Insurance isn't bought in a vacuum. Rather, insurance is bought and sold within a broader financial planning context – as a means to achieve the client's own personal objectives. Cash value life insurance, then, must be considered as part and parcel of the client's asset allocation within his or her portfolio.
But seniors bring some unique planning characteristics, considerations, and values to the table, say advisors in the field. "Seniors are a lot more concerned about return of their money than return on their money," observes Mandell Winter, CLU, ChFC, and a veteran of both the insurance and security industries.
St. Louis-based advisor John Olsen, CLU, ChFC, and author of The Annuity Advisor agrees, in principle: "Sure, we pooh-pooh the meager rates of return [in whole life policies]. But try explaining that to someone like Bob Hope, a survivor of the Great Depression. But Bob Hope was able to tap his life insurance policy – in his case an annuity – and stay afloat." A lot of seniors still remember those days, Olsen points out. Insurance reps ignore these senior cultural memories at their own peril.
For these reasons, many seniors are naturally attracted to the stability, simplicity, and predictability of whole life insurance – a happy coincidence, considering their substantial appetite for fixed income investments, which provide the structural foundation of life insurance companies.
ASSET ALLOCATION RAMIFICATIONS
Modern portfolio theory states that an optimal mix of asset classes exists for every level of desired risk, and for every level of expected return. The underlying mathematics is complex – but where a desired asset allocation can be identified, the presence of a substantial whole life policy may provide advisors with planning opportunities elsewhere in the portfolio.
Specifically, if the cash value within a whole life policy can be usefully counted as a conservative fixed-income holding, strongly correlated to bonds, then the investor may be able to take more risk – and potentially greater return – in the remainder of his or her portfolio, says Winter.
But should permanent life insurance be considered an asset class? Can it serve as a replacement for a fixed income allocation? How will it perform and with what is it most strongly correlated? And should it even be considered as part of the asset allocation process?
Matt McGrath, a certified financial planning practitioner with Evensky, Brown & Katz in Coral Gables, Fla., says yes: "It is very fair to categorize the whole life policy as a fixed income allocation – within the context of a well-balanced portfolio," he says.
John L. Olsen, however, is more circumspect: "One can argue that whole life insurance amounts to an investment decision," he says, pointing out that whole life policies are themselves backed by fixed income investments, and in the long run, may be expected to produce modest bond-like returns. "But the problem with whole life as an asset class is that the return on a whole life policy is negative in the early years," he says. "Returns are not linear: It takes 15 years or longer for [whole life policy] returns to make sense on that basis."
APPLICATIONS
With their layers of assurances and guarantees, a standard whole life policy can be very effective at establishing a financial foundation with a minimum of uncertainty – as long as premiums are paid up and the insurance company does not become insolvent, the senior investor can count on a predictable death benefit and stable cash value. This stability lends itself to a number of other applications beyond simply replacing the expected income of the decedent:
Asset protection
Death is not the only misfortune which may befall an estate. Lawsuits racked up $260 billion in damages in 2004, according to data from the Insurance Information Institute – damages which amount to more than $850 per person – and which are naturally borne primarily by the affluent. Further, average jury awards for wrongful death, product liability, and medical malpractice have doubled since 1997. And nine out of every 10 affluent Americans say they are "very concerned" about losing their wealth to marauding trial lawyers and other threats, according to a recent Prince Associates survey.
In today's litigious environment, cash value life insurance can protect against much more than the untimely assumption of ambient temperatures. Fortunately, insurance policies may offer substantial creditor protection. State laws vary, but some states, such as Texas and Florida, offer unlimited creditor protection for cash values built up within a permanent insurance policy.
Even in states which provide no such protection, it is very easy to create it by placing the policy within a limited liability corporation (LLC). Since the LLC is a separate entity from the individual, it would not necessarily be subject to the personal liabilities of the investor – and vice versa. What's more, with special allocation rules and an assumption of the debt, the client can still gain tax-free access to the money in retirement, says Roccy DeFrancesco, a Michigan attorney and founder of the Wealth Protection Institute, a credentialing body for advisors wishing to specialize in asset protection (www.thewpi.org). Be sure to work in close consultation with the client's attorney when using this technique – the language used in drafting business entities can be important.
You can find a by-state listing of creditor protection laws concerning insurance policies at http://www.assetprotectionbook.com/life_insurance_exemptions.htm.
Special needs planning
For most individuals and couples over age 65, their children have grown and are no longer dependent on them – thus obviating much of the need for life insurance as a vehicle for income replacement. But children with special needs may never outgrow their dependency on their parents.
