What type of customer does income planning and when do they do it? What is the role of life insurance in income planning? What are the responsibilities of the agent?

These questions bring two thoughts to mind. First, what is coming to be known as income planning often does not involve life insurance anymore, at least not in the way industry professionals used to think about it. And second, the people that tend to utilize policy loans to supplement retirement income–a tried and true sales idea–may not be the people that have the larger estates. Let me explain.

As baby boomers age and begin to think about retirement, they may seek out someone who can map out their expected income needs into retirement. Most often, this seems to be occurring after the boomer reaches age 50–which is sometimes too late to have enough time to plan effectively.

The advisor that is sought out may be a life insurance agent or financial planner, and sometimes a CPA. Based upon assumptions like how much income the client will earn into retirement, how much income is needed in retirement and other factors the client chooses–such as longevity or lack thereof, special bequests, the educational needs of children, and so on–the planner comes up with a computer projection of everything.

After reviewing plans like this for clients, I have concluded that the number of assumptions may be so large that chances of achieving the projections are low. But clients do like to see these projections. It’s as if there is something magical about seeing it all supposedly come together on a few sheets of paper. However, after delving more deeply into the issue, clients often see there are many variables that can affect the ultimate result.

For high-net-worth individuals, life insurance is usually depended upon for estate liquidity needs, not for lifetime income. So, this segment of clients has been moving away from utilizing life insurance loans to supplement directly the retirement income.

Of course, policy loans are still used for financial emergencies. But, otherwise, for higher-net-worth clients, we do not see borrowing policy values for personal reasons as much as we used to see it. The change in tax laws, making policy loan interest not deductible in most cases, is one reason behind this.

However, among the high net worth, policy loans are still used for personal investments. This may depend on the availability of other funds, and the sophistication of the client. Wealthier clients are also more likely to draw on the cash values for income planning in business situations. Taking withdrawals and then loans is a standard approach in nonqualified deferred compensation agreements.

Clients with smaller estates tend to view life insurance differently, when it comes to income planning. They are more likely to surrender policies to get the cash values, not make withdrawals or policy loans. They may not need the death benefit for liquidity purposes. (Note: By nature of their insurance and estate planning needs, these clients may not be sought after by insurance professionals.)

Regardless of the situation, the life insurance agent’s responsibility is primarily to inform the customer about the options available under the products owned by the customer and to make recommendations as to possible other products to be purchased. The agent should revisit the customer’s assumptions periodically–for instance, once every two years–and whenever a life event occurs, such as retirement or death in the family. That way, the agent’s expertise can come to bear on the customer’s situation at times it may most be needed.

This approach will also help to keep the customer on track. Sometimes the best laid plans go awry because the customer does not follow up and do the things the customer is supposed to do. We see this in our legal practice, too. By keeping regular contact with the customer, the agent can help the customer to avoid unexpected results.

I do not believe the agent generally is required to conduct these follow-up visits. But, if the agent that represents he or she will do so, or if the prevailing practice in the community is for agents to conduct these follow-ups, then the agent may be held responsible for failing to do so.

With respect to life insurance, income planning may not be a strategy that is used today as much as in earlier times, as in the 1990s. However, life insurance cash values are still an important asset in a customer’s estate. Knowing what options are available is important to the customer, and the financial advisor is well advised to keep the person informed of the alternatives.

Douglas I. Friedman is a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala. His e-mail is doug@fdatty.com.

For high-net-worth individuals, life insurance is usually depended upon for estate liquidity needs, not for lifetime income