In the life insurance arena, we live in a different world than we did a year ago. Applications are up significantly, insurers have lifted most Covid underwriting restrictions, and opportunities abound. There has never been a better time for advisors to talk with clients about the unique planning benefits of life insurance.
The best opportunities are with advisors serving the affluent market. Why? Because there are fewer advisors with the ability to provide a comprehensive planning approach to clients. For many advisors, life insurance is an often misunderstood and neglected asset class. However, for those who understand how its unique properties can address the particular needs and concerns of highly affluent families, life insurance provides distinct solutions in protection, supplemental income, and tax advantages these clients appreciate.
The Remarkable Leverage of Life Insurance
These advisors understand that life insurance provides two critical types of leverage. The first is tax leverage because the death benefit is never subject to income tax or, if properly held outside of the estate, estate taxes. The second is its fundamental death benefit leverage. By redeploying some capital, clients can magnify their legacy assets by many multiples of that amount, giving them more financial capacity than they thought they had.
One of the best examples of capitalizing on life insurance’s tax and death benefit leverage is solving for unwanted required minimum distributions (RMDs). Many wealthy clients don’t need the income from their IRAs or 401(k)s, preferring instead to maintain them as legacy assets. The forced distributions and taxes paid on them result in a substantial loss of legacy value. Here’s how life insurance can be leveraged to solve that problem.
The client takes the RMD and subtracts the amount of taxes owed on it. The balance of each RMD is then redeployed into a life insurance policy. If the estate is projected to exceed the estate tax exemption, it would be best to own the insurance in an irrevocable trust. The effect of this strategy would be to create excess wealth that can expand the client’s legacy value and maximize it for their heirs with a tax- and estate tax-free death benefit. No other investment or planning vehicle can accomplish anything close to that.
For that matter, your philanthropic-minded clients could use the strategy of redeploying a portion of the capital assets they plan on committing to charitable causes into a life insurance policy, thereby multiplying their gift by a factor of three or four. For people who consider philanthropy a pillar of their financial plan, nothing could please them more.
Numerous Planning Opportunities
Numerous planning strategies can capitalize on the tax and death benefit leverage of life insurance, often making possible what can’t be done with any other vehicle, including:
- Equalizing an estate for children not participating in the running of a family business
- Keeping the estate whole for heirs by providing liquidity to pay estate taxes
- Providing liquidity to fund a buy-sell agreement or replace a deceased key person in the business
- Creating a tax-advantaged source of deferred compensation for executives
There’s no other planning tool where you can take 1 plus 1 and have it equal 3 or more. That’s the power leveraging life insurance can bring to planning solutions. Advisors in the affluent market can find those clients needing these creative solutions by taking a comprehensive approach in examining their circumstances, needs, and objectives. With our resources and planning expertise, FAIU can help you design the perfect solution.
By: Ken Shapiro, President