Protection Products

Level the DI Playing Field with Multi-Life


Protection

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.

Let’s use an example

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.

Buy more. Pay less.

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.

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Optimizing Retirement Income


Protection

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.

Let’s look at an example

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.

A continued need

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?

  • Asset location provides a tax-efficient vehicle for retirement savings
  • Asset location gives planners a vehicle to own tax-inefficient assets
  • Asset location can provide tax-diversification in retirement

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.*

Make it work for your clients

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.

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Successful Outcomes – Advisor Wins from 2019


Protection

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.

Outcome #1 – Business Succession Planning with Buy-Sell Partnerships

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.

  1. The structure allows the two business owners (equal owners of the partnership) to equally share in the cost of funding the coverage. Since Jim and John are relatively similar in age, it is not particularly relevant in this circumstance, but this is an issue often raised.
  2. This structure allows them to easily, upon exit of the business, distribute the policies to each insured rather than trying to negotiate a sale between two now-former business partners.
  3. The partnership structure avoids some of the transfer-for-value issues that can arise from other buy-sell arrangements (specifically for those clients considering a buy-sell trust if more than two business partners are involved).

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.

Outcome #2 – Repositioning the Right Assets for Healthcare in Retirement

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.


Outcome #3 – Annuity Restructure

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.   

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Disability Does Not Play Favorites


Protection

What if you knew you were going to become totally disabled today? Are you ready? Are your clients ready? What about their finances – are they prepared, too? Most people and their financial plans aren’t protected from the unexpected. It’s unfortunate – you never know when a disability or illness will strike. 

Sometimes, it’s hard to imagine what could possible happen to make someone unable to get up and go to work anymore. It’s too difficult to think about being too sick or injured (physically or emotionally) to continue with live as we know it. 

But it happens. Trust me. I’ve heard many life stories that were both unexpected and unfortunate. 

One woman, a dentist, was cleaning her fish tank as usual when the unimaginable happened: The glass shattered and severely lacerated her wrist. Not only can she no longer practice dentistry and care for her patients, but she also can no longer provide for her family. She waited too long to decide to purchase a disability income policy.   

For one family man, the story ends on a brighter note. He was healthy. He went to the gym on a daily basis. He ate right. He saw his doctor regularly. Then, without warning, he suffered a stroke. He became wheelchair bound and unable to do the things he loved, including his work. Because he was prepared with a strong disability policy, however, his family was impacted emotionally, but not financially.  

Put it in Practice: Disability does not play favorites. It can happen to anyone. It comes in many forms. Ask your clients where they would be if they no longer had a paycheck. Then do something to help.  

 

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