Personal DB Plans Funded By Life Insurance? Not D?j? Vu

These advantages frame life insurance as valuable to those wanting to turbo-charge their future retirement security. But how much life insurance is appropriate?

The purpose is not to maximize the amount of life insurance purchased based upon a given annual outlay. The better approach is to issue the policy at the minimum life insurance amount needed to preserve favorable income tax treatment plus 20%. This provides the latitude to increase outlays in the future, an ability to be preserved when increases in contributions are needed to respond to investment performance that is less than the assumed interest rate.

Annual monitoring and reporting functions are one of the keys that would turn a life insurance policy into a personal DB retirement program.

In fact, the monitoring and reporting linked to this concept may even hold the promise of reinventing the value of cash accumulation life insurance. How so? These administrative functions are vital to achieving good compliance, quality sales and avoiding yesterday's poor sales practices.

Since the 1980s, variable and fixed universal life policies have been consistently sold on the basis of policy performance projections made far into the future. However, I've not seen even one UL policy perform as projected.

VUL policies were often sold based upon projected annual investment results of 12%. Market downturns caused many of these policies to under-perform their projections, resulting in negative consequences, including policy premiums that didn't "vanish," investment losses on 1035(a) cash value rollovers, customer complaints, litigation and arbitration awards to policy owners.

Virtually all of this unpleasantness was due to poor sales practices as well as lack of systems to provide ongoing monitoring of policy performance. This is why the monitoring and reporting function is so important in the new plans.

Marketing the personal DB plan is fraught with challenges, but these can be successfully overcome.

Consider: What got the industry into trouble years ago were agents who did not tell clients that the plan they were selling was funded by life insurance. This cannot again happen. Balance must be observed in the sales process. Consumers must understand that life insurance is funding the strategy, that life insurance costs money, and that there may be limitations on liquidity. Fortunately, today there are new web-based marketing tools that can address this by ensuring the message is consistent, understandable and compliant across multiple distribution channels.

Twenty years ago, retirement security in the United States was fairly predictable. That is less so today. But, challenges beget opportunities. Specifically, life insurers and distributors can now adopt the personal DB strategy, funded by life insurance, to meet the real need in the affluent market for retirement income predictability.

David Macchia is president and CEO of Wealth2, Inc., Hingham, Mass. His e-mail address is [email protected].