Clients are taking more of a long-term view with their life insurance, and here's the result.

It’s impossible to predict if and how estate taxes could change under a new president and Congress, but for 2016, at least, married clients with joint estates under $10.9 million still fall under the taxable threshold. States’ estate taxes are another story, of course, and can still require planning.

Changing goals

The liquidity that life insurance provides to help with estate expenses was a key motivation for the product’s use. So, are higher net worth clients dropping their life coverage as the potential impact of estate taxes diminishes? Probably not, although they may be valuing the policies from a different perspective.

Stephanie Sherman, CFP, financial planner with Prudential Advisors in Rockaway, New Jersey, notes that her clients are taking more of a long-term view with their life insurance than they were eight or nine years ago. The typical reasons for a life insurance purchase were to pay off debts and provide for survivors, she notes. While those classic reasons are still important, clients are focusing more on permanent life’s value in hedging against the potential costs of longevity. Consequently, the primary life insurance products that she is using have the lifetime guarantees as a component of the product structure.

“We’re seeing that people want to age in place,” she says. “They’d like to stay in their homes; they don’t want to have to make changes. Where we live, here in the Northeast, real estate taxes alone could be a fortune and to maintain the house, you might not be able to do so unless you have sufficient assets. If you need to be depleting assets because somebody gets very sick toward the end or has a long-term illness, the life insurance can simply do what it’s supposed to do: replenish and provide liquidity in a time of need.”

Sherman explains that some policyholders are expanding their coverage benefits by adding chronic illness or long-term care riders to their permanent policies. Dave Minich, CFP, CLU, vice president with Applied Financial Concepts Inc. in Richfield, Ohio, is also seeing increased usage of combination life policies. The coverage is attractive to insureds because it eliminates the perceived “use-it-or-lose-it” risk with traditional long-term care coverage.

If they don’t use a combination policy’s long-term care benefit, “having the assurance that a death benefit will be paid is attractive to them because they know they are at least getting something for their money,” he notes. The level premiums for combination life coverage are also attractive, he adds.

Market research supports these advisors’ impressions of their clients’ changing attitudes. According to LIMRA’s 2014 Individual Life Combination Products Annual Review, individual life combination premium, including both chronic illness and long-term care acceleration riders, increased 14 percent in 2015 versus 2014. New premium totaled $3.1 billion and accounted for 15 percent of all new premium collected for individual life insurance products.

Keeping it flexible

The reduced risk of incurring federal estate taxes is also influencing how advisors are planning with life insurance. Minich cites the case of a client whose estate would have incurred significant taxes several years ago; under those tax rates, Minich had determined a $3 million insurance need.

Recognizing that the estate tax exemptions were scheduled to increase, Minich divided the coverage into three separate $1 million policies. As the exemption increased and the insurance need consequently decreased, Minich worked with the client to start selling the unneeded policies in the life settlement market. “So, in one year we sold a million-dollar life insurance policy, in the second year we sold another one and then he ended up keeping one of the $1 million life insurance policies,” he explains. “The death benefit paid out last year and his children received that.”

The potential impact of a government pension offset on client’s Social Security retirement benefit is another situation where life insurance can provide planning flexibility. Under the offset rules, if a surviving spouse receives a pension from a federal, state or local government based on work for which he or she didn’t pay Social Security taxes, the agency may reduce the spouses, widow or widow’s benefit it pays. There are exceptions, but the rule can result in the recipient incurring a two-thirds reduction of the Social Security benefit. (Details available here: https://www.ssa.gov/pubs/EN-05-10007.pdf.)

Minich uses term insurance to offset the offset. Even though clients are older and the term costs are higher, the coverage still makes sense financially because it’s a short-term need, he explains. “As an example, if someone retires at age 65 and the spouse receiving Social Security passes away within a short period of time, after turning age 65, then that will create a drastic loss in income for the person in retirement. As that person gets older then that reduction in benefit becomes less severe. That’s why we structure it in a term insurance product.”