From the June 2006 issue of Investment Advisor • Subscribe!

Back to Basics

Sometimes all that's necessary is to look at things from a different viewpoint

New products and strategies proliferate in the insurance industry as companies work hard to keep up with modern needs, but advisors should not lose sight of the basic purposes of products that can benefit their clients, even in a changing financial environment.

So says Gavin Morrissey, advanced planning consultant to Commonwealth Financial in San Diego. His department helps Commonwealth's advisors implement the best strategies for their clients. One of those strategies is an old one: the use of life insurance as life insurance.

"It seems advisors are using life insurance for what it was meant: a death benefit," says Morrissey. While policies have, of course, figured prominently in "many creative strategies, such as retirement, cash accumulation, and deferred compensation," now Morrissey says he's seeing them used "either to leverage the estate or to solve some problem that has come up in estate planning."

With the high national divorce rate for first and second marriages, Morrissey says more advisors are coping with the needs of extended families; the complexity factor rises as family groups include multiple ex-spouses and several sets of children of various ages, perhaps on both sides.

One case Morrissey helped a planner resolve involved a client with adult children from a previous marriage and a six-year-old from his third marriage. The client's net worth was around $10 million, and the third wife was close to his grown children in age.

"So traditional estate planning says you set up your bypass planning with a QTIP [qualified terminable interest trust], and that will provide for the latest spouse through income and principal for health, welfare, and support as needed," says Morrissey, but the children don't stand to inherit the assets of the QTIP until the death of the latest spouse.

As might be imagined, relationships like these can lead to a lot of animosity on both sides; frequently adult children regard the surviving spouse as spending down their inheritance or taking their livelihood while estate assets are tied up in the QTIP, and the spouse has to deal with their hostility. "Greed will do crazy things to people," notes Morrissey.

Instead, he suggests using an irrevocable life insurance trust (ILIT) on the father of the adult children. This has the effect of distributing the inheritance at the time of the father's death, instead of forcing the adult children to "outlive the latest surviving spouse." Even though "the children may still say '[the surviving spouse] has a lot of our money,' it will hold them over for a while."

Morrissey cautions that advisors still must consider the implications of the estate tax, premium payment for the ILIT, and Crummey notices, and ensure the ILIT is kept running properly, but this way there's a "decent death benefit to take care of the heirs." While he points out that other planning strategies take advantage of code sections of the IRC, "if they work they're great, but advisors say, 'I really need a death benefit here' to solve a problem generated by the estate or the [family] situation I talked about." So going back to basics may be the key.

Marlene Y. Satter is a multi-faceted freelance business writer based in central New Jersey. She can reached at harpwriter@verizon.net.

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