A generation ago, clients had no residual value from their retirement plans. Life insurance was needed to provide a financial legacy. Today, the largest asset in many people’s estates is the value of their retirement savings.
That’s greater, in most cases than the value of their home. Is there a need for life insurance?
Today, people live longer. Is the value of life insurance still there? Many sell the house in which they raised their family and downsize, or move to an assisted living facility. Most don’t have any federal estate tax liability (at least under current law). The state estate taxes, if any, are at rates lower than capital gains. So, who needs life insurance?
Protection: Just starting out
Certainly, life insurance on my life is needed to replace my income, provided there is someone left who relied on that income for their financial support. I should have life insurance to cover my debts.
Life insurance death benefits can also help pay the expenses to educate my children/grandchildren. Not only is the death benefit worth having, but the cash value operates like a 529 savings plan (or Roth account): Contributed after-tax dollars accumulate tax-deferred and are distributed tax free. But cash value life insurance policies have fewer restrictions than 529 plans.
Accumulation: Pre-retirement
Once I accumulate funds (qualified and non-qualified), my need for life insurance lessens. However, consider re-thinking the use of life insurance and the selection of who should be insured. Which will occur first; your retirement or your parents’ (or grandparents’) death?
Yes, it’s a morbid conversation, but look at the internal rate of return (IRR) on premiums to death benefit. What return are you getting on your current retirement savings?
Make sure to adjust for income taxes during retirement for the non-qualified investments and after retirement for the qualified investments. I can reasonably guaranty that your parent/grandparent may not have died before your retirement, but will certainly die during your retirement. So, don’t stop funding retirement. Just take a piece of that budget and look at buying life insurance on people older than you.
Distribution: retirement
At the death of the first spouse, life insurance death benefit can be used to replace income for a surviving spouse. This allows the couple to spend more.
The problem, of course, is not knowing how much more can be spent since we don’t know when each spouse will die. So, financial advisors run lots of projections with lots of assumptions. What those analyses produce is the optimal recipe for retirement security: work longer, die sooner, save more pre-retirement, by lowering your current standard of living, and spend less during retirement, by reducing your expected standard of living during retirement.
The result is large retirement savings left to your heirs. You project that your heirs will “stretch” the distributions and take only required minimum distributions. But, when your kids were younger and you filled the cookie jar, did they want just one cookie?
Consider using life insurance death benefit to pay the income taxes on a Roth conversion at death. That way, if they take out more cookies, they will not incur income taxes on the distributions. Who can convert to a Roth? There are no income limits (under current law). The participant can convert to a Roth. So, if you have any warning of your death, you can exercise the conversion, even on your death bed. The surviving spouse of the participant can convert. So, even if you had no warning of your death, but you are survived by a spouse, the spouse can convert and use your life insurance proceeds to fund the income taxes.
A non-spouse beneficiary (inherited IRA) cannot convert to a Roth. But, the life insurance would be there to fund the income taxes as heirs remove cookies from the cookie jar.
So, why don’t we sell as much life insurance as we should?
A generation ago, life insurance agents were seduced by assets under management. As investment returns plummeted in the aftermath of 9/11, these investment advisors were seduced by the lifetime benefit riders on variable annuities.
To the best of my knowledge, no one has ever been rated or declined for an investment or annuity. Chasing down investment statements is a lot easier than chasing down attending physician statements.
If I can make the income I want from selling an easier product to sell, why sell life insurance? Are there people in your office whose compensation is directly tied to increasing assets under management and/or selling annuities? If so, then they are selling against you. Your greatest competition may very well be coming from inside your own office.
The second reason why we don’t sell as much life insurance as we should is that we continue to confuse our clients. Which life insurance product is right for you?
Should it be term or permanent?
If permanent, should it be whole life or universal life?
If universal life, should the engine be fixed, indexed, or variable?
If fixed, should it have current assumptions or guarantees?
If a client came to you today with $1,000,000 to invest, would you be selecting just one investment?
Should it be stocks or bonds?
If stocks, should they be domestic or international? growth or value? large, mid, or small cap?
Of course the answer is asset allocation; a diversified portfolio.
That should be the same answer for life insurance. A combination of: term, whole life, universal life, fixed, indexed, and variable.
The third reason is that we have become myopic and only look at the person in front of us as the potential insured. Why not insure a client’s parents and grandparents?
So, finally, how much life insurance does anyone need? That should not be the question. I have clients tell me that they don’t “need” long-term care insurance. There a ways to protect family assets and they have sufficient income and assets to provide the custodial care.
I ask them if they have considered cancelling their fire insurance. They may have sufficient income and assets to replace the house. So, why do they have fire insurance, if they don’t have a mortgage? It is not about “need.” It is about understanding the value of life insurance.
Wouldn’t you rather have your client’s beneficiaries say to you, “Thank you for helping our family. You took care of the people he loved. Had it not been for you providing for us …Thank you for pushing him to do the right thing.” Instead of, “Why didn’t you bring up life insurance?”
Questions? Contact Nick@agent-link.net
