For financial advisors, long-term care can be one of those topics that produces a groan followed by a dismissal. Anyone anywhere near the industry has heard of carriers, products and pricing changes. And the pandemic has forced a change in the way we sell as well. There’s a lot to know about how to help your clients plan successfully.
During our recent virtual LTC U, we covered a lot about LTC. We took a high-level look at the need for planning, and then got down to some of the nitty gritty. Read on to discover some of the highlights of the series. And, if your interest is piqued, check out the replay on demand.
Why You Should Give LTC Planning Another Look
The need for a long-term care plan hasn’t diminished. In fact, if anything, it’s become something that more clients are asking for. It continues to be an emotional subject, and one that can seem overwhelming when clients really start looking into it. To help your clients plan starts with a conversation that is about embracing the emotional aspect, not about selling a policy.
Financial Impact
Clients sometimes object that they can self-insure. And, in fact, clients that haven’t planned will end up self-insuring, although unintentionally. But what matters more is whether self-insurance offers the best value. By thinking through the costs of self-insurance versus transferring the risk to the policy, you help your clients develop an intentional plan and avoid eating up in long-term care costs the wealth they want to leave for their children. Long-term care is probably the single largest risk to an otherwise thorough retirement plan.
Long-Term Care Is Not a Place
It’s an event. But when your clients hear long-term care, the first they think is nursing home. With a little education, you can show them all of the options available should a long-term care need occur. And, with people living longer, there’s a greater chance of needing care. One way to bring up the topic is to ask where they’d like to receive care if they needed it.
Designing a Plan
Once you and your client have discussed what they want to have happen, and that they are interested in transferring some of that risk to a carrier, it’s time to design a plan. It’s important to remember that long-term care is not a capital issue, but a cash flow issue, and assets need to be allocated to it.
For most clients, long-term care is a once-in-a-lifetime purchase. They need time to make the decision. So, make yourself available, provide education and follow up, and allow them to move at their own pace.
In addition to your Ash LTC team, we have other resources to help:
And this is just the tip of the LTC U iceberg. If you’re ready to learn more, check out all three days of the replay. The most important takeaway is that you don’t have to be an expert when you have a team of experts behind you. Reach out to your LTC team, here to answer any questions. Just Ask.
Most of us are beyond ready to get back to the normal we knew a year ago. And for financial advisors, that means helping your clients prepare for the possibility of taxes returning to higher rates. As clients have questions about taxes, you have an opportunity to protect them with tax-efficient solutions.
There’s also a good chance that these same clients need life insurance. Which just happens to be a great resource for providing that tax efficiency we just mentioned.
To get started, think of your high-income clients. The easy solution for providing insurance is to look at a term policy. It’s relatively inexpensive and the application process keeps getting simpler. But that only gets you halfway there — it doesn’t solve the problem of tax efficiency.
Instead, consider a cash value life insurance policy that provides the needed insurance protection, AND allows them to accumulate money for retirement on a tax-advantaged basis. Let’s go into a little more detail about why this strategy makes sense.
Currently, high-income professionals are paying record low taxes. Consider a family of two working professionals, each making $150,000 per year, for $300,000 Adjusted Gross Income. In this example, the family falls into the 24% marginal tax bracket, which, adjusted for inflation, is the lowest it’s been in the past 70 years (see the chart below). To put it in perspective, in 1981 their marginal tax bracket would have been 64%.
Cash value life insurance can be used to hedge against a “return to normal” in terms of taxes for clients in this demographic. And under our new administration, there’s definitely a chance that taxes will increase in the near future.
Find out more about how cash value life insurance can help your high-income clients create a tax-diversified financial plan. We’re here to walk you through the basics and design the plan that’s right for each individual situation.
When it comes to the insurance industry, and specifically to how products are priced, men and women aren’t created equal.
Statistics prove that women live longer. So, when purchasing life insurance, they pay smaller premiums than men. Unfortunately, when it comes to disability insurance, that’s not the case.
All things being equal, a female will pay 30-50% more for a disability policy than her male counterpart. It’s because women are more likely to file a claim – not just for pregnancy, but for all types of claims.
The good news is that there is a solution. Multi-life. Most carriers offer some type of multi-life option, but I’m going to focus on Principal for this example. In addition to being one of the largest DI carriers in the market, they are also more flexible, and they offer unisex pricing options. To qualify as multi-life, they require policies to be placed on three or more people with a common employer. There is no requirement for the employer to contribute to the premium, although that’s certainly an option. In fact, the policies can be billed directly with no employer involvement.
Here we'll look at a 40-year-old female business owner in a white-collar occupation who lives in Indiana. For her policy, we’ll use a 90-day waiting period to age 65, and a $5,000 monthly benefit with residual. The premium for the policy, without any multi-life discounts, is $3,500 annually.
Now let’s assume that the client buys policies on two other employees. We just hit the magic number for making this a multi-life plan. Those two policies, after the discounts, can have annual premiums as low as $165 — which we can help you design. The client is paying a total of $330 per year for these two polices.
And now that the plan qualifies for multi-life, our client’s premium of $3,500 on her own policy is discounted to $2,300 annually. Her new premium, along with the $330 for her employees’ policies puts her total annual bill at $2,630. That’s an additional 25% savings, and her premium discount is locked in for the life of her policy — even if the other two policies are canceled later.
I believe that’s what we call a win-win.
Your Ash DI team can help you structure a multi-life plan for male and female owners. The discount on the females is much more significant — it lowers the female rate to be similar to that of a male — but don’t let that stop you from considering multi-life plans regardless of gender.
Take a minute to consider small businesses you work with. If multi-life is a viable solution to protect them and their employees, let us know. We’re here to help.
When we think of financial retirement strategies, our first thoughts are usually strategies involving Individual Retirement Accounts (IRAs) or annuities. And that makes sense. They are an important part of a secure retirement and they fill a vital need. Today, however, I’d like to throw out another idea— that of using life insurance to optimize retirement income.
Before I dive into the how, I want to start by looking at the financial lifecycle, which begins with your first job. The financial lifecycle has two components: human capital, or the ability to earn an income, and financial capital, or monetary wealth, built up over time. Human capital can be converted into financial capital as workers earn wages and save some of those earnings. For example, this occurs when deductions are withdrawn from workers’ paychecks and deposited into their 401(k) accounts.
Both human capital and financial capital are used over a couple’s lifetime to generate income. During their early working years, couples tend to have higher amounts of human capital and lower amounts of financial capital. As the working years wind down, human capital diminishes. Ideally, at the point of retirement, enough financial capital is in place to generate income for a couple as long as it is needed.
A couple, both age 30 and both high-income earners. They plan to retire at age 65, giving them 30 years of human capital before we need to have it all converted to financial capital to fund their retirement. They each have a qualified plan balance of $125,000 and nonqualified balance of $25,000. Their annual qualified contributions are $19,000 each; nonqualified contributions are $25,000 each.
During their working years, life and disability income insurance are important in case of an immediate need. It’s also a time to plan for retirement, so we put annuities in place, and have the long-term care conversation to make sure they are prepared for an extended health care need. The qualified and nonqualified funds they are investing in are for retirement, as is a plan for long-term care. That’s when these solutions really come into play.
After retirement, though, the need for life insurance doesn’t go away, although it might change a bit. Life insurance can be purchased to help achieve several different goals, including income protection, efficient wealth accumulation and wealth preservation
The key is to use life insurance to help with asset LOCATION. Why?
All of this sounds great, but how do you do it? The short answer is by understanding Section 7702, which defines life insurance, modified endowment contracts (MECs) and tax-advantaged life insurance. The taxation of non-MEC life insurance is actually more favorable than many of the traditional retirement products.
Taxation of Life Insurance vs. Alternatives
|
|
Traditional IRA |
Roth IRA |
NQ Investments |
Annuity |
Life Insurance |
|
Tax-Deductible |
Yes |
No |
No |
No |
No |
|
Tax-Deferred |
No |
Yes |
No |
Yes |
Yes |
|
Tax-Free Distributions |
No |
Yes |
No |
No |
Yes |
|
Tax-Free Legacy |
No |
Yes |
Yes |
No |
Yes |
|
Unlimited Contributions |
No |
No |
Yes |
Yes |
Yes* |
*Subject to suitability and financial justification limitations
Back to our couple of 30-year-olds, and how to apply this concept. Start with a minimum non-MEC death benefit, purchased with their nonqualified cash flow. This is will be funded now, while they are still converting human capital to financial capital. On retirement, the death benefit will be level.
Using their $25,000 annual nonqualified investment, we will cover a portion of their insurance need and utilize Section 7702 to create a favorable tax location all while reducing investment volatility.
In this example, the female earns a $1.3 million death benefit, net of savings, to age 65. Her projected cash value at retirement is $3 million, and her tax-free retirement income projection (age 65-90) is $230,000. The residual death benefit is $500,000.*
We can help achieve similar results with your clients. Identify high earners between the ages of 20-55. Incorporate this concept into their term insurance strategy. It all starts with having the conversation. Then tap into your Ash resources. Our Life Sales team is always happy to help structure a plan that is the right fit for your individual client.
*Using Allianz LifePro+ Advantage, Female PNS Age 30, $25,000 for 35 years. 6.9% assumed rate of return.
Our world is full of complicated information. And the insurance industry is notorious for creating products that can be hard to understand. I’m sure we’ve all had clients suffer from “analysis paralysis” when trying to decide between multiple solutions. But it doesn’t have to be scary.
As advisors, we experience success when we can break down the complexities into a strong solution that the client can understand. And, believe it or not, it IS possible to simplify the way we help our clients fund a long-term care plan.
Once you’ve talked with your clients about long-term care and helped them understand the value of a written plan, it’s easy to stall out. But a written plan is only half the story. If they decide to use an insurance strategy to fund the plan, they will need our expertise to figure out the best way to proceed.
To keep it simple, there are four main categories to consider when finding the funding. Learning about your client’s complete financial picture will be your guide when deciding which funding option to recommend. And, once you’ve got that figured out, your Ash team is perfectly positioned to help create an individual solution for each client. The key is to choose a funding method that won’t force the client to sacrifice lifestyle or other financial goals.
Let’s look at each option, and which type of client it is most likely to fit best.
As advisors, we’re juggling lots of moving parts to create a solid financial plan. The upside is that by understanding the complete picture we’re in the perfect position to take assets from vehicles that don’t meet the client’s needs and use them to fund a long-term care plan. Because without a solid plan for long-term care, the entire retirement plan is at risk. And that’s something to be afraid of.
© 2018 Ash Brokerage LLC.