In our line of work, there’s a question that comes up from time to time. And, it’s being asked more frequently: What should I do with this life insurance policy?
With recent estate tax reform, married couples can now shelter more than $22 million from estate taxes at death. So families with a net worth less than $22 million find themselves wondering what they should do. They have life insurance to pay for estate taxes that no longer exist.
These families and their advisors should proceed with caution, thoughtfulness, and all the relevant facts as this is often a long-term and highly consequential decision. Here are 10 options to consider.
1. Do nothing. The current estate tax law “sunsets” at the end of 2025. Should the political climate shift – as it seems to do frequently – future legislators could create a more draconian estate tax regime. Our mantra has always been, “It doesn’t matter what the estate tax is today – it matters what it is when you are no longer here.”
2. Repurpose the coverage. Even if a family won’t need their life insurance for estate taxes, they may have other considerations – estate equalization for illiquid assets, for example, or the desire to provide a meaningful legacy to children, grandchildren or a favorite charity.
3. Surrender or exchange the policy. Proceed with caution as cost basis planning can be incredibly important and impactful! If you surrender a policy with a significant amount of tax-deferred gain, that gain will likely be heavily taxed. On the flip side, if you surrender a policy with cost basis that exceeds the current cash value, you lose that basis forever. Consider a 1035 exchange for a new insurance or annuity policy and allow the cash value grow tax free until it’s at least back to basis. We recently pointed out this option to a wealthy family. They were able to preserve nearly $2 million in cost basis on the purchase of a sizable, no-lapse guarantee contract that had zero cash value. (Call us for case studies of how this works).
4. Consider a life settlement. Believe it or not, there is a secondary market that acquires life insurance contracts. It’s possible to sell your policy to a third party for a value in excess of the current cash surrender value. However, consider this: If a policy is attractive for investors, it might be pretty attractive to keep!
5. Change funding to maximize return. Do a thorough Internal Rate of Return (IRR) analysis on your coverage to find the optimal funding pattern. One of the most common mistakes we see is policies that are funded to age 120, when a mortality study might suggest 90 or 95 would be sufficient. Through our efforts, we have been able to produce rates of return that are 50 to 200 basis points better by simply managing the policy’s funding schedule.
6. Consider an asset swap. Provisions of an Irrevocable Life Insurance Trust (ILIT) often provide the ability to substitute an asset of equal value for your life insurance policy. This may be a good way to repurpose the policy (see number 2 above).
7. Take a “wait-and-see” approach. See if you are able to stop, lower or modify the premium payment pattern to keep options open for future changes. Again, the tax law is temporary. And don’t forget: Your clients likely aren’t getting healthier. You may want to keep their insurability locked in.
8. “Pay up” the policy. Consider reducing the face amount to yield a lower premium, or even no premium. Many policies can be adjusted to a “reduced paid-up” status, or new coverage can provide a guaranteed death benefit with no additional premium outlay.
9. Talk to the beneficiaries. Your client’s children may consider funding the coverage for its future investment return.
10. Plan for other needs. Simply because your clients don’t need coverage at death doesn’t mean that insurance isn’t a good solution. Many new policies offer living benefits for extended care or even retirement income. And, the return on these policies is hard to match! Check out our December webinar replay for details on how this works.
Here is an even better suggestion: Call us. We will help you navigate the new tax laws and make it easy for you and your clients to make an informed decision. Whatever the question, whatever the need. Ash Answers.
Register for our April 12 webinar where Tim and Sam will walk through each option in a more detail.Register Now
One of the first questions you’ll see on most life insurance applications is whether or not the applicant has Alzheimer’s disease, dementia or any form of cognitive impairment. In most cases, a “Yes” response is often the precursor to declining your policy. However, understanding these impairments will help get your client full consideration – and potentially a policy in hand.
The word dementia is really just a general term used in describing symptoms caused by disorders of the brain. Symptoms are things like memory loss, or difficulties with thinking, problem solving or language.1 The most common type of dementia is Alzheimer’s disease. Typically, if you have been diagnosed with end-stage dementia or Alzheimer’s disease, the condition has progressed enough that it interferes with activities of daily living. This decline in cognition is severe enough to generally exclude consideration for traditional life insurance plans.
Mild Cognitive impairment or MCI is a decline in memory and personality that could produce alterations in judgment, behavior and language. Mild cognitive impairment is a disorder that presents with measurable memory decline, but the client is able to independently perform all usual activities of daily living successfully. This is not to be confused with basic forgetfulness or not being able to recall a name on occasion. However, it’s important to understand the signs and symptoms. In fact, there are several causes of mild cognitive impairment that are actually reversible. To name just a few: thyroid dysfunction, vitamin deficiency, medication side effects, sleep disorders and even stress.
In general, a medical workup for cognitive impairment will include:
If the workup doesn't create a clear clinical picture, the doctor may recommend neuropsychological testing, which involves a series of written or computerized tests to evaluate specific thinking skills.2
To help best negotiate a life insurance offer, we must work together to determine the actual diagnosis and how it was made. We must understand the severity of the client’s symptoms or lack even lack thereof.
It’s important to highlight all of the favorable factors. This would include having regular preventative health care and immunizations, as well as compliance with any prescribed medications. You should also make note of a routine that involves gainful employment, regular exercise, hobbies, participation in social activities and the ability to travel or take vacations. It also helps to point out if there are any family members with longevity as well.
What does this all mean for your clients’ chances of securing life insurance? Carriers are continually re-evaluating their manuals when it comes to older age underwriting and cognitive impairment, giving more opportunity to secure affordable life insurance.
Clearly, many factors need to be taken into consideration for underwriting, and Ash Brokerage is here to help. To help assist you in gathering the needed information, we have developed a Cognitive Impairment Questionnaire. Give our experienced underwriting staff a call to discuss your case.
Dianne Leidigh has earned an unwavering reputation, among customers and constituents alike, as a respected partner and trusted resource. Through her personal commitment to continuous professional growth, she’s become an Associate of the Life Management Institute, Associate of Customer Service with LOMA, and an Associate of the Academy of Life Underwriting. As Dianne approaches her second decade in the brokerage life insurance industry, much of which dedicated to advocating risk, her passion for helping others, commitment to personal growth, and perseverance continues to yield truly winning solutions!
Ash Brokerage Cognitive Impairment Questionnaire: https://ashcmsstorage.blob.core.windows.net/media//Docs/uw/impairment/Mild_Cognitive_Impairment.pdf
1Alzheimer Society Canada, “What is dementia?”: http://www.alzheimer.ca/en/About-dementia/What-is-dementia
2Alzheimer’s Association, “Mild Cognitive Impairment”: https://www.alz.org/dementia/mild-cognitive-impairment-mci.asp
Tax season is here. And with tax reform in place, this season could be a game-changer. What do I mean? Well, your clients could be saving thousands of dollars on their income taxes. Now’s your chance to help them use it wisely.
Take a look at the chart below. I’m not a tax expert, but I estimate a married couple with a combined income of $250,000 and two kids could save more than $7,000 with the new tax code.
What if you took that money and used it to purchase a tax-advantaged financial instrument?
Cash value life insurance can not only give clients protection during their working years, but it can also create a supplemental, tax-free retirement income stream for their future. It may sound complicated, but it’s not. You’re simply taking one tax advantage to create another – and your clients don’t lose any net household income. You can watch a great video that better explains the concept.
There are other uses too. Today’s insurance products offer flexibility and coverage for things like long-term care or chronic illness. If you missed it, watch the replay of the webinar we did on this topic.
Bottom line: No matter their situation, you owe it to your clients to explore the possibilities. Before they cash out their tax savings, you should check out the options available with life insurance. Give me a call – no matter the question, no matter the need. I’m here to help.
For financial professional use only. Calculations based on married couple with two children, living in Texas (with no income taxes), paying $11,157 in mortgage interest. Actual tax savings will vary. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Ash Brokerage and its representatives do not provide tax or legal advice. Consult a tax or legal professional.
It's been a great run in the equity markets. If you manage money, business has been good. Your assets under management are likely at an all-time high. You’re starting the year with a nice recurring revenue stream. Life is good – or is it?
Well, life insurance isn’t all good. It’s somewhat of a pun, but in all seriousness, risk management products have taken a back seat to AUM. Who wants to talk about death, getting sick or running out of income in this market? Not many people.
Let’s face it, most of your time is spent on asset allocation, rebalancing, tax management, seeking alpha, low-cost, etc., etc., etc. By the time you’re done with all that, the risk management strategy can wait for the next meeting. You can get to it another time … your clients are fine, right?!
For now. Unless you know something I don't, everyone has a 100 percent chance of not being fine forever.
What if you put the risk management conversation at the forefront of your conversations this year? Actually have a heart-to-heart discussion about the risks in life. I’m not talking about death insurance conversations, I’m talking about living insurance conversations.
You need to plan for WHEN something will happen, not if. You need to talk about risk – extended health care, chronic illness, disability, outliving income and, yes, death – at every client meeting.
To put it bluntly: You cannot call yourself a financial advisor, wealth manager or any other term that implies “holistic” planner unless you have a strategy around risk management.
No more excuses. Make 2018 the year you become a "When it happens" advisor. To clarify, I don't think your clients must buy or own insurance coverage. But I do think you need to help them set a plan for action for WHEN one of life’s risks happens to them.
Take the pressure off yourself and just have a conversation with the clients you serve. This isn't about product, or features or price. Tell them that you simply care enough to make a plan. When you do this, I bet your business will grow, your clients will be happier and you will know more about them than you do now.
And yes, I imagine a few folks will want to transfer some of that risk away from their own balance sheet. If they want to know what that looks like, that's when you call us. And we’ll answer.
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