Show clients the important role life insurance can play in retirementArticle added by Channing Schmidt, JD, CFP on August 22, 2014
Channing Schmidt

Channing Schmidt, JD, CFP

Joined: September 20, 2012

Most people think preparing for retirement involves saving as much money as possible and using diversification to invest it wisely. But in addition to diversifying investments, smart retirement savers also consider how taxes will affect their retirement dollars.

As a financial advisor, you can help pre-retirees evaluate and implement ways to save for retirement, and to withdraw income once retirement arrives. It’s important to consider the contribution, accumulation and distribution tax characteristics of these options.

This process suggests steps you can take to show clients the important role life insurance can play in retirement. Starting with education, continuing through prospecting and fact-finding, and concluding with strategy design and implementation, each step highlights the resources available to you.

1. Education

Many experts advise that life insurance should not be used as a retirement investment vehicle. Others recommend life insurance be used as a retirement investment vehicle once other vehicles are maximized.

Life insurance can be an instant asset, providing beneficiaries with a means of support after the death of a provider. But a cash value life insurance policy can also be used to supplement retirement. It should be considered only after other, more expedient retirement vehicles are used. These include 401(k)s, Roth IRAs and similar investments.

Permanent life insurance features tax-deferred growth and tax-advantaged access to its cash value, provided it is structured correctly.
  • Policy values up to the amount the client has paid in premium is considered “basis.” Since it is essentially the client’s money, the client may withdraw from the policy up to this amount without taxation.

  • Any amount over basis is considered gain and is taxable. However, if a client withdraws this portion of the cash value through a policy loan, there is no tax as long as the client maintains the policy in force, pays the interest or pays off the loan. This is why life insurance is considered “tax-advantaged” and, under some circumstances for some clients, can be a strategy for providing supplemental retirement income.
2. Prospecting

When engaging this market, it is extremely important that you network, build and maintain relationships with local business owners, human resources professionals, estate planning attorneys, accountants and other professionals. By building these relationships, you can position yourself as an advisor with the expertise to help clients retire comfortably.

You may already have clients who could benefit from a discussion about how life insurance may be used to supplement retirement income. These clients will:
  • Need a life insurance death benefit
  • Have maximized or will not qualify for current available retirement accounts
  • Have discretionary income they can use to fund a life insurance policy
3. First appointment

Once clients are ready to identify financial strategies for their families, these steps can help you develop each case:
    a. Gather basic information.
    A worksheet that gathers basic information gets clients thinking about their immediate and long-term goals and possible disruptions to their goals, including loss of employment, disability or death. A worksheet could also walk them through “diversification” as it applies to assets, and to time and taxation. Once clients understand that assets vary in terms of how and when they are taxed, they can begin to properly diversify their assets.

    b. Take inventory of your clients’ tax efficiency.
    A tax efficiency inventory helps your clients list assets according to when they are taxed and understand how taxation can affect their retirement goals. Break it down like this:
      i. Items that are taxed today, such as savings, checking, CDs, mutual funds, bonds, stocks and treasuries
      ii. Items taxed in the future, such as qualified retirement savings plans and annuities
      iii. Tax-advantaged items, such as Roth 401(k)s and IRAs, municipal bonds, and life insurance cash value
Diversifying asset taxation may give clients a stronger chance of reaching retirement goals.
4. Solutions and implementation

Once you have collected the necessary information, you can design the appropriate financial strategy to fit your clients’ needs. Refine the information gathered to determine if a life insurance solution may meet your clients’ objectives.

After identifying the proper strategies, the next step is to help them make an informed decision. A customized sales illustration helps your customer tie the discussion to the relevant numbers and help bring your solution to life.

5. Service and support

Once your clients’ life insurance coverage is in force, they have a sense of security knowing you helped provide solutions that meet their needs. Hold annual reviews and ask:
    a. Is the policy still performing as expected and fitting the estate plan?
    b. Have the client’s needs or retirement objectives changed?
    c. Have circumstances changed?
Reaching out to your clients on an annual basis shows them that you will help ensure the strategy you developed will stand the test of time, even if your clients’ goals or circumstances change.

Please keep in mind that the primary reason to purchase a life insurance product is the death benefit. Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender periods. Policy loans may create adverse tax results in the event of a lapse or policy surrender. Loans and partial surrenders (withdrawals) will reduce the policy’s cash value and death benefit. Depending upon actual policy experience, the owner may need to pay higher premiums to keep the policy in force.
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