dramatic changes, homeowners insurance premiums continue to mount and some clients will be looking for ways to trim their insurance budget safely.

"December is a great time for people to review their insurance coverage," says Alan Gotthardt, president of Brightworth, a wealth management firm in Atlanta. "Many people have a chance to slow down in December, so they can take a little time for personal life logistics. We pull out all the documents showing property and casualty coverage, find in-force ledgers for life policies, etc."

Of course insurance checkups needn't be limited to year-end. "Whenever we go through the financial planning process with new clients, we review all their insurance coverage," says Bryan Wisda, a senior financial planner with Summit Wealth Management in Scottsdale, Ariz. "Also, we periodically review insurance with existing clients when we update their financial plans. We try to determine if their insurance is adequate; sometimes we find too much coverage, but it's more common for clients to have too little insurance."

Financial planners are not likely to be insurance experts, so a comprehensive evaluation might require some assistance. "For new clients we do a pretty thorough review, often with a third-party insurance agent, to make sure there are no gaping holes," Gotthardt says. For example, he'll check whether a homeowner's policy or rider properly covers jewelry, antiques, art and so on.

BALANCING ACT

Finding insurance gaps might not be difficult; most clients will have some risks that are not fully covered. But a client who has bulletproof life, health, disability, home, auto and long-term-care insurance may also have a bank balance that's bleeding from steep premium payments.

"The most difficult part of the process can be finding the balance between coverage and affordability," says Melissa Hammel, who heads a financial advisory firm in Brentwood, Tenn. "If a client has a tremendous income, he or she can afford all the insurance that's needed and still pay for college and build a retirement fund. For many clients, though, paying for all the insurance they need can be prohibitive."

To help clients strike the right balance, Hammel's firm provides clients with a multi-page insurance review form that spells out current and recommended coverage for each type of insurance. "We may make recommendations and provide clients with contact information for agents we prefer," says Allison Perritt, a registered paraplanner at the firm. "In some cases, we help clients obtain quotes or set up conference calls with the insurance professional. Sometimes we'll arrange for an agent to review a client's current policy—anonymously—and suggest potential changes."

SET FOR LIFE?

Changes may be most urgent for life insurance policies. "These days it is very important for people with life insurance policies, particularly universal and variable, to get them audited to see how the past 24 months have impacted projected values," Gotthardt says. "Our sense is that many policies will implode in the coming years due to overly optimistic projections. Even ones with bond-type interest crediting may be in trouble."

Why would life insurance policies be in peril? "A lot of people bought variable life insurance in the late 1990s, when stocks were hot," says Terry Quinn, an attorney who has an insurance consulting firm in Atlanta. "Since then, the stock market has gone backward. Universal life and whole life policies have had their own problems, even if they may not be as great as those for variable life. Interest rate assumptions on old policies were higher than the rates we've seen recently."

Permanent life insurance policies typically are sold with illustrations, which are really projections of earnings on the premiums paid. If the actual investment results lag the projections, the policy will be inadequately funded. "We request an in-force ledger for any existing permanent policies," Wisda explains. "This is the best way for us to analyze the policy and determine its overall effectiveness."

The next step is to see what you have. If a policy is underfunded, you can get a schedule of what premiums the client will need to pay to catch up.

Rather than put more money into a lagging policy that's five or 10 years old, a client might be better off exchanging it for a new policy, tax-free, under Section 1035 of the Internal Revenue Code. "What's available now might be better," Quinn says. "Some carriers are offering stronger guarantees on permanent life insurance policies."