Life insurance as a journey
By Pat Foley
My colleagues and I think of insurance as part of every client’s life journey.
Ongoing research has shown us that life insurance can work with the ebbs and flows of an individual’s life cycle. Coverage needs evolve over time — starting with some basic coverage and migrating to a full complement of plans that can serve a lifetime of change.
The Genworth 2011 LifeJacketSM Study, which included consumer surveys and interviews with beneficiaries, revealed that life insurance is not a one-time transaction. Rather, agents and advisors are able to serve as guides for their clients. Getting your clients adequately covered is the ultimate goal. Getting them there can take time.
For example, follow the life path of a person and add some typical situations that many of us encounter on the way. As life goes on, so do varying needs for insurance. I recommend a universal life insurance policy because it offers the greatest flexibility in terms of low initial planned premiums and coverage that can be modified along with life’s twists and turns.
UL policyowners can change or vary what they pay in premiums, paying more one month and less the next — as long as they pay enough, or there are sufficient policy values to cover the monthly charges that keep the life insurance policy in effect. For convenience, most life insurance policyowners choose to pay a planned premium on a regular basis.
In addition, many universal life insurance policies offer death benefits options, such as death benefits that increase every year, or the ability to reduce the amount of death benefit in the future if needs change.
A young adult out of college may not be looking at insurance right away, as concerns for paying student loans and getting that first real job take priority. However, once that twenty-something is employed, does his/her employer offer enough group term life insurance? Perhaps some supplemental coverage is in order.
Another consideration is that many people won’t likely have long-term job security, given the economy. This could be the first opportunity to meet with an agent or advisor and look at the big picture, including starting a financial plan roadmap.
The UL policy can be part of the journey, as career changes may result in lack of group life insurance. Buy it at a young age and start building cash reserves.
When a walk down the aisle takes place, it’s time to look at protecting both partners to ensure there is enough life insurance to cover living expenses and lost income in the event of an unforeseen death. As family comes along, the need for additional life insurance death benefit will increase. Not only will the additional coverage be needed to help protect a growing family, it can also serve as an emergency fund.
For example, if you need additional life insurance during childrearing years, you can structure the death benefit to remain at a certain level for say 20 or 25 years. At the end of that period, you can reduce the death benefit to better fit your needs.
Advise parents to consider establishing insurance policies for their children so that they will have coverage guaranteed for lifetime. Ages 40-60
During these two decades, getting the kids off to college may make it necessary to tap into the cash value of the policy — but the plus is that the UL policy can remain in effect. This is also the time to revisit that financial plan and map out retirement income sources.
As empty nesters — once the children have graduated from college and the home mortgage is paid off, retirement approaches and income replacement needs reduce — there is a shift towards permanent coverage for estate conservation and protecting retirement needs.
This is also the time to look at long term care insurance as a means to help protect retirement savings and assets. The cash value in a life insurance policy may be a good source of funds to help pay the LTCI premiums.
While many people may be forced to defer an early retirement, some are able to retire in their sixties. If our person could retire at age 62, here’s a possible scenario: he has a $500,000 death benefit UL policy that he intends to keep for estate needs — it is guaranteed for his life with no additional premiums.
He also has a current assumption UL policy with $100,000 of cash value, $300,000 of death benefit, and $50,000 of cost basis. He has just purchased a long term care insurance policy with annual premiums of $6,000.
He exchanges the smaller life policy for a life with period certain single premium immediate annuity that pays $6,000 per year — and then assigns the SPIA under IRC section 10351 so that the payments flow tax free each year to cover his LTCI premiums. 2
Age 70 and beyond
By age 70, most people have retired. Our person may not need life insurance and may use funds from the cash value to purchase an annuity product for a guaranteed lifetime income. LTCI payments are being met and life is meant for living.
When the end of the road comes, it is likely that our person has left his family a legacy of a life well lived, with no debt and goals that have been realized.
I like to call these versatile UL products my Swiss Army knife of financial offerings; like the versatile, yet practical knife, they are designed for life’s journey and can offer your clients some of the best insurance options available.
1 Prior to engaging in a 1035 exchange, clients and representatives should carefully consider a number of factors including the features and crediting rate(s) of the current product, applicable surrender charges, any new surrender charge period on the purchase of a new product, as well as the various features and crediting rate(s) of the new product.
Clients and representatives should carefully consider whether a replacement is in the best interest of the client before engaging in or making a recommendation to replace the client's existing product.
2 The discussion of tax treatments in this material is the Genworth companies' interpretation of current tax law, is not intended as tax advice, and cannot be used to avoid any IRS penalty. Clients should consult a tax professional for information relating to their particular situation. Immediate annuity payments do not guarantee continuing long term care insurance coverage as long term care insurance premiums may increase over time.