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Life Health > Life Insurance

9 tips: Using life insurance to protect affluent client assets

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Your clients — especially those with high incomes — have the need for death benefit protection as well as a seemingly unlimited number of retirement investment options.

As a financial advisor, you have an opportunity to meet the needs of your high-income clients with life insurance.

So, how can life insurance help your high-income client better manage longevity, opportunities and risks? There are several things to understand and consider.

1. The challenging tax landscape

“We are in one of the greatest times for income tax planning, with low tax rates right now,” said Brett Berg, J.D., CLU, ChFC, Vice President of Advanced Marketing for Prudential’s Individual Life Insurance business. This means that it is critical for you and your high-income clients to seriously consider the tax implications of all of their retirement investment strategies.

2. The opportunities of tax-related investment buckets

From the taxation standpoint, there are four “buckets” available to clients for retirement savings.

    1. Qualified tax-deferred: Includes 401(k)s, deductible IRAs and pensions.
    2. Non-qualified tax-deferred: Includes investments like annuities.
    3. Non-qualified taxable: Includes stocks, bonds, mutual funds and cash equivalents.
    4. Qualified, tax-free: Includes Roth IRAs, which are subject to income limitations and phase-outs. “This [bucket] is where more people need to focus,” said Berg.

3. Life insurance is where more people need to focus

Life insurance can — and should — be included in the “qualified, tax-free” bucket, as well. When designed, purchased and managed properly, it can be of significant value to your high-income clients. “Permanent life insurance has unique characteristics that may be difficult to find in other financial alternatives for clients with high income,” Berg said.

As it pertains to this strategy, the client must have a valid need for death benefit protection before considering the accumulation features of life insurance.

4. Which clients benefit most from life insurance in their tax planning?

Life insurance as part of a retirement strategy will appeal most to high-income earners — those who, for example, are maxing out their 401(k)s, Roth IRAs, and other investment vehicles. This group includes married people earning more than $184,000/year and single people earning more than $117,000/year — the levels at which Roth IRAs begin to phase out for 2016. Your target group will be under age 55 and have money for life insurance after maxing out other retirement vehicles.

5. Show your clients how life insurance can help

It is first important to help your clients understand the value of life insurance. Help them see how it can be a very positive financial vehicle for them, both in terms of providing a meaningful death benefit for their families and providing an opportunity for cash value accumulation to supplement their retirement income.

In other words, life insurance can provide lifelong death benefit protection to meet minimum protection needs, and children’s needs after the primary income-earner dies.

Life insurance is an attractive protection vehicle and accumulation tool by offering tax-deferred cash value accumulation and tax-free income potential, assuming withdrawals and loans are properly structured. 

Outstanding loans and withdrawals will reduce policy cash values and the death benefit, and may have tax consequences if not properly structured.

6. Be creative: “Build it backward”

You want to help high-income clients maximize the time they have in order to accumulate cash value within life insurance. The best way to achieve this is to “build it backwards” — to think of cash value accumulation from the very moment you suggest life insurance opportunities to high-income earners.

“‘Build the policy backwards’ means contributing the maximum amount of premium and minimizing the death benefit to meet their minimum protection needs as much as possible,” said Berg. Examples of appropriate life insurance options for this approach include variable universal life and cash-accumulation universal life.

7. Explain the value of life Insurance for chronic illnesses

“So many chronic conditions, such as heart disease, diabetes and Alzheimer’s, are taking a big toll on our older population, and the health care costs associated with these are astronomical,” said Michele Frey, Vice President of Product and Solutions Marketing for Prudential’s Individual Life Insurance business.

In fact, 86 percent of all health care expenditures in 2010 were for people with one or more chronic conditions. And five in 10 people age 65 will need chronic illness care later in life.1

“The beauty of life insurance the way it exists today — particularly a policy with a chronic illness rider — is that it can give them options at a time when they may feel like they don’t have very much control,” said Frey.

8. Take advantage of the flexibility life insurance offers.

People with chronic illnesses most often receive care from family members, who sometimes give up their jobs or reduce their hours, lowering their own income. A chronic illness rider, available with some life insurance products, provides patients – your clients — with flexibility and ability to access life insurance in a way they may not have considered. In addition, some chronic illness riders can be used as the client sees fit with unrestricted use of the benefits- nursing home care, income for caregivers, home improvements, etc.

9. Don’t Wait: The time is now!

Now is a perfect time for you, as a financial advisor, to sit down with your high-income clients and discuss the many benefits life insurance can add to their retirement portfolios. As a product option that can provide additional financial protection and offer flexibility if their needs should change, life insurance – particularly with specific riders – is a practical tool for protecting your affluent clients’ assets and providing value to their portfolio.

Important considerations of this strategy

If policy premiums and/or performance are insufficient over time, the policy could lapse which would require additional out of pocket premiums to keep it in force.

If your client’s financial situation changes and they need to forego making premium payments to focus on paying other expenses, their life insurance death benefit may terminate and the results illustrated may not be achieved. Loans taken will become taxable upon policy surrender or lapse.

For loans to remain income tax-free, the policy must stay in force until death and non-MEC status.

If classified as an MEC, policy distributions are taxable to the extent of gain on a LIFO basis (10 percent penalty rules may apply before age 59½).

Withdrawals in the first 15 policy years may have adverse tax consequences. IRC Section 7702(f)(7) (B-C) retests life insurance contract withdrawals and face reductions and may cause adverse income tax consequences.

There is exposure to market volatility if variable life is used.

The accuracy of determining future needs and expenses is more critical for clients at older ages who have less opportunity to replace assets used for the strategy.

Your client should consider developing a comprehensive financial plan to take into account current and future income & expenses in conjunction with implementing a strategy discussed herein.

Your client should consult their tax and legal adviser to discuss his/her specific situation before implementing any strategy discussed herein.

Life insurance is issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY and/or NJ), and Pruco Life Insurance Company of New Jersey (in NY and/or NJ). All are Prudential Financial companies located in Newark, NJ. Variable universal life insurance policies are offered through Pruco Securities LLC (member SIPC). 

Your client should consider the investment objectives, risks, and charges and expenses carefully before investing in the contract, and/or underlying portfolios. The prospectus, and, if available, the summary prospectus, contains this information as well as other important information. A copy of the prospectus(es) may be obtained from Your clients should read the prospectus carefully before investing.

It is possible to lose money by investing in securities.


1 Favreault M. et al. Long-term Services and Supports for Older Americans: Risks and Financing, ASPE Issue Brief. Department of Health and Human Services, July 2015, pp.3,9

0293055-00001-00      Ed. 06/2016   Exp. 12/16/2017


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