Industry Innovation Is Maximizing The Versatility Of Life Insurance

Estate tax reform has focused clients and their advisors on the non-estate tax aspects of wealth management and transfer. Insurance companies have responded by creating new products and riders, making life insurance products much more versatile.

Estate taxes are still an important consideration; however, such taxes and other potential taxes at death are only one considerationjust as the death benefit of a life insurance policy is only one important aspect of a policy.

Life insurance is an important wealth management tool in addition to being a wealth transfer tool. While the death benefit is of great significance, it is important for clients to have a full understanding of the potential uses of life insurance while they are still alive.

Clients and their advisors need to know that the cash accumulation in permanent life insurance contracts may be used for supplemental retirement income. If variable universal life insurance is used, clients may need help in managing the subaccounts of the contract to best accomplish their objectives. These products are being modified and created to provide financial planners and clients a wide range of choices in terms of investment options and asset allocation strategies to help them achieve cash accumulation and retirement goals.

However, the lifetime benefits of life insurance include more than just the potential for supplemental retirement income.

Depending upon the contract, clients also may be able to add long term care benefitsan important retirement planning and estate planning consideration. Often clients will purchase a stand-alone long term care insurance policy to cover this risk.

But some clients may be interested in purchasing a life insurance contract with a long term care rider to secure an additional source of funds to meet potential long term care needs. Overall, a long term care rider is not intended to replace other forms of long term care insuranceit is intended to help complement other insurance and sources of funds for this need.

The terms of long term care riders vary from company to company; some long term care riders are designed to help pay long term care benefits in the form of an accelerated death benefit. Under such a rider, the client may specify an amount to be used for long term care at the time of purchasing the contract. These riders usually include qualification requirements, such as the inability to perform two or more activities of daily living (e.g., bathing, dressing, etc.) with an elimination period, such as 90 days.

Upon qualifying, long term care benefits are paid out as an accelerated death benefit, thereby reducing the ultimate death benefit paid to the beneficiary of the contract by the amount of long term care benefits used.

If the client does not need long term care benefits from the life insurance policy, the client may use the policys cash values to supplement retirement income or simply leave the death benefit to the beneficiaries. The client also may decide to gift the policy to an irrevocable life insurance trust. Of course, gift tax considerations must be taken into account at that time and the client must realize that, if he or she dies within 3 years of making such a gift, the death proceeds will be included in his or her estate for estate tax purposes, if such estate taxes apply.

Overall, life insurance can be a flexible multi-dimensional wealth management tool with many potential uses in wealth management.

In addition to modifying products and introducing new product riders to help address wealth management and estate planning concerns, insurance companies also are introducing more comprehensive services to help financial planners and clients. Some insurance companies, through trust company subsidiaries, now offer trust services to help financial advisors implement, manage, and maintain the clients wealth management and estate plan.

This is a tremendous opportunity because now financial planners have the ability to work with a corporate trustee to help implement a wealth management and estate plan. This ability provides the financial planner, attorney and client with an opportunity to work with the advanced sales department of the insurance company as well as trust company attorneys from design to implementation to administration of the plan.

By working together as a team with professionals familiar with the insurance products, as well as the trust services, the financial planner can coordinate a package of services and products to the client in an efficient and effective manner. It also helps the financial planner retain the clients business and helps develop a multigenerational client relationship to retain business. Such trust services can help implement life insurance by packaging life insurance trusts and generation skipping trusts. In addition, trust services also may promote more annuity sales.

For example, lets assume that Frank and Jane Mays are both in their 60s. Both have been married previously and have children from their prior marriages. Frank has an IRA worth $800,000. He would like to provide for Jane at his death but wants the remainder interest in his IRA to pass to his children from his first marriage.

Lets also assume that Frank would like to purchase an individual retirement annuity because of the death benefit features of the annuity. We can position the IRA as the funding vehicle, talk about minimum distributions and even provide information about using a trust as beneficiary. In this situation, we probably would talk about using a qualified terminable interest in property trust (QTIP) as beneficiary to help accomplish Franks objective. As always, clients should consult with their attorneys and tax advisors to implement this type of solution and to coordinate the solution with their overall plan.

Now, insurance companies, through trust company subsidiaries, can go one step furtherwhich allows the financial planner to go one step furtherand coordinate the QTIP solution to help implement and solidify the IRA planning with the annuity. In such a case, the trust can be named as beneficiary on the IRA and preserve the marital deduction election. At Franks death, the QTIP trust will pay income to Jane for her life with the remainder paying to Franks children from his first marriage.

Certainly, this may be accomplished even if the insurance company does not have a trust company subsidiary. But the process may be more efficiently and effectively packaged for the client and also more manageable for the financial planner if the insurance company does have a trust company subsidiary.

The overall fundamentals of wealth management remain constant. Clients need to accumulate, protect, preserve and transfer wealth. Insurance companies continue to improve products to serve multiple purposes. A long term care rider for life insurance is only one important example.

Financial planners should evaluate all product features and riders in light of the ability to help manage wealth. Insurance companies continue to provide more services to help financial advisors manage their clients wealth for this generation and the next. The introduction of trust services is only one important example.

These products and services are an ongoing innovation and increasingly are important for financial planners who need these types of products and services to help meet the growing demand for wealth management for this generation and the next.

Brett W. Berg, JD, LLM, CLU, ChFC, is director of advanced sales for Nationwide Financial in Columbus, Ohio. His e-mail address is bergb@nationwide.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 23, 2004. Copyright 2004 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.