A yearly review routine for a permanent policy

A permanent policy is the one financial product many families buy once and then forget for thirty years, and it is the one that most rewards a yearly look. A whole life or universal life contract changes quietly: a loan grows, a dividend scale shifts, a beneficiary dies, a premium payment method expires. None of it announces itself loudly, and by the time it does, the options are narrower. An hour a year, at the same time each year, catches nearly all of it.

This post is a routine, not a lecture. Each group below lists what to do and why it matters, in the order that makes the work quickest. The shorter, general-purpose version for all policy types is in the guide on how to review your life insurance policy every year, and the printable list is the annual life insurance policy review checklist. This version is built for permanent coverage, where loans, dividends and cash value are in play.

Pick the date and set the routine

Choose a fixed point on the calendar. The best anchor is the policy anniversary, the day each year when the policy's year turns over, because the annual statement is usually produced around it and dividends and crediting rates reset on it. If you hold several policies, put each anniversary on the calendar with a reminder two weeks ahead. The reminder is for gathering documents, which is the step that usually delays the review.

Keep a single folder, paper or digital, for each policy, and add the year's statement and any letters to it. A folder of ten statements tells a story that one statement cannot: you see the cash value climb or stall, the loan balance move, the premium change.

Decide who else can see the folder. A spouse or an executor should know where it is. A routine that only one person can run stops when that person cannot.

Group 1: request the documents

Do this two to three weeks before the anniversary.

• The annual statement. It is mailed or posted automatically, but confirm you have it. Why: it is the only document that shows the year's actual values, loan balance and dividend credited.
• A current in-force illustration, run at the current assumptions and, for flexible policies, at the guaranteed ones. Why: it projects how long the policy lasts and what it will do, and it is the only way to see a problem coming years before it arrives. See how to request and read an in-force illustration.
• A policy ledger or a values page for the next several years. Why: it shows the guaranteed cash value schedule, so you can see whether this year's value is on the contract's track.
• Any notices of change sent during the year, such as a dividend scale change, a rate change or a change in administration. Why: a notice is easy to bin as junk, and some rights, like the right to respond, have deadlines.
• Beneficiary and ownership records on file at the insurer. Ask for the current designation form. Why: the insurer pays whatever its records say, not what you remember filing.

If a request goes unanswered for more than a few weeks, write it down and follow up in writing. The record of asking can matter later if a dispute arises.

Group 2: check the values

Open the statement and the ledger side by side.

• Cash value against the guaranteed schedule. For whole life, this year's cash value should be at least the guaranteed figure for the policy year. Why: a shortfall would mean a loan, a missed premium or an error.
• Cash value change from last year. Compute it. Why: a cash value that rose by less than expected, or fell, is the earliest sign of trouble in a universal life policy. A drop in a policy you paid on schedule needs an explanation from the insurer.
• Death benefit. Confirm the figure and, if you have paid-up additions or a rising option, how it changed. Why: the death benefit is what the family counts on, and it can differ from the face amount after loans.
• Premium due and premium paid. Make sure what you paid matches the contract or the planned premium. Why: a billing error or a missed payment can start a lapse clock without a loud warning.
• Charges, for universal life. Find the monthly cost-of-insurance and expense charges and compare them with the year before. Why: rising charges are the main way these policies drift off course, a subject covered line by line in a universal life annual statement checklist: ten things to verify.

For whole life statements, an annual whole life statement read line by line reads each line.

Group 3: check the loans

Loans are where permanent policies most often go wrong, because they are easy to take and easy to ignore.

• Loan balance, including accrued interest. Why: interest on a policy loan accrues, and if you do not pay it, the insurer adds it to the loan, so the balance grows even if you borrow nothing more.
• Loan interest rate and whether it is fixed or variable. Why: a variable rate can rise, and the cost of the loan depends on it.
• Cash value minus loan. This is your net cash value. Why: when the loan plus accrued interest approaches the cash value, the policy is near lapse. If the policy lapses with a loan outstanding, the loan can become taxable income to the extent of gain, with no cash from the policy to pay the tax. See how cash value is taxed: withdrawals, loans and surrenders.
• Whether the policy has an overloan protection rider, and its conditions. Why: such a rider can keep a heavily borrowed policy from lapsing under defined conditions, but it is not universal and carries limits. Ask the insurer for its terms.

Here is the arithmetic that makes the point, with invented figures. Say an owner borrows $20,000 against a policy and pays no interest, letting it add to the loan at an illustrative 5 percent a year. After one year the loan is $21,000. After five years it is $20,000 times 1.05 to the fifth power, which is about $25,526. After ten years it is about $32,578. If the cash value over those years has grown from, say, $30,000 to $38,000, the cushion between the cash value and the loan has shrunk from $10,000 to a little over $5,000 by year 10. The loan did not change. The interest did the work. The policy loan calculator runs this with your numbers, and life insurance policy loans: how they work and what they risk explains the options for repaying.

Participating policies add a second question: whether borrowing reduces dividends. direct and non-direct recognition loans: how borrowing affects dividends explains why the answer varies by company.

Group 4: check dividends or crediting rates

What you check depends on the product.

• Whole life: the dividend credited this year, against last year and against the illustration. Why: the dividend is not guaranteed, and a trend downward is information.
• Whole life: the dividend option on file. Cash, premium offset, paid-up additions, deposit or term. Why: a default selected years ago may not match what you want now.
• Any announced change to the dividend scale, and how the in-force illustration treats it. Why: a lower scale changes whether dividends can still cover premiums or build paid-up additions on the original schedule. what to do when your whole life dividend scale is lowered covers what to do.
• Universal life: the credited rate compared with the illustrated rate, and whether the account is earning only the guaranteed minimum. Why: a policy credited at the guaranteed minimum for years is running on its floor, and the projections that assumed more no longer apply.
• Indexed or variable policies: the credits or returns and the fees. Why: in a poor year the charges still come out of the account.

Group 5: ownership and beneficiaries

This is the check that prevents the most painful surprises, because it costs nothing and mistakes cannot be fixed after a death.

• Who is the owner? Confirm it matches your intention. Why: the owner controls loans, surrender and beneficiary changes. A policy owned by a former business or a trust needs special care.
• Primary and contingent beneficiaries, with correct names and percentages. Why: a beneficiary designation generally overrides a will, and a form that names someone who has died, or a former spouse, may not do what you want. See beneficiary designation.
• Life events since the last review. Marriage, divorce, births, deaths, a child reaching adulthood, a change in the trust. Why: each event can change who should be named and in what shares. audit your beneficiaries: a worksheet for every policy and employer plan helps if you hold several policies.
• Contact details the insurer holds for you. Why: notices of change, rate changes and lapse warnings go to the address on file.
• Where the paper policy lives, and whether the family knows. Why: a policy no one can find is a claim that may not be filed.

Group 6: riders, payment method and the insurer

• Riders you pay for. Check each is still useful, for example a child term rider after the child is grown. Why: a rider that no longer serves you is a recurring cost.
• Payment method. Confirm the card or bank account has not expired, closed or changed. Why: a failed automatic payment is a common route to a lapse notice that the owner never sees.
• Third-party lapse notice designation, if the insurer allows one. Why: a trusted person who receives the notice can act if you cannot.
• The insurer's news and rating. Look for a sale, a transfer of your block of policies or a ratings change. Why: a long-term contract depends on a long-lived company. See AM Best, S&P, Moody's and Fitch ratings explained.

A hypothetical review, start to finish

Say a 56-year-old owns a participating whole life policy bought 22 years ago, with a $10,000 loan taken six years ago for a roof repair. On the anniversary she follows the routine. The statement shows a cash value of $64,000 and a loan balance of $13,400, so the net cash value is $50,600. The dividend credited was a little lower than the year before, and a letter in the folder explains that the company trimmed its scale. Her election is paid-up additions. The beneficiary on file is her husband, with no contingent named, and her daughter turned 18 two years ago.

In an hour she does four things. She names her daughter as contingent beneficiary on the form the insurer sends. She decides to pay the loan interest each year so the balance stops growing, which at an illustrative 5 percent on $13,400 would cost about $670 a year. She asks for an in-force illustration at the lower scale to see whether the paid-up additions still reach the amount she planned. And she notes in her calendar that next year is a fifth-year review. None of this required a decision about whether to keep the policy, only attention. The figures are invented, but the pattern is typical: small corrections, made early, cost little.

What to do when the review finds a problem

Most findings are routine, but a few call for fast action. Treat these as the order of priority.

1. A missed premium or a lapse notice. Contact the insurer the same day. Many contracts have a grace period, and reinstatement rules narrow with time.
2. A cash value that fell when it should have risen. Ask the insurer in writing for an explanation of the monthly deductions, and ask for a projection of when the account runs out at the current premium.
3. A loan close to the cash value. Ask for the exact amount that would stop the loan from growing and the amount that would bring it down, and consider paying the interest. A tax professional can say what a lapse would cost in tax before it happens.
4. A wrong or missing beneficiary. Fix it now with the insurer's form, and keep a copy of the confirmation.
5. A dividend scale cut or a rate change. Request a new illustration, and then decide whether to adjust premium, loans or the dividend option.

Put every request in writing and keep the replies in the folder. A policy review is also a record, and a record of what the insurer told you and when has value if the policy is ever contested.

The five-year deeper review

Every fifth anniversary, add these items to the annual routine.

1. Re-ask the original question. Why did you buy this policy? A need for a spouse's income, an estate plan, a legacy, a dependent? Write the reason down and ask whether it still holds.
2. Rerun the in-force illustration at guaranteed assumptions and at a conservative lower scenario, and compare it with the original sale illustration. Note the differences and what drove them.
3. Calculate the cost of staying. Add the premium you pay in a year and the interest you give up by leaving the cash value in the policy, and divide by the death benefit. This gives a rough cost per $1,000 of coverage that you can compare year to year.
4. Reconsider the design. Could a smaller policy, a paid-up option or a reduced death benefit meet the need at lower cost? Each has consequences, which a planner or the insurer can explain.
5. Consult a professional if the policy is large, is owned by a trust, or has a loan nearing the cash value. A fee-only planner, a tax professional or an estate attorney can see what a policy statement does not.

Key takeaways

• Run the same hour each year at the policy anniversary, keep a folder for each policy, and make sure someone else knows where it is.
• Request the statement, an in-force illustration and a values ledger before the anniversary, and compare cash value with the guaranteed schedule.
• Loans compound quietly; an unpaid $20,000 loan at an illustrative 5 percent becomes about $25,526 in five years, and a lapse with a loan outstanding can create a tax bill.
• Check dividend or crediting changes, the election on file, ownership, beneficiaries and the payment method every year, because each can fail without a warning.
• Every five years, revisit why you bought the policy and whether a smaller or different design would now serve the need.