Now is a good time to raise the topic of life insurance with clients and prospects. U.S. policy sales grew 5% last year, the largest annual increase in nearly three decades, due to Americans’ Covid concerns, according to life-insurance research organization LIMRA. And if you don’t sell insurance, folks may be more likely to heed your advice and sidestep common blunders.
“Because we are fee-only, most clients welcome our insight into their life insurance needs. They typically increase their coverage when we suggest it, given that we have no conflict of interest,” said Bruce Primeau, president of Summit Wealth Advocates LLC in Prior Lake, Minn. To get clients the right product, team with service-oriented insurance pros who represent multiple carriers (and can therefore get clients the best deal) and whose primary focus is client needs, not hawking policies.
Primeau actually recommends greater coverage quite frequently. Why? “Many people significantly underestimate what a surviving spouse and family need to live a comfortable lifestyle. When you add paying off the mortgage, funding the kids’ college, and the surviving spouse’s retirement, often a client is considerably underinsured,” he said.
Business owners are famous for this. Many view their enterprise as an insurance policy of sorts, i.e., something they can leave behind. “However, they often refuse to recognize that since they are the key person in the business, it won’t be worth nearly as much without them running it. The family typically gets pennies on the dollar in terms of the value of the business,” according to Primeau.
For advisors, the challenge is to convince clients to boost coverage. “They may not want to pay the premium on a 20-year level-term $2 million policy, so you have to make them understand that if they’re underinsured, their family’s lifestyle can be significantly impacted,” said Primeau, adding, “We show them the math behind our recommendation.” His firm uses three different methods of computing the coverage needed, then recommends the average. Folks can prove it to themselves with online calculators.
Too little protection is one common boo-boo. A second is neglecting to review coverage periodically.
“People think buying life insurance is a one-time exercise, and it becomes one of those set-it-and-forget-it items. But the amount of coverage someone needed 10 years ago is almost certainly not the same amount needed today,” said Laura Bereiter, director of tax and financial planning at White Oaks Wealth Advisors, a fee-only Minneapolis firm.
A Chance To Repurpose
Downsizing coverage, which can be appropriate for older, successful clients, spares them from paying premiums. One of Bereiter’s clients, age 65, surrendered her whole-life policy, netting $80,000 after taxes that she directed to college savings for young grandchildren. “She felt the $80,000 today was going to make more of an impact than $500,000 [death benefit] 30 years from now,” Bereiter explained. And the client saves $4,500 in annual premiums.
Still, imagine the family’s mood had the client died shortly after quitting the policy, even if everyone had agreed beforehand that the death benefit wasn’t really needed. “It's important to help clients understand all aspects of a decision like this,” Bereiter cautioned advisors. “Some whole life policies allow for conversion to long-term-care insurance, which can be a good repurposing option,” she added.
Another reason to regularly review existing coverage is to determine whether the policy might unexpectedly lapse, said Matt Saneholtz, president of Tobias Financial Advisors in Plantation, Fla. “Flexible premium life insurance policies bought a long time ago may be based on assumptions that are not applicable today. A client who has been paying on a policy for twenty plus years might think they are insured for life, then they find out they haven’t been paying enough to sustain the policy. I’ve seen clients get surprised that their policy could lapse,” Saneholtz said.
These clients are in a tough spot. They can pay a higher premium, or walk away from the policy and let it lapse, Saneholtz said. It’s better to prioritize current needs than continue to address past needs, experts agree.
No Protection
In a roundabout way, the current sky-high exemption from federal estate tax ($24.12 million for a couple) is leaving more insurance policies exposed to creditors, observed Las Vegas estate planning attorney Steve Oshins, managing partner of Oshins & Associates LLC.
When the exemption was drastically lower, he explained, wealthy individuals routinely established irrevocable life insurance trusts to reduce estate tax, with protecting the policy from creditors an unsung side benefit of the ILIT.
But today only the ultra-wealthy harbor estate tax concerns, so fewer ILITs are being established. “People are taking ownership of the policy either in their own name or in the name of their revocable trust, and that leaves the policy exposed to their creditors,” Oshins said.
The majority of states shield policy cash value and/or the death benefit from creditors. But in those that provide minimal creditor protection, such as California and Maine, Oshins said, “if the policy isn’t owned by an irrevocable life insurance trust, then the client should consider setting up some form of domestic asset protection trust to own the policy so that a creditor can’t take it.”