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Life Health > Life Insurance

How to help protect your clients from economic and financial uncertainty

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Your clients look to you for financial guidance. As their advisor, you can help them immeasurably by taking the current economic climate into account and helping them navigate uncertainties with an investment diversification strategy that includes life insurance. First, take a moment to put into context what economic risk means to them. Then, show how life insurance can add a new dimension to their portfolio that can help them hedge that risk.

1. You cannot always equate the stock market with the economy.

Often, according to Dr. Quincy Krosby, Prudential Financial market strategist, the economy and the stock market do not operate in tandem, particularly at inflection points. “For example, the stock market will typically turn positive as the data begin to get ‘less bad,’ or when the Federal Reserve begins a round of stimulus. In other words, the economy still looks weak, but investors project that growth is soon to rebound,” said Krosby, who served as Assistant Secretary of Commerce and represented the U.S. to the International Monetary Fund, in addition to many years working in capital markets. Conversely, the market can reach new highs as signs — sometimes subtle ones — suggest that the economy is losing momentum.

The stock market at the beginning of Q3 2016 appears to be hovering at new highs, but questions still remain as to whether or not the economy is significantly rebounding from a weak first half. ”While the economic data continue to improve, questions remain as to how robust the recovery will be, and if stock market valuations are too rich given economic uncertainty here and abroad,” added Krosby.

Ramifications from the Brexit vote, the upcoming election, questions focused on China’s growth, the low-interest rate environment and Federal Reserve policy all contribute to an underpinning of uncertainty for global markets.

Implications for your clients: Short-term portfolio performance may not accurately predict long-term economic trends

2. The uncertainty we face today.

“Are we seeing the beginning of a viable recovery, or is it just a short term upswing?” asked Krosby.

For example, just as it appeared that the Federal Reserve was poised to raise interest rates at some point this summer, investors and economists alike were surprised by a markedly weak payroll report of only 38,000 new jobs added in May, 2016, coupled with downward revisions for the two prior months.  The following month’s report, however, delivered a strong 287,000 added jobs with wage growth continuing to climb, albeit slowly. 

Not only were market participants caught off guard with the May payroll report, but it was obvious that the Federal Reserve was, too, as Chairperson Janet Yellen made clear that the Fed needed more time to assess incoming data.

In addition, unemployment was over 10 percent during the recession, and is now below 5 percent; however, part of this low number is due to the fact that many people simply stopped looking for work, and are no longer included in the unemployment numbers. This leads to more uncertainty. ”Why did so many people stop looking for jobs?” said Krosby.  “The participation rate — that is how many Americans are actively looking for work — at times appears stalled.”

In other words, if the economy is doing well, why didn’t the participation rate increase, even after factoring in those who retired?

Implications for your clients:  Today’s stronger economic indicators can belie longer-term uncertainty.

3. The cyclical nature of the economy


Some experts believe another recession is looming in 2017, and many experts question what form of stimulus the Federal Reserve can offer given that interest rates remain historically low.

Countries outside the U.S., including Japan and the Eurozone, have introduced negative interest rates to spur economic growth, only to find that, without demand, the policy is not working as intended.

Data in the U.S. suggest that consumer spending is strong, and with 71 percent of the economy predicated on the consumer, this is welcome news. Housing is showing momentum, as well. Similarly, manufacturing appears to be turning the corner after months of lingering at stall speed. Still, there are concerns that we may be nearing peak economic growth, with an inevitable slowdown to follow.

At some point, though, we are expected to enter another recession — just not necessarily one as deep as in 2008-09.

“Recessions are very much part of the normal business cycle, and many are mild and not long lasting,” said Krosby. “2008-2009 was definitely not the norm.”

Implications for your clients:  Recessions happen and we need to prepare for them.

Economic forecasting is not an exact science, according to Krosby. “I’m not saying that there is no importance in looking and planning ahead, but doing so always has uncertainty woven through it.”

So how can you help your clients build portfolios that, as they move toward retirement, protect them and their families from economic disconnect and uncertainty? Consider these four steps:

Step 1: Identify your clients’ concerns.

A pressing concern will likely be preparing for unexpected events like early death or serious illness, health care costs, market performance, investment diversification, how investments are taxed, and having enough money to leave a legacy.

“Clients really need to have strategies that can help them be more confident about their financial futures,” said Michele Frey, Vice President of Products and Solutions Marketing for Prudential’s Individual Life business.

Action item: Ask your clients about their specific rather than general concerns (i.e., taxes or inflation vs. “the economy”).

Step 2: Remind your clients that diversification can have tax benefits.

“Diversification normally focuses on spreading investment risk across multiple assets or asset classes,” said Frey. “However, not nearly as much focus has been placed on diversification across tax buckets. And overlooking that tax diversification can have an impact on people’s retirement income.”

How does this work? Some investments, such as 401(k)s, pension plans, and traditional IRAs, are taxed at traditionally high rates. Others, such as stocks, mutual funds, and sometimes real estate, are taxed at lower capital gains rates. And some investments, such as Roth IRAs and municipal bond interest, are tax-free.

Action item: Help your clients understand that diversification goes beyond asset classes into taxable vs. tax-free.

Step 3: Introduce your clients to LIRP.

“When structured properly, life insurance can be an attractive accumulation tool  for clients who have a valid death benefit need,” said Frey. This is called Life Insurance in Retirement Planning, or LIRP.

“Permanent life insurance has some unique characteristics that may be difficult to find in other financial alternatives, particularly for those clients who have high incomes,” said Frey. “In addition to death benefit protection, any accumulated cash value within a life insurance policy can generally be accessed income-tax-free while living, if done so properly.”

Unlike a Roth IRA, there is no specific limit on the dollars allocated to purchase life insurance. However, there are maximum premium limits determined by the policy face amount. So, assuming these requirements have been met, the policy owner may access any available cash value that grows, tax-deferred and potentially tax-free, through policy withdrawals and loans. Policy owners need to be aware though that if their policy lapses or otherwise terminates prior to death, loans become immediately table to the extent they exceed cost basis.

Action item: Encourage your clients to consider LIRP as a tax-preferred hedge against economic uncertainty.

Step 4: Identify the ideal LIRP prospect.

Who can most benefit from the LIRP strategy? Your target audience should have a legitmate death benefit need and be high-income-earners — married couples earning over $184,000 a year and single people earning over $117,000 a year.

Those who are already maximizing their contributions to other traditional retirement plans can benefit, too.

Action item: If your clients are maxing out retirement accounts, show them how LIRP could help them maintain retirement income.

The bottom line: A LIRP strategy can provide your clients with a versatile solution, providing a valuable death benefit and a way to generate a stream of supplemental income to help keep them on track to meet their retirement goals.

Loans are charged interest; they are usually not taxable. Withdrawals are general taxable to the extent they exceed basis in the policy. Loans that remain unpaid when the policy lapses or is surrendered while the insured is alive will be taxed immediately to the extent of gain in the policy. Unpaid loans and withdrawals reduce cash values and death benefits, may reduce the duration of the guarantee against lapse, which may lapse the policy and may have tax consequences.

Life insurance is issued by The Prudential Insurance Company of American, Newark, NJ and its affiliations.

Created Exclusively for Financial Professionals. Not for Use with Consumers.



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