Question

what impact will life insurance policies have on wealth planning?

Answer 1

Life insurance can make an enormous difference in how clients allocate funds to help reduce risks associated with other areas of a portfolio. While more advisors acknowledge the value of life insurance as a distinct asset class within a portfolio, they need to put more emphasis on the product’s importance, while continuing to educate consumers about its value.

The education component is significant. With so many varieties of life insurance to choose from, consumers need education around the nuances of each product type, especially the mechanics of insurance and the different types of policies available for meeting specific needs. This requires advisors to make it a priority to help clients evaluate their insurance needs and help them understand the pros and cons of each option.

For example, term life insurance may be right for someone with short-term needs, such as paying off a mortgage or college tuition. Meanwhile, a cash value policy such as indexed universal life or variable universal life, depending on risk tolerance levels, may be more appropriate for a client interested in the potential to accumulate tax-deferred savings that can be distributed income-tax free through policy loans (against the income tax-free death benefit) and withdrawals (up to basis or premiums into the policy).

Moreover, because polices can be paired, advisors, working closely with clients, have the opportunity to craft customized solutions for their clients. Arriving at the best decision requires the advisor and client to discuss the client’s needs and investment profile, particularly as they relate to long-term objectives and risk appetite.

Structured in the right combination, life insurance can offer a sure way to transfer financial legacies via a death benefit with tax efficiencies and cash value growth potential.

Furthermore, multiple life insurance policies can be purchased to create a portfolio of policies combining different sets of coverage to address different issues, with multiple forms of wealth protection strategies for the long-term.

The numbers support the benefits of educating consumers about taking a more holistic approach to financial planning. According to Lincoln Financial Group’s recent 2015 M.O.O.D. of America survey, 84 percent of life insurance owners said they felt optimistic and more in control of their finances, compared to 76 percent of non-owners.

What makes life insurance a valuable complementary tool to other investments is its ability to be structured to provide wealth protection, while offering predictability.

Because of the associated tax-free death benefits, life insurance can be a financial bedrock to a portfolio, helping to secure the kind of financial protection most clients want in today’s increasingly uncertain and volatile marketplace. Life insurance, as part of an overall portfolio, can offer advantages in meeting goals at every stage of a client’s life, including potentially:

• alleviating some of the cost of a child’s school tuition;
• strengthening retirement savings;
• creating additional cash flow while reducing tax exposure; and
• helping to protect wealth for future generations.

All in all, life insurance is more than just a stand-alone product; it should be considered a critical component of a financial plan and can help create balance and stability within a portfolio.