Legacy planning for the uninsurable client

For a client who would like to create a legacy plan to benefit their grandchildren, it can be discouraging to discover how age and failing health has an eroding effect on the leveraging power of life insurance. In fact, it may even prevent your client from qualifying for a policy.

If a client is uninsurable or if the perceived cost of the premium outweighs the value of the death benefit, the next logical step in your client’s mind is to forfeit the idea of life insurance and just give the cash to their grandchildren as a gift instead. It’s important to provide sound advice and to help your clients understand their options. The decisions made today have the potential to influence your client’s family for years to come.

One option would be to purchase a whole life insurance policy on each of the grandchildren. In last month’s column, we explored how whole life can be funded in a way that could guarantee a paid-up policy either contractually or through the use of a non-forfeiture option. This kind of guarantee can be especially comforting to a client who may have concerns about how the policy will be funded after they are gone. The guaranteed cash value, along with any non-guaranteed dividends, accumulates tax-deferred and can be used throughout the lives of each grandchild as a vehicle for education funding, as an emergency fund, or even as a part of a retirement strategy. At the end of their lives, the remaining death benefit would be paid to the next generation as yet another way to continue your client’s legacy.

How it’s done

This strategy may not be so easy, however, if your client has a large family with a wide difference in age between the youngest and oldest grandchild. An equal premium might have a considerably different impact on each policy. Let’s say, for instance, that your client has three children in their 50s and nine grandchildren ages 10 through 25. To add a level of complication, the first child has four children, the second has three, and the third has two. One solution would be to write a policy on each of the three parents. The policies can be owned by a trust or by your client, depending on estate tax issues and cash value accessibility. The trust, whether set up as an ILIT or a testamentary trust, can be written so that, upon the death of any of the three parents, the death benefit will be paid out immediately and equally to all of the grandchildren.