As your clients prepare for retirement something strange happens. They begin to divide their money into two “buckets.” First is the money they need to live on during retirement, or “live-on” money. The second is money they intend to leave to someone else after they are gone, or “leave-on” money.

Wealth transfer is all about the “leave-on” money, not “live-on” money. It is for money that the client does not intend to use in retirement. However, this is money that they do not want to give up the control over, just in case they need it in the future. So where do you want to “park” the “leave-on” money until they are either ready to use it or pass it on? Here are the requirements for that money:

  • Safe
  • Tax-advantaged
  • Simple
  • Has an access option
  • May provide future growth

Safe. You want the money to be somewhere that is safe. When the client dies you want to be sure their children or grandchildren are guaranteed to get the amount of money the client wanted them to receive. In short you are more concerned about a return of your money, than a return on your money.

Tax-advantaged. The account should be tax advantaged. You don’t want to pay income taxes every year on an account that you plan to give away. Nor do you want your beneficiaries to have to pay income taxes on the account when they ultimately receive the money.

Simple. Starting and keeping the plan should be simple. It should provide “auto-pilot” control, so once you set it up you don’t have to worry about it again. What you see should be what you get. There is no additional work on your part after the initial set up. Again, if you are planning to give the money away you should not have to spend lots of your time managing that money, or getting a bunch of quarterly mailings about the account.

Has an access option. If for some reason you need to use this money at any time you should be able to get to it. After all it may be “leave-on” money today, but we don’t know what the future holds and you may need some of it later on.

The plan may provide for future growth. While you plan to give this money away, it would be nice if it would grow-without a risk of loss-in the future. But getting good growth, no risk of loss and having access options in one account can be difficult to find.

A product that may cover all of these requirements for wealth transfer is single premium life insurance. Yes, life insurance.

Let me be clear about a few things

First of all, while a single premium life may be right for wealth transfer, it’s not the only answer. You may want to consider other ways to do wealth transfer; it takes a meeting with the client to determine if it fits their financial situation and goals.

It’s only for money they don’t plan to use. Wealth transfer is not right for all or even most of their money; it’s just for “leave-on” money. The client wants to keep control over the money and have it pass only at death, not before. They very much want to be sure it is guaranteed and will be there when needed and for the amount planned on. I say again, it’s only for money you don’t need in retirement. We can’t stress this point enough. So let’s see how the single premium life insurance fits the requirements for a good wealth transfer plan.

Safe. The single premium life is backed by the full financial strength of the insurance company.

Single premium life insurance has been around for more than 100 years, and has generations of clients that have benefited from the coverage. The single premium method of payment may be fully guaranteed and also has a long track record of getting the job done, safely. The death benefit and cash values are fully guaranteed. Plus, the death benefit will always be more then the single premium you paid. However, if you borrow or withdraw the cash value or use any of the accelerated death benefits (that most plans offer) those amounts will be deducted from the final death benefit.

The death benefit passes directly to the beneficiary you name in the policy, without delay or cost of probate. It will go to the person they chose-without probate, just like putting a name on the back of the money. The premium is one and done; it is guaranteed that there will be no future premiums due, no matter what the financial markets do in the future (some UL-type plans may not have this guarantee but offer higher growth potential). Note that taking money out of the contract before death may affect the lifetime guarantee.

Tax advantaged. Since it’s a life insurance policy it has all of the tax advantages of a life insurance plan.

The death benefit is paid income tax free (under current law), and no tax on the cash value growth while the insured is alive, so there is no affect on their Social Security. It is a MEC (Modified Endowment Contract) so it’s treated like an annuity while alive. As a MEC, any funds paid out other than as a death benefit will be taxed as ordinary income, plus a 10 percent penalty if the owner is under age 59-and-a-half at the time the money is taken out. Since the client wants to keep control of the money (and will be the owner), the death benefit will be included in their taxable estate, in most cases. So if estate taxes are a problem, we suggest doing a full estate plan before you consider wealth transfer. Because the money will pass income tax free at death to the beneficiary, it may work better than annuities or qualified funds.

Simple. The single premium means it’s one and done. Since it is life insurance, the insurance company will want to know the insured is in a good health. Yet many policies are offered, within limits, on a simplified underwriting basis, which means generally speaking candidates will not be required to give a blood sample or have a medical exam. Finally, the death benefit goes to whoever is named as beneficiary directly upon proof of death. In most cases there will be no delay or costs of probate. Plus no need for lawyers

Has an access option. OK, you might be thinking, why should I go through all this, why not just give the money away now? After all I don’t intend to use it during retirement. So why not give it to them and watch them enjoy it? That is, in fact, a choice. But what happen if somewhere down the road you need that money back? Would you want to ask them to return the money? Or worse, would they be able to give it back to you? This is part of what wealth transfer is all about. Setting aside the money, but keeping control of it, just in case. It’s your dignity money. All the policies allow you access to the cash value while alive, through either loans or withdrawals. Most have a terminal illness rider that allows the owner early access to the death benefit in their final days. Some offer access for either long-term care in the event of a critical illness. Lastly, at any time you can cancel the policy and take the current cash value; some plans even guarantee to give all your money back upon a full surrender.

A plan that may provide future growth. First of all, with this type of policy, on day one the death benefit will be greater than the single premium paid. No matter when you die, the death benefit is guaranteed to always be more than the premium you paid for the plan. Historically, life insurance has about a 5 percent IRR, long term, on the death benefit. If they die sooner the IRR is greater. But 5 percent long term is not bad at all. If you do take a loan/withdrawal or an accelerated death benefit those amounts will be deducted from the final death benefit, plus the income tax since it’s a MEC. But in no case will the total of those funds plus the final death benefit be less than the premium you paid. As the cash value grows, the death benefit may also grow. Again, as life insurance the death benefit passes income tax free no matter how much the cash value has grown.

Target markets.

  • Clients that are already retired or getting ready to retire, ages 50 to 80.
  • They want to leave a legacy to family or charities.
  • Do not want to lose control of this money.

Has a “leave-on” asset base of at least $10,000. This could be in bank accounts, which if left there are fully taxable. Mutual funds or brokerage accounts are also taxable and subject to market risks. With annuities, this means that the taxes are going to be passed on to the beneficiaries. Have you delivered any death claims lately? This is a great time to talk about wealth transfer because they know that life insurance works. Why not take some of the money and start a wealth transfer plan for the next generation? They do not want to lose control of this money, and guess what? These clients are already in your book of business. Wealth transfer can be a great way to re-connect with them to talk about something new.

What plan should you use? Actually, any single premium life plan can work. However, some companies offer special plans for this market that have easier underwriting and guarantee money back. Ask your marketing/brokerage representative if you can have access to such a plan. Another idea that should not be overlooked: If they currently own a term insurance plan that they no longer need, consider converting some or all of it into a single premium policy as their wealth transfer.

Wealth transfer is just another tool to help you re-connect with your clients, you should use it.

For more on single premium life insurance, see:

Bob Miller, CLU, ChFC, MSFS, is the principle and chief consultant for RAM Marketing Innovation, LLC based in Waukesha, Wis. His website is http://www.rammarketinginnovation.com.