Customers, and many producers, tend to think of life insurance in terms of cost, whether the product is for protection or accumulation purposes.
But anytime something is reduced to cost, the sale becomes much more difficult.
Advisors need to present it differently. Permanent life insurance, even on a variable chassis, can be structured so that it guarantees benefits. As such, permanent life insurance is really an asset; it needs to be thought of, and presented, in that fashion.
True enough, many insurance products may not be considered an investment because there is no expectation of favorable increase in value, especially in today’s economic environment. However, when life insurance is presented as an asset that can protect other assets, it is a “must-buy.”
Life insurance can stabilize the overall wealth transfer strategy and, if properly structured, can be estate- and income-tax-free. Given today’s economic environment, consumers should embrace any asset that can stabilize their investment portfolio.
Some individuals purchase futures contracts to buy items in the future at a fixed cost, as a hedge. What about thinking of life insurance as a true futures contract–except that cash, from expected death benefits, will flow to named beneficiaries at a future point in time?
And, unlike regular futures contracts, life insurance proceeds can be guaranteed to be there 20, 30, and 40 years or longer.
Example: Kim is a very active, healthy 65-year-old widow with a $6 million dollar investment portfolio.
Although Kim doesn’t believe she needs life insurance for her estate taxes because she’s always heard that it is expensive, she is concerned that, over the remaining balance of her life, her assets might underperform. Why? Between the credit shelter trust and her own tax bracket, she sees an income tax bracket of 23.75%. If she were to receive a 7% gross rate of return over the next 25 years, she would see her assets grow 5.34% on an after-tax basis each year.
However, if Kim were only to receive a 5% gross rate of return, the assets would only grow at a 3.81% after-tax basis. Over 25 years, that difference could be significant. For instance, at age 90, the value of her portfolio, assuming a pre-tax 7% rate of return would be $22,015,392; but if assuming a pre-tax 5% rate of return, this value would be $15,289,472.
The real key here is the expected rate of return on the portfolio. Is a 7% gross return realistic? Is 5%? Are there customers that are more concerned now about losing money rather than getting a return on their investments?
To hedge against her portfolio risk, Kim decides to use $60,000 each year, just 1% of her assets, to purchase a guaranteed death benefit policy, for just over $3 million of total death benefit, on her life.
Kim can own this policy outright, although in her case she may want to consider using a trust–either a new irrevocable life insurance trust or even through the existing credit shelter trust.
Tables 1 and 2 show the impact, assuming 7% average growth and 5% average growth, respectively.
Of course, by using life insurance, Kim’s investment portfolio decreases by $60,000 each year to pay the insurance premium. But as Table 1 illustrates, even at the assumed life expectancy of 18 years from now, at an assumed 7% growth rate, the insurance option provides beneficiaries with almost $1.2 million dollars more than planning without life insurance.
What happens at age 100? In Table 1, the payout to beneficiaries is assumed to be just over $3 million less if using life insurance. But the key questions to raise here are: Will the customer live to age 100? And will the investment portfolio actually return 7% average?
Obviously, by looking at Table 2, which shows results assuming a 5% growth rate, it is clear that the insurance protection makes even more sense at the assumed life expectancy of 18 years from now.
In fact, it’s the insurance policy that is the only asset guaranteed to be worth a certain amount–no matter when death occurs and no matter what happens in the economic environment.
Now is the time to do that policy review. Even with a variable policy, highlight the death benefit and other protection elements that may be available.
Given the current economic environment, everyone involved in the life insurance industry has a tremendous opportunity to highlight the benefit of life insurance products. Producers who take advantage of this opportunity should become extremely successful over the next year.