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April 13, 2009 at 08:00 PM
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.
