June 28^th is National Insurance Awareness Day. As the day draws near, consider the ways a new category of fee-based insurance—expressly re-engineered to fit the way RIAs and fee-based advisors work—can help you offer clients a new approach to holistic financial planning. Whether they are saving for retirement, generating retirement income or making plans to leave an enduring legacy, fee-based insurance can help you provide unbiased advice in your clients’ best interest across all three stages of their financial lifecycle.

Likewise, protecting assets are one of investors’ top three concerns year over year, according to our annual “Advisor Authority” study of more than 1,600 RIAs, fee-based advisors and individual investors. So as the bull market winds down, and concerns about volatility and a potential bear market are on the rise, fee-based insurance may help you create the “safe haven” that your clients seek.

A Changing Reality

Despite offering benefits such as tax-deferred accumulation or guaranteed income streams, many traditional insurance solutions, such as fixed and variable annuities and variable universal life, have been difficult for RIAs and fee-based advisors to incorporate within financial planning. Most RIAs and fee-based advisors are not licensed to sell traditional insurance solutions—and even when they are, many of these insurance products are commission-based, raising clients’ questions and concerns about conflicts of interest.

Insurance is also considered a “held away” asset because it does not integrate seamlessly with most of platforms and portfolio management systems popular with RIAs and fee-based advisors. Without this level of technical integration, it is nearly impossible to clearly see how insurance solutions perform alongside other financial vehicles in support of a client’s short- and long-term goals.

The result is in an incomplete picture for the advisor, and a less-than-optimal experience for the client.

But in recent years, a new and expanding category of fee-based insurance solutions has been designed to fit the fee-based distribution model, eliminating commissions, integrating with many workstations and platforms, and made more accessible for RIAs and fee-based advisors through insurance companies that can provide a licensed insurance agent service. This changing reality makes it easier to incorporate insurance solutions into holistic financial planning in their clients’ best interest—from accumulation, to income to legacy planning.

Accumulating Wealth

Evaluating your clients’ portfolios to address the impact of taxes is key to helping them accumulate more wealth. Taxes are among the biggest investing expenses clients may face—especially the more affluent—with rates of 40 percent or more each year, after federal and state taxes are factored in.

While qualified accounts, such as 401(k)s and IRAs, can offer clients tax-deferred growth potential and have the benefit of being funded with pre-tax dollars, they can only shield a fraction of a high-net-worth client’s assets from taxes, due to contribution limits, age restrictions and minimum distribution requirements.

You can help affluent and high-earning clients accumulate more tax-deferred and protect investment gains using fee-based insurance such as investment-only variable annuities (IOVAs) or variable universal life (VUL). These can offer unlimited tax-deferred contributions and allow clients to contribute after age 70½ with no minimum distribution requirements during their lifetime. For clients who want growth but need protection, index linked annuities can provide upside potential while limiting downside risk, and in recent years many advisors have been recommending fixed indexed annuities (FIAs) as an alternative to bonds.

Moreover, with a smart asset location strategy, which includes using tax-deferred vehicles such as IOVAs for tax-inefficient assets—including fixed income, REITS, liquid alts and actively managed funds—you can help clients to potentially increase returns without increasing risk. Gains from these investments would accumulate and compound tax-deferred for greater growth potential and would not be taxable until they are distributed from the contract.

Maintaining A Lifestyle In Retirement

Year over year, “Advisor Authority” also shows that saving enough for retirement—and fears of outliving those savings—are also among investors’ leading concerns. As 10,000 baby boomers a day are retiring, while pension plans disappear and concerns about Social Security increase, the retirement income challenge is real—and growing.  

For clients already in retirement, insurance such as single premium immediate annuities (SPIAs) can provide another guaranteed income stream, to complement their Social Security—or help bridge the income gap if they postpone Social Security until a later age to maximize their potential benefits. Guaranteed income can also minimize the hazards of drawing down an investment portfolio, a strategy that exposes retirees to market downturns and sequence-of-returns risk. With a base of guaranteed income in place, retirees can invest a portion of their portfolio more aggressively for greater growth potential

Insurance that can guarantee lifetime income—such as SPIAs and variable annuities with living benefits—can mitigate longevity risk. In fact, this year’s “Advisor Authority” shows that 53 percent of RIAs and fee-based advisors use variable annuities with living benefit riders as a solution to protect their clients from outliving their savings. Deferred Income Annuities (DIA) can also help manage longevity risk, typically purchased around age 65 with guaranteed income beginning at age 80 or 85. Qualified longevity annuity contracts (QLAC) are funded with assets in qualified retirement plans such as 401(k)s, 403(b)s and IRAs.

Leaving A Legacy

The great transfer of wealth between baby boomers and their Gen X and millennial heirs in the coming decades will equal roughly $30 trillion, according to industry estimates. Fee-based insurance can help your clients at the legacy and estate planning stage. You can incorporate insurance to keep estates, or parts of estates, from getting tangled up in legal proceedings. Proceeds for annuities and other insurance products can be structured to be passed directly to beneficiaries without going through probate or a complex legal process. With proper planning, this also may be a way to avoid estate taxes at the federal or state level.

Fee-based insurance also can help clients set up trusts in a tax-advantaged fashion. For properly structured trusts, using an IOVA with potentially lower fees and broader selection of underlying investment options, the income earned can accumulate tax-deferred, sheltered from certain distribution requirements and capital gains taxes, until it is distributed from the annuity. Within charitable remainder trusts, especially the NIMCRUT [net income make-up charitable remainder unitrust], using IOVAs allows clients to receive a tax deduction up front, accumulate assets tax-deferred inside the annuity, and effectively time the distribution of an income stream for later years.

“Stretch” provisions for certain annuities can be used to create lifetime annual income for some beneficiaries—while also helping them avoid the tax burden that would be triggered by a lump-sum payment. Recent legislation that will limit the stretch functionality has already passed in the House and is moving through the Senate, but the stretch provision will continue to be an option for a spouse, a minor child, a child with a disability, or a beneficiary who is chronically ill. For all other beneficiaries who inherit tax-advantaged retirement accounts such as annuities after Dec. 31, 2019, they must withdraw the money within a decade of the owner’s death and pay any taxes due.

The Missing Asset Class For A Holistic Financial Plan

Using insurance solutions designed to fit the way RIAs and fee-based advisors work—with greater transparency and more choice, accessible through the support of a licensed insurance agent service and integrated seamlessly into your workstation—makes it easy to adopt for your clients.

National Insurance Awareness Day is a perfect opportunity to evaluate how insurance solutions can help you better serve your clients, as part of a comprehensive approach to holistic financial planning, supporting wealth accumulation, retirement income and legacy planning needs. To learn how you and your clients can benefit, download this whitepaper: Fee-Based Insurance: The Missing Asset Class for a Holistic Financial Plan.

Craig Hawley is the head of Nationwide Advisory Solutions.