Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Friday, December 30, 2011

Case Study on Purchasing Life Insurance

Insurance-policy1An overview of a case study provided by Peter C. Katt (life insurance provider and sole proprietor of Katt & Company, Kalamazoo, Michigan) is below. The case study is intended to help individuals understand issues they can use in their own life insurance purchases.

Doug (72) and Helen (71) considered purchasing $50 million of life insurance in 2007 and sought to purchase the life insurance and receive advice from the son of Doug’s long-ago college roommate, Marty. Marty suggested that the couple buy no-lapse UL policies with premiums guaranteed until Helen reached age 100. The premium amounts did not appeal to Doug and Helen, but Marty convinced the couple that they could reduce the amount of life insurance and premiums by selling them in the life settlement market. In 2011, Doug and Helen could not continue with their current premium burden, so they hired Katt. A list of a few of the problems surrounding the couple’s life insurance purchase is below:

  • Marty was inexperienced and unable to put together this program. Clients should be very wary of buddy-buying.
  • Clients should not buy life insurance amounts that border on or breach the client’s tolerance for premium amounts.
  • Marty failed to consider other options of life insurance, instead focusing only on level death no-lapse UL with premium and death benefit guaranteed to age 100.
  • In 2011, Doug and Helen reduced the amount of life insurance by $20 million (40%), and the policy has no surrender value because of surrender changes. Therefore, the possibility of selling off their policies was nonexistent because they were both in the same good health as they were at the time they purchased the policies in 2007.

See Peter C. Katt, Life Insurance Options, and What Lies in the Shadows, Journal of Financial Planning, Nov. 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.


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