Help Your Clients Leave A Larger Legacy

The past couple of years have been difficult for anyone with invested assets, whether they are in fixed accounts or equities. In particular, the majority of resources held in stocks, mutual funds or other variable accounts have lost significant value. What if there was a way to help your clients recover all or a portion of those lost asset values?

Many people have depended on their savings, 401(k)s, IRAs, CDs and other investments to help them enjoy a comfortable retirement. For these people, the drop in asset values will mean they must work longer, live on less, save more or even make riskier investments in the hope of a potentially higher return.

For others, it has an entirely different meaning. There are many people in the United States who have more than enough money for retirement income or emergencies. Their primary objective is to pass as much of their wealth as possible to the next generation. It is disconcerting for them to see the value of their legacy diminish so drastically in such a short time period. For some of these people, there might be a solution to quickly rebuilding that legacy–life insurance.

Lets look at an example: John is a successful small business owner. He started his company 30 years ago and now at age 65, has recently sold it for a substantial sum that he converted to a guaranteed lifetime income. Fifteen years ago Johns wife passed away and he invested the $100,000 life insurance policy into a variable annuity. His primary intention has always been to transfer this asset to his children and grandchildren, as a gift from his wife. John doesnt consider himself wealthy, but to many people, his estate of $2,500,000 would classify him as such.

Until recently, John has been thrilled with the return on his $100,000 variable annuity. He was highly concentrated in technology, and his account grew to a little over $400,000. Today its value is $250,000. John knows that even if he transfers the value to a fixed account, the growth that has been lost over the past two years will not be recaptured in his lifetime. He is extremely saddened that his wifes legacy to their children and grandchildren will be so diminished.

However, John is in good health, so there is a perfect solution–life insurance.

Suppose John surrenders his annuity and pays the income taxes on the gain today (instead of his family paying the taxes at his death). If he uses the balance as premium for a life insurance policy, he can not only recover the loss in the account, but could provide a much larger legacy to their children. Many policies today offer no-lapse provisions that would protect the death benefit for life.

For an example of how it might work, see Table 1. First, lets assume the following two options:

1. To avoid further loss of principal, John will probably convert his current annuity to a fixed account. The values assume the fixed account earns 5% each year. Furthermore, the values assume death occurs in each year indicated, and calculates the income and estate taxes that would be due in that event.

2. The second option assumes John surrenders his variable annuity and makes a single premium payment of $205,000 ($250,000 minus $45,000 income taxes) into a universal life insurance policy with a lapse protection rider. Well also assume he receives a standard non-smoker rate.

If the fixed account earned 5% each year, at age 85–Johns life expectancy–the value would have accumulated to $663,324. However, at his death that year, the estate and income taxes due would be $448,262, leaving only $205,063 for his children.

In our life insurance example above, if John dies in the first year, his family could receive $542,973 in life insurance benefits, $427,630 more than in the fixed annuity account. If he dies at life expectancy, the life insurance advantage would be $268,499.

Of course, instead of surrendering the annuity, John has other alternatives. He could:

Annuitize the account for a few years (or a lifetime) and use the income stream to purchase a life insurance policy; or,

Under Section 1035, he could exchange the annuity to a single premium immediate annuity and use the income stream to purchase a life insurance policy. This can also be paid over a few years or a lifetime.

Either alternative would result in a somewhat smaller life insurance amount, but if John died during the annuity payout period, depending on the payout option there could be an additional benefit to his family–the balance of the annuity payments.

Most people dont realize that many of the investment tools that have been so successful in helping them to accumulate assets are not very efficient in transferring those assets to the next generation. At a persons death:

Annuities are taxed as ordinary income based on the gain in the policy. They could also be subject to estate taxes, if applicable.

CDs and other interest bearing accounts are taxed annually as ordinary income, but usually accumulate much more slowly than an annuity because there is no tax deferral. These assets may also be subject to estate taxes, depending on the size of the estate.

The entire balance of IRAs, 401(k)s and other qualified plans, are taxed at ordinary income tax rates and could also be subject to estate taxes, if applicable. These types of accounts are most vulnerable to loss in value at a persons death.

As an agent, you probably already know a number of people who might be interested in repositioning assets to provide a legacy. There are three prerequisites to qualify as a prospect for this concept:

1. The person must have “idle” assets that he knows wont be needed for income or emergencies later in life. If your prospect is under age 55, he might not be able to identify assets that he wont need in the future. Additionally, some assets have additional taxes and penalties if withdrawn before age 59 .

2. Your prospect must have a desire to pass a legacy to the next generation. Bill Gates recently stated that he didnt think it was a good idea to leave all his billions to his children and that he would probably give a significant amount of his assets to worthwhile causes. Bill might not be a good prospect for this concept.

3. In order to use this concept, the prospect must be insurable.

You can use the decline in the market to your advantage and the benefit of your clients. Provide them with an alternative that could help them recover some of their lost returns for the benefit of the next generation.

Penni P. Foust, CLU, ChFC, RFC, LUTCF, is assistant vice president, custom marketing programs for Jefferson Pilot Financial, Greensboro, N.C. She can be reached at

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 6, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.