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Life Health > Life Insurance

Whole life insurance in the senior portfolio

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Insurance isn’t bought in a vacuum. Rather, insurance is bought and sold within a broader financial planning context – as a means to achieve the client’s own personal objectives. Cash value life insurance, then, must be considered as part and parcel of the client’s asset allocation within his or her portfolio.

But seniors bring some unique planning characteristics, considerations, and values to the table, say advisors in the field. “Seniors are a lot more concerned about return of their money than return on their money,” observes Mandell Winter, CLU, ChFC, and a veteran of both the insurance and security industries.

St. Louis-based advisor John Olsen, CLU, ChFC, and author of The Annuity Advisor agrees, in principle: “Sure, we pooh-pooh the meager rates of return [in whole life policies]. But try explaining that to someone like Bob Hope, a survivor of the Great Depression. But Bob Hope was able to tap his life insurance policy – in his case an annuity – and stay afloat.” A lot of seniors still remember those days, Olsen points out. Insurance reps ignore these senior cultural memories at their own peril.

For these reasons, many seniors are naturally attracted to the stability, simplicity, and predictability of whole life insurance – a happy coincidence, considering their substantial appetite for fixed income investments, which provide the structural foundation of life insurance companies.

Modern portfolio theory states that an optimal mix of asset classes exists for every level of desired risk, and for every level of expected return. The underlying mathematics is complex – but where a desired asset allocation can be identified, the presence of a substantial whole life policy may provide advisors with planning opportunities elsewhere in the portfolio.

Specifically, if the cash value within a whole life policy can be usefully counted as a conservative fixed-income holding, strongly correlated to bonds, then the investor may be able to take more risk – and potentially greater return – in the remainder of his or her portfolio, says Winter.

But should permanent life insurance be considered an asset class? Can it serve as a replacement for a fixed income allocation? How will it perform and with what is it most strongly correlated? And should it even be considered as part of the asset allocation process?

Matt McGrath, a certified financial planning practitioner with Evensky, Brown & Katz in Coral Gables, Fla., says yes: “It is very fair to categorize the whole life policy as a fixed income allocation – within the context of a well-balanced portfolio,” he says.

John L. Olsen, however, is more circumspect: “One can argue that whole life insurance amounts to an investment decision,” he says, pointing out that whole life policies are themselves backed by fixed income investments, and in the long run, may be expected to produce modest bond-like returns. “But the problem with whole life as an asset class is that the return on a whole life policy is negative in the early years,” he says. “Returns are not linear: It takes 15 years or longer for [whole life policy] returns to make sense on that basis.”

With their layers of assurances and guarantees, a standard whole life policy can be very effective at establishing a financial foundation with a minimum of uncertainty – as long as premiums are paid up and the insurance company does not become insolvent, the senior investor can count on a predictable death benefit and stable cash value. This stability lends itself to a number of other applications beyond simply replacing the expected income of the decedent:

Asset protection
Death is not the only misfortune which may befall an estate. Lawsuits racked up $260 billion in damages in 2004, according to data from the Insurance Information Institute – damages which amount to more than $850 per person – and which are naturally borne primarily by the affluent. Further, average jury awards for wrongful death, product liability, and medical malpractice have doubled since 1997. And nine out of every 10 affluent Americans say they are “very concerned” about losing their wealth to marauding trial lawyers and other threats, according to a recent Prince Associates survey.

In today’s litigious environment, cash value life insurance can protect against much more than the untimely assumption of ambient temperatures. Fortunately, insurance policies may offer substantial creditor protection. State laws vary, but some states, such as Texas and Florida, offer unlimited creditor protection for cash values built up within a permanent insurance policy.

Even in states which provide no such protection, it is very easy to create it by placing the policy within a limited liability corporation (LLC). Since the LLC is a separate entity from the individual, it would not necessarily be subject to the personal liabilities of the investor – and vice versa. What’s more, with special allocation rules and an assumption of the debt, the client can still gain tax-free access to the money in retirement, says Roccy DeFrancesco, a Michigan attorney and founder of the Wealth Protection Institute, a credentialing body for advisors wishing to specialize in asset protection ( Be sure to work in close consultation with the client’s attorney when using this technique – the language used in drafting business entities can be important.

You can find a by-state listing of creditor protection laws concerning insurance policies at

Special needs planning
For most individuals and couples over age 65, their children have grown and are no longer dependent on them – thus obviating much of the need for life insurance as a vehicle for income replacement. But children with special needs may never outgrow their dependency on their parents.

For these individuals, the need for insurance protection is permanent – term insurance is out of the question. Likewise, since these special needs individuals have little or no earning power of their own, they cannot rely on their own incomes to offset the risks inherent in variable products. In these cases, there may be no substitute for some variety of whole-life insurance: Market risk is simply not an option. While the possibility is often overlooked earlier in life, the same, of course, goes for individuals buying insurance to provide for a disabled spouse -or for a spouse who may become disabled in the future. Which is to say, all spouses.

In these cases, be sure to consult closely with a Medicaid planning specialist and set up a special-needs trust: If the advisor is careless, and the insured names the spouse or child as the beneficiary directly, the special needs individual could be rendered ineligible for Medicaid, food stamps, and other needs-based assistance programs.

Something for mutton
Mandell Winter recalls one client who was in the sheep business. He would buy lambs early in the year, feed and raise them, and then sell them as they grew to adulthood. Like most farmers, he relied a great deal on credit, and in earlier years, he had to fill out a separate loan application with his bank every year – with all the attendant hassle and paperwork.

As the cash value of his permanent life insurance policy grew to nearly $1 million, though, Winters’ client was able to cut the umbilical cord with his bank. “Now he’s his own bank,” observes Winter, “and he loves it!”

Why? Because when you use the cash value within an insurance policy, there’s no paperwork, no applications to fill out, no new underwriting process to endure: You just call your insurer, tell them how much you need, and they send you a check.

Winter recalls another client – a woman who was able to tap her insurance policy for a loan of $30,000 in order to help her children into a house. She was able to use the $30,000, put it back some months later, and her position didn’t change one iota. “If you tried that with a [traditional] investment, you might miss a year’s worth of appreciation in a couple of weeks,” says Winter. “You would also have sales charges or commissions. In this case, she was able to make the transaction without it affecting her lifestyle one iota.”

True, a buy-term-and-invest-the difference investor could avoid sales charges by using no-load funds or direct Treasuries for the side fund. But he or she would still be liable for capital gains and dividend taxes, and in the case of funds, pay an ongoing expense ratio in the meantime. Not that a whole life plan doesn’t have downsides of its own – but it can represent one more arrow in the client’s quiver.

Beating estate taxes
When used in conjunction with an irrevocable life insurance trust (ILIT), a life insurance policy can help remove assets from your client’s estate – and thereby help you avoid the onerous 46% estate taxes on assets greater than $2 million under current law. Remember, too, that unless Congress acts, the exemption under estate tax laws is scheduled to revert to just $1 million in 2011, with a top estate tax rate of a whopping 55%!

Longevity concerns
Ninety percent of the population lives to age 65 or greater, argues Winter, who claims that in 25 years in insurance he never had a term claim actually pay out – his clients died after their terms expired, their insurance worthless. Further, once a client lives to age 65, he or she can generally expect to live another 20 years. “The best kind of insurance is the kind that’s in place when the insured dies,” says Winter.

As the chances of outliving your term insurance increase, the relative value of term insurance decreases. Few people actually reach the point where they can self-insure later in life, Winter says. The closer you get to being able to do so, the more likely it is that estate tax liability may create the necessity for life insurance to protect against the needless dissolution of assets in order to pay them.

Charitable giving
Life insurance can help facilitate charitable giving – even for those who desire to leave substantial wealth to their heirs. For instance, a wealthy individual may simultaneously donate $1 million to charity, receiving a current year tax deduction. Simultaneously, this individual may take care of his or her heirs by purchasing a $1 million life insurance policy.

The end result: The individual has made a charitable contribution costing just pennies on the dollar, after premiums and tax deductions are taken into account. In some cases, the tax savings from the deduction alone can pay for several years’ worth of premiums on the life insurance.

For all the ancillary benefits of whole life and other forms of permanent life insurance, it’s easy to lose sight of its primary purpose: to serve as a tool for the management and transferal of risk.

Olsen suggests not selling the cash value component of permanent life insurance at all: “I do not talk about whole life insurance as asset allocation,” he says of his real-world discussions with clients. “I talk about it as a risk management program… Sure, the cash value is there, and it’s nice. But it’s incidental. It’s gravy.”

Jason Van Steenwyk is a free-lance writer based in Fort Lauderdale, Fla. He has been published in Registered Rep., Mutual Funds, The Annuity Selling Guide, Wealth and Retirement Planner, and, among other outlets.


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