Traditionally, large universal life insurance sales have been associated with the estate tax exemption and how much exposure an individual’s estate may have to what is commonly referred to as the “death tax.” The process was simple: take an individual’s net worth, add a growth factor, assume a date of death, subtract the estate tax exemption, and voila, the result is the life insurance face amount needed to address estate tax liquidity.
If this past decade has taught us anything, it’s that there is nothing simple about determining an appropriate amount of insurance needed to deal with a “moving target”–the estate tax.
However, the uncertainty that currently exists as a result of estate tax legislation is actually the catalyst for significant opportunity for those of us in the life insurance industry.
The Paradigm Shift
Now, more than ever, clients are looking for the one thing that our industry can provide–guarantees. Yet it is how we position these guarantees and other benefits that will determine the level of success in closing a case. Specifically, this paradigm shift happens when we change the focus from estate tax planning to the client’s goals and values, which are at the core of legacy planning.
Producers should steer the conversation toward how clients want to affect the lives of their children and grandchildren. Taxes certainly are important, but they should be part of a larger strategy.
Many producers feel paralyzed because the 2010 Tax Relief Act gives individuals a $5 million exemption ($10 million for married couples) for estate taxes for years 2011 and 2012. While it is true that a married couple would have to be worth more than $10 million to have any estate tax exposure, it’s also true that this piece of legislation will only be in effect for the next two years. Producers should remind clients that uncertainty still remains for estates in 2013 and beyond, ultimately setting the stage for legacy planning.
Shift in Focus Broadens the Market
The number of legacy planning prospects is far greater than that of prospects with potential estate tax exposure.
These prospects have several concerns that may need to be addressed, and life insurance can offer an ideal solution. For example, many families today are considered to be “blended families,” in which married couples have children from previous and current marriages.
Without proper planning, conflict among family members often appears after the death of the principals of the estate. Other concerns may include how the family business is transferred from one generation to the next, how children or grandchildren with special needs will receive proper care, or how to make a significant contribution to a worthy cause.
For this demographic, it’s all about how an individual wants to be remembered, what’s important to them, and what they want for their children and grandchildren–rather than tax planning. For example, how many grandparents would rather talk about taxes vs. their grandchildren? Producers will gain more attention (and sales volume) by showing they understand and care about the broader picture.
Ask Open-Ended Questions
Once these clients are identified, develop a legacy plan through simple fact finding, using open-ended questions such as:
* What’s important to them about their wealth? Does it simply provide loved ones with financial security or does it let them pursue a specific passion?
* What kind of life do they want for their children or grandchildren? What values do they want them to have?
* Do they want a specific charity to remember them? Emotions run strong for themes such as alma maters, churches and medical causes.
When the tax discussion takes a back seat to the conversation about goals and values, a different perspective emerges. A “Family Values Trust” can offer incentive provisions to the next generation, with payouts at key milestones such as graduating from college, getting married, having a first child, and starting a business.
Of course, every effort is made to minimize taxes and provide liquidity as needed. A legacy plan also aims to preserve wealth that often is lost from generation to generation from events in addition to transfer taxes, such as divorce, creditors, and lack of asset-management skills.
Use Consumer Drivers in Proposed Solution
Producers will undoubtedly continue to face objections such as “I’m not worth more than $10 million so I don’t need life insurance for estate tax purposes” or “I know that I may need life insurance in the future but with the fluctuating estate tax exemption, I don’t know how much to buy.”
These are legitimate concerns and, when addressing them, producers should be aware that today’s individuals are motivated by three consumer drivers: guarantees, flexibility and control. Specifically, they are concerned about how and when the death benefit will be paid and what choices they have if their needs change.
Many policy options address these three key consumer drivers:
* Guarantees. Insurers can offer no-lapse guaranteed universal life product, where the death benefit will be paid out, regardless of market performance.
* Flexibility. Policies can have riders and endorsements that allow clients to receive a certain percentage of their premiums back after 10 years and 100% after 15 years. Other features include the ability to reduce the face amount within the first 10 years without incurring a surrender charge.
* Control. Producers should look for features that would give the insured owners control over the policy while they are alive. Some carriers have developed universal life products that offer initial and back-end lump-sum payments and guaranteed monthly income distributions over a defined period.
Clients buy life insurance not because they want to save money on taxes; they buy life insurance because they love someone. Ultimately, these same clients will be more willing to sign an application if a plan is legacy based and incorporates the three key consumer drivers of guarantees, flexibility and control.
Victor Sanchez, MBA, CLU is vice president, strategic marketing for Transamerica Insurance & Investment Group, Los Angeles.