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Identifying an Unsalvageable Life Insurance Policy

A sample letter of explanation to a trustee about an underfunded policy.

The following is an email I just sent to a trustee who asked my opinion on a life insurance policy her new clients, Judy and Mark, would like the trust company to take over. She did exactly what she should do when presented with a new client.

Hello Melinda:

It was good talking last week, and thank you for getting me this information. Unfortunately, it looks like you have a disaster on your hands, or at least your clients do.  

This policy will lapse very soon, even with the $12,000 annual premium it looks like they’ve been paying. The policy is so underfunded that insurance and tax law don’t even allow a projection showing enough money to be put into the policy to keep it going. On the new ledger, you can see the $150,000 annual premium for a while and then a lower premium before the policy collapses at age 94. This is because 1980s-era laws to prevent life insurance from being used as a tax shelter are still in place and limit the allowable premium. They literally can’t illustrate putting enough money into the policy to keep it alive over time. 

Looking at the original ledger you provided, I can see this policy wasn’t even appropriately funded from the beginning. In a dropping interest rate environment over the years, it’s dying even earlier. I also see that a little over a decade into the contract, the assumed premium payments more than doubled, though it doesn't appear they ever increased their premiums. I can’t know if they were ever aware of this. 

Maybe there’s a story behind this that I don’t know, but this policy is a goner without a huge premium influx moving forward, and even at that, it may not be salvageable over the long term.  

Are Judy and Mark both alive at this time? Is this $2 million death benefit critical to their estate plan? What can you tell me about their health? Unless one is already deceased and the other has a short life expectancy, it appears any additional premium may be throwing good money after bad.

I look forward to talking when it works for you. There may be an option for salvaging some value from this. Thanks again, Melinda, and enjoy your day.


Bill Boersma is a CLU, AEP and licensed insurance counselor. More information can be found at,,, via email at [email protected] or call 616-456-1000.


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