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.
One of the most common threads I’ve seen in successful financial advisors is a tenacious focus on the client outcome. Outcomes are the results that outstanding advisors provide clients to achieve goals, solve problems and provide financial fulfillment. This is not to understate or minimize the process and client experience along the way – both of which are intensely important – but results provide advisors with tangible proof of their value to reinforce client relationships.
Let’s highlight three strategies that led to outstanding client results. I will take you through how advisors engaged with their insurance partners to solve problems and achieve the best outcome for their clients.
Early this year we had an advisor approach us with an opportunity to assist in putting together an insurance portfolio for two business partners. Let’s call them Jim and John. The two clients built an extremely successful manufacturing business that was well capitalized and generated significant cash flow. Jim and John needed to arrange a buy-sell agreement and funding strategy.
Based on the advisor’s discovery session with Jim and John, their goal was to ensure they had enough insurance coverage to fund the buy-sell arrangement, and they didn’t like the idea of “renting” term insurance. The clients believe that in 15-20 years they will be exiting the business and it is important to them to either have cash value built into their coverage that they could take with them or permanent insurance they could repurpose for estate planning. While this may sound relatively straightforward, the typical “cross-purchase” arrangement makes this more difficult to accomplish as the partners would essentially own each other’s policy. While cross-purchase is still a workable strategy, a more streamlined solution for this type of scenario is to establish a partnership to own the policies with an operating agreement that will govern the buy-sell.
The benefit of using a partnership to own and govern a buy-sell agreement is threefold.
The advisor suggested the clients consider creating a partnership agreement funded with cash-accumulating life insurance. Jim and John agreed to the strategy and began underwriting while also engaging with their attorney to draft the appropriate agreements.
Jim and John were both approved with favorable underwriting terms and put the advisor’s recommendation in place. Each of their policies is projected to last for their lifetime and have cash values at their target retirement age that well exceed the premiums paid. The outcome of this scenario is the coverage Jim and John needed with an ownership structure that accomplishes what they wanted.
The fastest-growing line of business at Ash is our long-term care business or, perhaps more appropriately named, our healthcare in retirement business. In speaking with advisors across the country, there is a palpable demand from their clients for solutions to fund potential long-term healthcare events. Virtually everyone has now witnessed a grandparent or parent go through an extended care event and the strife and complexity that often accompanies it. The question is no longer if a client will need care, but when and how to fund the care.
One of our most successful advisors found a unique funding mechanism to seamlessly provide his clients with a substantial amount of LTC coverage without impacting their cash flow or investable assets. This advisor has a group of clients with significant cash accumulations in underperforming whole life contracts. These contracts were earning a relatively modest, albeit safe, rate of return every year and required an annual outlay. Few clients needed the insurance death benefit and the money in the contracts was more of a contingency pool of assets rather than dollars needed for retirement income.
Knowing that one of the primary reasons a client might need those “contingency” whole life dollars is a significant long-term healthcare event, the advisor looked for a different strategy. The advisor recommended a tax-free exchange to an asset-based long-term care policy. Asset-based LTC is relatively simple: The client deposits money with the insurance company (since this was a rollover, it was a single lump sum) and in return gets a pool of dollars for long-term care that is often three-five times the initial lump sum and is indexed for inflation. In some of this advisor’s cases, the LTC pool of dollars represents a tax-free internal rate of return in excess of 8% at life expectancy. The drawback of the asset-based strategy is a very modest death benefit – essentially a return of the premium. Since this group of clients weren’t concerned with death benefit, but knew the impact of an LTC event, this solution fit very well.
This advisor was able to provide his clients with certainty and peace of mind about long-term care, all with very little disruption to the client’s financial picture. By repositioning an asset that was no longer serving the client’s needs, he was able to mitigate one of the biggest risks in retirement, a long-term health event. This is a very positive outcome.
This summer, we had an advisor approach us with a client who had been oversold a portfolio of annuities. The annuities had significant surrender schedules, high fees for guaranteed income riders, and the client (let’s call him Joe) had no need for the income in retirement. These annuities were ultimately going to pass to Joe’s family, and he was relatively unsure why he had acquired them.
Joe’s advisor brought his portfolio of annuities to Ash and asked us to help model some scenarios integrating insurance. We put together projections for maintaining the current annuity portfolio but also looked at using the guaranteed income features to fund an insurance strategy for the client. The insurance strategies created a far more compelling net result for the client and added in some potential long-term care coverage as well.
The outcome for this client was a better, more sound planning result that was a custom fit for his circumstances, not an advisor’s commission statement. Our models proved the value of insurance and created a platform for this client to make the right decision.
2019 was a great year, and by focusing on bringing solutions to every client, every time, we can keep this momentum going in 2020. And beyond.
Sometimes, helping my advisors sell life insurance is an uphill battle – with them and their clients. I know it’s not the sexy choice, and it’s not an exciting solution that’s going to help people make a million bucks. But, it does enable peace of mind, which can be more valuable in and of itself.
With many years behind the scenes and out in the field, I’ve heard a lot of excuses. But, many of them just aren’t true. Advisors and clients are relying on myths, not facts, when considering life insurance.
Ask your clients: Is the amount really enough to cover your needs? Can you keep your policy when you retire or change jobs?
Many employers provide life insurance equal to one to two times the employee’s annual salary, and they may be able to purchase up to four to six times their salary. First of all, to replace a client’s income for their dependents, they typically need five to eight times their annual income – some experts even recommend 10 to 12 times. Second, their calculated “salary” doesn’t typically include commissions, bonuses, and second incomes. A needs analysis calculator can help you determine the amount of coverage your clients need.
Even if they do have enough insurance through their job, you’re clients will likely lose their coverage when they leave. That’s they should only include their employer’s policy in covering their needs if they can take it with them at affordable rates. Otherwise, consider it a bonus. Plus, they may be able to get a better deal on their own, especially if they’re young and/or in above average health.
Ask your clients: If your spouse works, how would you replace their income in your household budget? If your spouse stays at home, how would you replace their value in child care, cleaning and other household operations? What’s that add up to over several years?
Are you kidding me?! Spouses who earn less or are non-working are extremely important, and their contribution to your household needs to be protected. If you haven’t already, you should read my colleague Sharlene Woerther’s blog for more information on why spouses need life insurance.
This is yet another reason why it’s so important to do a needs analysis with your clients. Once it’s been put to paper, it’s amazing how many people see the value in their spouse’s contributions. Insuring a spouse also gives the remaining parent the opportunity to take time off work and help the family adjust to their loss.
Ask your clients: What do you spend on soda and snacks in a month? Could you give that up to protect the ones you love?
I use to tell clients that often times you can get life insurance for what amounts to a bag of chips and pop a day. Since then I’ve changed my diet, so I no longer buy those things anyway … but I wasn’t too far off with my estimates. You should run a quick quote for your clients and show them the real costs!
A study conducted by Life Happens and LIMRA found that 30 percent of Americans acknowledge their need for more life insurance, but only 10 percent planned to purchase it within the next year. The main reason given was cost, with 65 percent saying that it’s too expensive. However, 80 percent of them overestimated the cost. While the cost for a health 30-year-old would be about $160 a year, the average estimate was nearly twice as high.
Ask your clients: Are your conditions under control? When was the last time you looked into coverage?
Don’t worry if your clients aren’t able to run a marathon or keep up with a fitness video on TV – they don’t have to be perfectly fit to qualify. Yes, the healthiest people pay the lowest premiums, but the life insurance industry has come a long way I just a few years. Many who were deemed uninsurable in the past can now receive coverage.
A lot of companies cover a range of health conditions, and some even specialize in high-risk cases. Clients can also purchase a policy that is not medically underwritten at all – just be aware that they tend to be more expensive and have lower coverage limits.
Ask your clients: Do you know of someone who died too young? Have you ever seen a Go Fund Me page to raise money for a person’s family after they’ve died?
Social media is littered with examples of young families who’ve been impacted by the loss of a spouse or loved one under the age of 40. Accidents and illnesses can happen to anyone at any age.
The bottom line? If your clients have anyone who depends on them financially, they should have live insurance. Help debunk the myths and make sure they’re covered.
As a relationship manager at Ash Brokerage, Jason O’Barr is a teammate for advisors – identifying new sales opportunities, providing consultative and comprehensive insurance support services, and effectively helping advisors grow their businesses. With experience as a producer, a marketer and an internal wholesaler, he understands the process from the ground up.
© 2018 Ash Brokerage LLC.