Clean Up Your Clients Life Insurance Portfolio Before They Retire

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Prior to actual retirement, an individual should “clean up” his or her life insurance needs. Sooner, rather than later, is the best time to take an inventory of term insurance policies, old permanent life insurance policies, policies that endow at age 65, or policies that were purchased for business needs that will no longer exist at retirement.

An assessment of current life insurance holdings and how they could be better structured is important to your clients financial future. With proper planning, using life insurance, clients could provide for the protection of a spouse in the senior years and also provide for tax liquidity.

Furthermore, they can begin to consider utilizing excess assets most efficiently to provide additional retirement income today, while leveraging gifts to create an inheritance for loved ones tomorrow.

Term life insurance plays an important role in your clients lives for temporary protection at relatively little cost. Many people use term to cover their lives during the years when their children are young all the way through college. Other people use term insurance to fund a business succession plan, fully intending that the insurance will not be needed after retirement.

Many term policies purchased are what are known as “convertible term.” Convertible term allows the insured to convert the term insurance to permanent insurance without further evidence of insurability. Most term policies provide a window of years prior to the expiration of the term contract for this option. But many term contracts only have a limited conversion period–for a specified number of years, to a set attained age, or a combination of both. For example, some contracts may only be convertible for the earlier of five years or attained age 65. Thus, the closer one gets to retirement age, the more risk one takes that he or she will not be within the conversion window. This may be extremely important to your client, depending on whether he or she is currently insurable.

Some policies have long-term conversion privileges, in some cases up to 20 years. As a rule of thumb, it might be wise to consider converting a clients term insurance five or more years before retirement age (or the end of the term). Also, it is more advantageous to make this conversion at a younger age, since future premium payments will usually be based upon the insureds age at the time of conversion. Perhaps at the same time a client is considering long term care insurance–which would typically be around age 55–they should consider converting their term insurance.

If a client is reaching age 65, and has just completed a buy-sell arrangement with business partners, converting the term insurance to permanent insurance for estate planning needs is also something to consider. After years of building and now reaping the rewards of being bought out of a successful business, the clients estate may increase significantly. Whether one outlives the buy-out funds or leaves them in the estate is never certain. Having permanent insurance to pay taxes due to an early death, provide an income stream to a surviving spouse or, if one lives to spend it all, leave a legacy for your children and grandchildren, only creates positive results. Be sure to check with the insurer for the terms of the conversion agreement to ensure that the client can still convert without further evidence of insurability.

Similarly, many permanent policies were set up long ago to endow at age 65. Often, people take the endowment funds and the policy terminates. It is possible, however, to turn that endowment policy into either permanent insurance or an annuity. One could exchange the policy before the endowment date to another type of insurance policy that could provide a guaranteed death benefit for life. Any gain in the endowment contract would be taxable, and further evidence of insurability would be required. In the event the client is “uninsurable” the policy could be exchanged to an annuity which does not require any underwriting. An annuity would pay out based on the life expectancy of the annuitant. If the client is unhealthy, an impaired risk annuity could help the client maximize the annuity income during retirement.

An insurance review of policies that are more than 10 years old may prove most practical and economical. Life insurance products, like all consumer goods, are constantly being improved. For example, whole life insurance used to be the only kind of permanent insurance one could purchase. It was guaranteed to provide cash value and a death benefit. Today there are many other kinds of guaranteed death benefit products, the most common of which is the universal life product. A universal life product may provide a higher guaranteed death benefit at a lower premium than the client is paying for an older whole life policy. Reviewing old life policies and assessing ones need for protection could result in savings each year. If this is the case after doing a review, complete a 1035 exchange of the old policy for a new one.

Once your clients life insurance is properly structured, if further premiums must be paid, consider using low basis, highly appreciated assets and a charitable remainder trust (CRT) to provide additional income and fund gifts to a life insurance trust. Using a CRT will provide a current income tax deduction and an income stream for life or a term of years. Part (or all depending on the premium due) could be used to make gifts to the trust. The result–income and estate tax free death benefit to the family.

Take a good look at existing life insurance. Youll be putting your clients in a better position as they enjoy the golden years of retirement.

, Esq., is director of advanced planning for the Individual Insurance Division of Sun Life Financial in Wellesley Hills, Mass. She can be reached at jane.warner@sunlife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 4, 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.