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.
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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.