Insurance Portfolio Management - Part 2

After policy performance is measured, only then can it be managed through five (5) portfolio management techniques, namely: 1) change policy funding, 2) change policy benefits, 3) change policy cash value investment allocations, 4) restructure/reduce policy costs, or 5) wait-and-see.

Management Techniques

After determining whether a policy is underfunded or overfunded, and by how much, policies can be managed through the below five (5) portfolio management alternatives:

1. Change Policy Funding – To maintain the targeted cash value required to endow the policies as permanent insurance coverage assuming the originally illustrated target average rate of return, annual funding would need to be increased for an underfunded policy. Conversely, premiums can be "refunded" from overfunded policies to the extent that current cash values exceed targeted cash value required to endow the policies as permanent insurance coverage assuming the originally illustrated target average rate of return.
2. Change Policy Benefits – For underfunded policies, policy costs can be lowered to an amount supported by planned annual premiums and current cash values assuming the originally illustrated target average rate of return by reducing aggregate policy face amounts. Conversely, death benefits can be increased in overfunded policies to the extent that current cash values can support the additional costs associated with increased death benefits (typically requires evidence of good health and insurability).
3. Change Asset Allocations – To increase growth of underfunded policy cash values necessary to support policy benefits, cash values may be re-allocated among the mutual-fund-like separate accounts to allocate more cash value to those asset classes that have produced historically higher returns, albeit with historically higher volatility, in an effort to achieve an overall net target rate of return. Conversely, cash values of an overfunded policy could be reallocated among the mutual-fund-like separate accounts to allocate more cash value to asset classes historically producing less volatility, albeit with historically lower rates of return, in an effort to achieve the originally illustrated target rate of return with greater cash value stability.
4. Restructure Policy Costs – In underfunded policies, it can be possible to reduce costs to an amount supported by current cash values assuming the originally illustrated target average rate of return through an exchange to policies offering lower cost of insurance (COI) charges, lower premium loads, lower fixed administration expenses, and/or lower cash-value-based fees (to the extent policies with lower cost structures are available). Conversely, it can also be possible to increase benefits of an overfunded policy through an exchange to a policy offering lower COI charges and/or lower Policy Expenses. However, in the event of any exchange, potential cost savings must be weighted against the costs of making such a change (e.g. premature cancellation penalties or surrender charges on the old policy and/or premium loads, State Premium Taxes, and/or Federal DAC Taxes on cash values transferred to the new policies).
5. Wait and See – Often times, current policy cash values are sufficient to support currently projected policy charges for many years into the future based on historical rates of return from the current year forward. As such, a “wait and see” approach may often be exercised over short durations in underfunded situations in anticipation of increasing interest/earnings rates as the policy may not be in any current danger of expiring for the foreseeable future. Conversely, it is also prudent to exercise a “wait and see” approach in overfunded situations over short durations to ensure that the overfunding is not a temporary fluctuation in policy values.