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End The Nightmare, Help Complete The Dream

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Recent market conditions have hampered many of clients’ dreams of doing something special with the money they’ve accumulated during their lifetimes; they are instead waking up to a financial nightmare. Testamentary concerns are overshadowed by concerns about reducing risks and replenishing wealth.

And that’s where you come in. You can help your clients restore their dream of leaving a legacy they can be proud of, in spite of the damage the markets may have done to their legacy assets.

As financial professionals, it is up to us to help ensure that our wealthy clients will have enough money to live out the rest of their lives fruitfully and still be able to leave a substantial inheritance to their families. To prove this point, we typically show clients that, based on reasonable assumptions, their “live on” assets will be sufficient to support their standard of living. What is or is not an acceptable hypothetical rate of return seems to have changed.

Not long ago, many clients would have assumed a long-term return of 10% or more was reasonable. Now, however, clients have substantially lowered their expectations and would be happy with long-term rates of return assumptions in the 6% to 8% range.We believe there is a general acceptance of an expected lower rate of return and a heightened concern with market volatility. This, when combined with very attractive new product guarantees, may make a life insurance death benefit compelling for clients to help counter some of their investment losses and also remove assets from the impact of market volatility in the current environment.

For clients with a death benefit need, life insurance is sometimes viewed as an alternative use of investment dollars because assets from other investments can be repositioned into a life insurance policy. However, the fact that life insurance is not an investment makes it attractive in times like these.

Traditional life insurance, particularly guaranteed universal life, is a non-correlated asset: The death benefit remains the same regardless of stock market performance, the real estate market or the interest-rate environment. The death benefit is guaranteed by the insurance carrier, regardless of the underlying performance of the policy’s cash value in the policy, so long as there is sufficient value to keep the policy in force. Of course, guarantees in a policy are based on the claims-paying ability of the issuing company.

Using life insurance to help counter losses

One popular planning strategy for insurable individuals is to use the proceeds of a guaranteed life insurance policy to offset the volatility of the future performance of a concentrated stock position for a client’s heirs. Consider a hypothetical 73-year-old male client who bought 10,000 shares of XYZ stock for $100 per share ($1,000,000) and is now trading at $60 per share ($600,000). At a hypothetical net 6% per year, it will take this client 9 years, or to age 82, to fully restore his losses.

If this client’s intention is to pass the initial value of these shares onto his or her heirs, life insurance may provide an alternative strategy that could replenish his wealth for that purpose. To implement this strategy, the client would sell $275,000 of his XYZ stock and use the sale proceeds to purchase a life insurance policy on his life. For a [standard/non-smoker] the $275,000 could purchase approximately $675,000 of guaranteed universal life insurance coverage. The $675,000 of life insurance plus the remaining $325,000 in XYZ stock would provide his heirs with a net benefit of $1,000,000 upon his death, provided the shares maintain this value through the client’s life.

If the same client is risk-averse, wants out of the equities market and qualifies under underwriting requirements, another option is to reposition the $600,000 into life insurance and purchase $1,475,000 of guaranteed death benefit. This, of course, decreases the client’s liquidity position, but the net result upon the client’s death is that his heirs receive even more than the initial $1,000,000 value of the legacy assets. Clearly, clients need to fully understand any tax implications that may result from selling a portion of their existing holdings and that life insurance policies have fees and charges.

The “1% Strategy”

Another strategy designed to help give people peace of mind and to help increase wealth transfer is to show clients how repositioning only 1% of their current portfolio on an annual basis into life insurance can dramatically hedge the future performance of their overall portfolio for heirs. Consider the scenario of a married couple, husband age 59 and wife age 58 (both standard non-nicotine class), with $10,000,000 of marketable securities. Assume they have additional assets and more than enough income to live off of for the rest of their lives. They are concerned about future market performance and are looking for a way to help ensure that, regardless of market performance, they will leave at least $10,000,000 to their family.

You could show these clients that if they took just 1% of the their current portfolio value ($100,000) and redirected that amount each year into a guaranteed survivorship universal life insurance policy, they could ensure that their family, regardless of future market performance, will receive the full $10,000,000 of value as a death benefit after both of them pass away.

In addition, life insurance proceeds could also be used to provide liquidity to help pay for estate taxes or to prevent heirs from having to sell a family business.

Recommending insurance strategies in today’s economic situation can certainly be challenging, but it is a mistake to think that these challenging economic times have changed people’s hopes and dreams about what they want to accomplish with their wealth. The most successful sales people will be those who can show clients how life insurance can help them alleviate the concerns that are causing them to lose sleep at night. The life insurance strategies outlined above can help your clients end their nightmare and complete their dream.

Richard O. Blaser, JD, CLU, ChFC and Ed Hardie are, respectively, high net worth marketing director and senior private wealth management consultant at The Hartford, Hartford, Conn. You can e-mail them at [email protected] and [email protected]


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