Monitor your life insurance policies & providers

It might not be the stuff of cocktail-party chatter, but insurance is certainly a topic worth talking about. That's especially true now, given the dramatic changes in the insurance industry, the stock market and perhaps in your own life over the past few months.

Here's a look at three insurance to-dos for this year.

Life insurance

Time was when not owning life insurance was the risky move. Now, however, owning insurance seems like it's the greater risk. Insurers are under pressure and experts say you should pay close attention to your various life insurance policies. AIG is, of course, a well-known problem.

But others are facing stiff winds, too. Standard & Poor's lowered its counterparty credit and financial strength ratings on 10 U.S. life insurance groups, according to published reports. What's more, the rating agency reported that around 40% of insurers were on a "negative" outlook.

Given those and other changes in the insurance world, Lee Slavutin of Stern Slavutin 2, says policy holders face at least two important risks in their life insurance portfolio in 2009 and beyond. Those include policy lapses because of investment losses in the stock market and insurance company impairments or failures. The former, he said, will be a problem for some variable life policies invested in equity sub-accounts. "Monitoring of insurance policies will require greater vigilance in 2009," he wrote in a recent issue of Steve Leimberg's Estate Planning Newsletter.

One task, Slavutin said, is to check at least monthly or quarterly on the value of your variable life insurance account and "retest" the policy. In other words, Slavutin said, have your insurer or agent get the "current in-force illustrations to see if current premiums are adequate to maintain the policy."

Also, what's the rating of your insurer? Check, perhaps even weekly, on your insurance company ratings with all the rating services, including Standard and Poor's and A.M. Best. Many insurers have already been downgraded and others have been taken over by state regulators, including Standard Life Insurance Company of Indiana and Penn Treaty Network America Insurance Company. According to Slavutin, "the rating services are not perfect, but can be a valuable source of information on the financial strength of the insurers."

Of note, if a company is downgraded and you're thinking of replacing your policy with a new policy from another carrier, Slavutin recommends carefully considering the following questions:

Is replacement really in your best interests? Is the old policy favorably priced and already "paid up"? Are there significant surrender penalties if the old policy is canceled? Are you insurable at favorable rates?

Consider also reading the life insurance buyer's guide on the National Association of Insurance Commissioners' Web site before canceling or exchanging a life insurance policy.

Convertible term insurance

If you have a short-term cash flow problem but need insurance as part of your estate plan, Slavutin recommends buying large amounts of term insurance. If this describes you, be sure to check the conversion option of the term policy for the following features:

Does the option last the full term of the policy? Can the term policy be converted to any permanent insurance product (whole life, universal life, or variable life) or is conversion limited to a particular product?

Will you keep the same underwriting class after the conversion? For example, will a preferred nonsmoker class before conversion stay the same or drop down to standard nonsmoker after conversion?

Is partial conversion permitted? For example, can a client convert $500,000 of term to whole life when the term policy starts as a $1 million policy?

Can the other $500,000 be converted at a later date?

Divorce and life insurance

It's hard to tell whether divorce rates are rising or falling during the current economic crisis.

Some reports suggest divorce is down, while others say otherwise. No matter. If you are divorced or getting divorced, Slavutin suggests changing the beneficiary of your life insurance from the ex-spouse to your children or someone else.

If you die without making the change, your ex-spouse may get the proceeds, depending on the state, he said. Still, some states protect those decedents who had no intention of leaving the insurance to an ex-spouse. For instance, he said, New York "has broadened the revocatory impact a divorce has on beneficiary designations."

In New York, divorce now revokes not only a disposition in favor of a former spouse in a will, but also in any revocable transfer, including life insurance and retirement plan beneficiary designations, to the extent permitted by law.