Advisors who work with seniors long enough are bound to encounter a certain unique species of client: the kind who at some point in his 60s finally comes to the realization he should start planning for retirement, only to discover that with retirement just around the corner or already upon him, it’s almost too late to make up for lost time.
Certified Financial Planner Gilberto Gra??a, principal at the Wealth Solutions Group in Coral Gables, Fla., has a name for that kind of client: Lotus Floridianus. Since this term is not found in any dictionary, Gra??a describes a member of the species as “someone who procrastinates planning for retirement. He waits until near retirement to start accumulating funds, or to supplement his low account contribution rate, to be used after he is finished actively working. At that point, the new retiree would have to win the Florida Lottery (Lotus Floridianus) to be able to retire in a style he is accustomed to living.”
What happens when a member of that species shows up at your doorstep? The tools available to advisors tasked with helping seniors who find themselves in such a hole are relatively limited, one which Gra??a says he tends to recommend in such a situation is term life insurance.
In fact, according to Gra??a and other advisors with insurance expertise, helping the procrastinating Lotus Floridianus hastily assemble some semblance of a retirement plan is one of several viable uses for term insurance in both a personal and a business context. While simple, straightforward term insurance is neither a sexy sell nor an especially versatile product compared to its permanent insurance cousins, universal life and whole life, it can be an effective planning tool – even for senior clients – in situations such as the following:
? A client needs coverage to pay off a debt due to expire in a certain period of time, such as a mortgage, so the surviving spouse isn’t saddled with that debt.
? A client wants the policy proceeds used by a family member (such as a spouse or offspring) to keep the family business in the family.
? A business partner or owner uses term insurance to underpin a buy-sell agreement that allows surviving partners to maintain control of a business when one partner or owner passes away.
? A senior can add value to his overall insurance portfolio by purchasing a permanent life insurance policy with a term insurance rider that eventually can be converted to permanent insurance.
? It is needed to cover short-term potential tax liability within a trust.
Advisors who, for whatever reason, find themselves shopping for a term policy for a senior client will quickly discover their options are much more limited than if they were shopping for a 40- or 50-something client, Gra??a says. “Your ability to acquire life insurance products may be substantially limited with age. If you don’t have life insurance in play by the age of 58 or 59, the pricing to purchase any type of life insurance policy after that substantially increases.”
Still, he says, term insurance “does have a place [in some senior portfolios], but it always has to fit within the constraints and parameters of a general financial plan.”
Good to have
When an uninsured or underinsured person reaches age 65 or 70, cost and underwriting emerge as major obstacles to obtaining insurance coverage. In situations where a senior needs life insurance but can’t afford or qualify for a permanent policy, then it may be time to look at term insurance.
When faced with such an insurance predicament at that age, even term insurance can get expensive, Gra??a points out. But the need for some kind of life insurance often outweighs the premiums required to obtain coverage, particularly for the Lotus Floridianus type who otherwise has little or no retirement nest egg, yet must protect his surviving spouse or family members from the possibility of him dying and leaving them with nothing but debt.
In these kinds of situations, Gra??a says, it’s incumbent on the advisor to be sure the client understands the limitations of term policies by pointing out that:
? A straightforward term policy has no value once the term expires, unlike with whole life and universal life, which accumulate cash value.
? The policyholder is covered only for the term of the policy.
? Only a small percentage of policies – in the neighborhood of 5 percent – actually results in claims.
? The premiums paid to maintain the policy are now property of the insurance company; there are no refunds (unlike with a return-of- premium policy, which is structured much like a term policy but gives the policyholder the ability to collect all premiums paid into the policy if he outlives the policy’s term, see sidebar).
One of the most common applications for term insurance in the senior portfolio, according to Alpine, Utah-based Certified Financial Planner Bruce R. Brittain, is to use it as a means of covering a significant outstanding closed-ended debt such as a mortgage.
“You do not want to leave a large mortgage payment to a surviving spouse, so you take out a term policy that if you die, provides your spouse with a death benefit to take care of that kind of debt. You don’t want a spouse left holding an empty bag.”
Besides using term life in stand-alone form to cover a limited debt situation, Certified Financial Planner Ellen W. Fairbanks of MD & A Financial Management in Pittsburgh, says seniors may also want to consider adding a term rider to a permanent life insurance policy, with the provision that the term portion of the policy will convert to permanent insurance after a given period of time, without triggering additional suitability screening, an important consideration for seniors whose declining health might otherwise prevent them from acquiring additional permanent insurance.
This approach works if a senior wants a certain level of life insurance coverage but can’t afford the premiums necessary to get that coverage with a pure permanent product. Thus the senior buys a lower level of permanent coverage and compensates by adding a term rider to bolster the overall value of the policy. Having such a rider also provides additional coverage for short-term needs to supplement the death benefit from the permanent component of the policy.
Another situation in which a senior may need a term policy is within the context of a trust, Fairbanks points out. For example, term life can be used to offset any potential short-term tax liability that would come to bear if the holder of the trust dies while certain assets of the trust are still susceptible to estate or gift tax. If the potential liability on those assets within the trust is due to disappear in, say, three years, a term policy of that length can be purchased with a death benefit in the amount of the potential tax liability.
The business end of term
Term insurance also holds some appeal in certain business scenarios. In some cases it even functions as a wealth transfer and preservation tool. For example, the partner in a closely held business may take out a term policy on himself and name a spouse or offspring as the beneficiary in order to provide the beneficiary with the funds necessary to hold onto a stake in the business.
On the other side of the coin, notes Brittain, there’s the buy-sell agreement, in which each partner in a business takes out a term policy (or policies) on the other partner (or partners) in the business, naming himself as beneficiary, such that the policy proceeds can be used to buy the deceased’s share of the business. A variety of factors, including projected business growth, existing and projected liabilities, the estimated value of the business and the amount of premium the business can afford, enter the equation in computing just how much term coverage to buy to underpin the buy-sell arrangement, Brittain explains.
In many cases, buying a term policy is a worthwhile investment. “Most partners would rather pay the premiums [on a term policy within a buy-sell agreement] than risk having to pay the [deceased's surviving] spouse out of company profits to buy [the deceased's] share,” he says.
Whether a term policy is purchased for a personal portfolio or in a business context, Gra??a says he offers the policyholder one piece of advice before signing the contract: Evaluate the eventual beneficiary.
“If a potential beneficiary has a condition such as a history of dementia in the family, you need to be careful, because you do not want a beneficiary who lacks competency upon receipt of proceeds from the policy,” Gra??a says. “So structuring the policy [correctly] is extremely important.”
Who said purchasing term life insurance is always a cut-and-dried exercise?