“Seniors don’t need life insurance.” That’s often true, but universal life can be a valuable resource for older clients who do need insurance. The product’s unique structure offers the flexibility needed for changing circumstances, and the availability of guaranteed UL can provide an insurance “safety net” to allay clients’ concerns. Variable universal life can help clients accumulate wealth in a tax-favored contract. According to the advisors interviewed for this article, UL and VUL are valuable planning tools that every senior market advisor should consider in the appropriate circumstances.
Reducing the pension bite
Workers fortunate enough to have pension plans are often surprised to learn their monthly retirement benefit assumes a single life payout. If they want a joint-and-survivor pension, which is the required default, the survivor’s benefit can range from 50 percent to 100 percent of the retiree’s benefit. Greg Gardner, CFP, with the Gardner Group in Dallas has found that the differential between the single-life and joint-and-survivor benefits varies significantly among clients. In some cases, it is small. In other cases, however, the difference is significant and taking the joint-and-survivor annuity option imposes a large decrease in retirement income. But in every case, he notes, the pension ends with the single- or two-life payout, even if the pension has a present value worth millions of dollars. When the recipients die, the payments stop and there is no legacy for heirs.
These factors create planning opportunities, Gardner says. In some cases, it makes sense for the retiree to take a single-life annuity and use part of the higher pension payment to purchase a UL contract, naming the spouse or a trust for the spouse’s benefit as beneficiary. If the retiree dies before his spouse, she can invest the policy proceeds for income. If the spouse dies first, the retiree can redeem the policy or name other beneficiaries to create a family or charitable legacy.
The merits of this approach depend on the numbers and the client’s wishes, Gardner says. If the single-life annuity pays a significantly greater benefit than the two-life annuity, then the UL-strategy can benefit the clients. If the difference between the payout options is relatively small, however, the two-life option can be the better solution. Gardner has implemented this strategy in three cases and is working on a fourth. “If the client is in his late fifties or early sixties, it helps if the spouse is much younger because that affects the payout option,” he says. “It also helps (reduce ongoing premiums) if he is healthy.”
Leaving a legacy
Retirees worry about spending principal and running out of money for two reasons. The first reason — sustaining their lifestyle — is obvious. But the second reason can be just as important, says Herb Daroff, J.D., CFP, with Baystate Financial Services LLC in Boston. Retirees are concerned that if they spend the principal from their retirement plans and other assets, they will deplete the legacy they want to leave for their heirs. Using part of a monthly pension to pay for a UL policy that will “replenish” assets can relieve clients’ concern.
Additionally, estate and income taxes on retirement plans left to heirs can erode the plans’ after-tax value. Daroff says this distribution-taxation is another problem where guaranteed UL can work for seniors by helping convert a stretch IRA into a Roth IRA. Roth conversions, except for those done in 2010, are subject to earned income limits. Assuming the client can keep his income under the limit, the strategy is to convert the client’s regular IRA to a Roth, incur the income taxes due on conversion and use the UL policy proceeds to pay the taxes. Assets distributed to the beneficiaries of the Roth IRA after the IRA owner’s death are considered qualified distributions and are tax-free.
Funding a buy-sell
Pat Nowak, CLU, ChFC, LUTCF with Nowak & Nowak Financial Services in Williston, Vt., recently used guaranteed UL to fund a cross-purchase buy-sell agreement. One of the company’s two owners had died and his share had gone to his two sons, who joined the business with the surviving owner, their uncle. Nowak met with them to talk about the different types of products they could use for the buy-sell. The sons asked about term insurance and Nowak suggested they consider guaranteed UL, which would function similar to term but also provide guarantees beyond the usual term policy limit of 10 or 20 years.
“The sons were considerably younger than their uncle, but their health was not quite as good as his,” says Nowak. “The premiums wound up being quite compatible amongst the three of them. I suggested the nephews retain the policies on the uncle after he retires in a few years in order to recoup the money they will have put out. They agreed, and we set up a cross-purchase agreement set up with the three of them. The brothers also bought policies on each other to age 85.”
Advisors can choose from three types of UL. Traditional UL is the policy format that’s been around since the late ’70s. VUL gives policyholders control over how they invest their policy’s values, including stock and bond account options. Available for about five years, guaranteed UL is the newest variety.
The client’s goals and ability to fund the contract will influence the most appropriate type of UL. Ben Baldwin, CLU, ChFC, CFP, with Baldwin Financial Systems LLC in Arlington Heights, Ill., is the author of “The New Life Insurance Investment Advisor: Achieving Financial Security for You and Your Family Through Today’s Insurance Products.” Once VUL became available, he contends, straight UL became obsolete because VUL is more flexible. “I can take a VUL product, and if my client says they want it to be universal, I can fund it exactly like a UL policy using the guaranteed interest account,” he says. “If I put them in a variable policy, I have reserved the right to do something than just having a UL contract.”
Baldwin believes a client’s desire to create legacy capital is the key factor in determining if VUL is appropriate. “If the client says, ‘Here is x amount of dollars of liquid net worth I intend to have as my legacy to the next generation or for my surviving spouse, and where should I store it?’ that would indicate we should at least take a look at VUL,” he says.
Nowak uses VUL for wealth accumulation in cases where clients have contributed the allowable maximum to their 401(k)s. “Where can they accumulate money on a tax-deferred basis and still have the opportunity to invest?” she asks. “Many of them don’t qualify for Roth IRAs, so we use the VUL almost as a supplement to their 401(k).”
UL is not a panacea for clients’ financial problems. The policies charge a monthly cost of insurance and if the client under-funds the contract, it will lapse. It’s also important to recognize it’s an insurance product. That means explaining the application process to clients so they understand the insurance company’s underwriting practices.
Maureen Leydon is vice president, MetLife New Business Operations, Life Underwriting, also based in Boston. She says that MetLife has modified its underwriting practices in recent years to facilitate contract issuance for older (age 70-plus) clients. “In October 2007, we introduced a new age bracket for our preferred criteria because someone who has higher cholesterol levels at the older ages doesn’t necessarily mean they are at higher risk.
“Conversely, someone who is overweight might be a little better risk than someone who is underweight at the older ages because of a frailty consideration. We look at the entire individual — their medical history, are they still active, traveling, playing golf, exercising? Many are still working and that is a great factor to look at in underwriting the elderly. Are they seeing their doctor regularly and taking their medications? All those types of factors come into play.”