In recent years advisors have changed their approach to financial planning, making it more comprehensive, while consumers have become more attuned to the challenges of planning for retirement. And while many consumers are more aware of the issues they may face, many are not taking the necessary steps to prepare for their financial future.
Advisors are focusing more on helping clients better understand overlooked financial tools that can be used to create balanced and diversified portfolios. It’s no longer enough to just implement financial plans concentrated exclusively on income accumulation.
Today, advisors also need to incorporate asset classes that protect values from market volatility, or the uncertainty of the portfolio’s duration. Not paying attention to these risks can enormously impact the way wealth is transferred to heirs and beneficiaries.
Life insurance can be an effective diversification tool. While the overarching value of life insurance is the death benefit as a source of income replacement, some policies also have features that can be used to help consumers reduce risk and protect wealth from the effect of taxes, market volatility and longevity. Certain policies also have an investment component that, structured the right way, may accumulate a cash value.
Life insurance as a way to diversify
Advisors today don’t always recognize the significant role that life insurance can play in helping clients reduce risk in their financial portfolio.
Life insurance can make an enormous difference in how clients allocate funds to help reduce risks associated with other areas of a portfolio. While more advisors acknowledge the value of life insurance as a distinct asset class within a portfolio, they need to put more emphasis on the product’s importance, while continuing to educate consumers about its value.
The education component is significant. With so many varieties of life insurance to choose from, consumers need education around the nuances of each product type, especially the mechanics of insurance and the different types of policies available for meeting specific needs. This requires advisors to make it a priority to help clients evaluate their insurance needs and help them understand the pros and cons of each option.
For example, term life insurance may be right for someone with short-term needs, such as paying off a mortgage or college tuition. Meanwhile, a cash value policy such as indexed universal life or variable universal life, depending on risk tolerance levels, may be more appropriate for a client interested in the potential to accumulate tax-deferred savings that can be distributed income-tax free through policy loans (against the income tax-free death benefit) and withdrawals (up to basis or premiums into the policy).
Moreover, because polices can be paired, advisors, working closely with clients, have the opportunity to craft customized solutions for their clients. Arriving at the best decision requires the advisor and client to discuss the client’s needs and investment profile, particularly as they relate to long-term objectives and risk appetite.
Structured in the right combination, life insurance can offer a sure way to transfer financial legacies via a death benefit with tax efficiencies and cash value growth potential.
Furthermore, multiple life insurance policies can be purchased to create a portfolio of policies combining different sets of coverage to address different issues, with multiple forms of wealth protection strategies for the long-term.
The numbers support the benefits of educating consumers about taking a more holistic approach to financial planning. According to Lincoln Financial Group’s recent 2015 M.O.O.D. of America survey, 84 percent of life insurance owners said they felt optimistic and more in control of their finances, compared to 76 percent of non-owners.
The survey also showed 74 percent of those polled acknowledged that getting life insurance coverage was an important step toward protecting their wealth. In addition, Lincoln’s M.O.O.D. study found the majority of those who owned a life insurance policy were more likely to work with a financial planner and would consider other financial offerings to help further diversify their portfolios.
Life Insurance as a valuable complementary financial tool
What makes life insurance a valuable complementary tool to other investments is its ability to be structured to provide wealth protection, while offering predictability.
Because of the associated tax-free death benefits, life insurance can be a financial bedrock to a portfolio, helping to secure the kind of financial protection most clients want in today’s increasingly uncertain and volatile marketplace. Life insurance, as part of an overall portfolio, can offer advantages in meeting goals at every stage of a client’s life, including potentially:
- alleviating some of the cost of a child’s school tuition;
- strengthening retirement savings;
- creating additional cash flow while reducing tax exposure; and
- helping to protect wealth for future generations.
All in all, life insurance is more than just a stand-alone product; it should be considered a critical component of a financial plan and can help create balance and stability within a portfolio.
Through life insurance, advisors have yet another opportunity to broaden their counsel and help consumers recognize the unique risk and return characteristics of including a policy within their portfolios. If you haven’t given life insurance consideration as a separate and distinct asset class, maybe it’s time to take another look.