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In Search of Guarantees

Clients are turning to whole and universal life insurance policies to lock in benefits

Consumers are taking a different approach to life insurance lately. While they may invest in stocks as they always have, even as they grow older, they increasingly look to eliminate risk and uncertainty from the life insurance products they buy.

Product guarantees are most important to consumers, says a recent survey from LIMRA International, the Windsor, Conn.-based insurance industry research association. Fixed premium, guaranteed death benefit and lifetime coverage are the most important policy features consumers cited, according to the same survey.

A Growing Market

Peter Radloff, a marketing vice president for Jackson National Life in Denver works with reps across the country, and he estimates that “we have seen a 30 percent increase in sales of permanent life insurance products with associated guarantees over the past few years.”

Part of the reason for the recent interest in guarantees is timing. Clients whose portfolios lost value several years ago are often “variable product shy” even though they have likely returned to the equities market, says Art Varavadekar, president of Worldwide Financial Group in Northbrook, Ill.

Age is another factor. Older baby boomers are buying universal or whole life insurance because “it adds to diversification and buys ‘peace of mind’,” says Varavadekar. “Clients are thinking, ‘I took a hit in the market, I don't want to do the same with my life insurance, so I'll go for the guarantees’.”

Gregory Large, managing partner of Lenox Advisors in New York, says his older clients accept the lower returns — 2 percent or 3 percent — produced on the savings end of universal and whole life policies because they are guaranteed.

He is also seeing more clients interested in adding secondary guarantees to their universal life insurance policies. This way, they can guarantee not just that they will get their benefits, but that what it costs (i.e., the premiums they pay) to get their benefits will not change either.

The Need

Bob Kerzner, the president and chief executive of LIMRA, points out that one of the reasons consumers are interested in guarantees is that they are concerned they will outlive their retirement money. “If one spouse depends on the other spouse's pension and part or all of that money dies with the providing spouse, the surviving spouse will be short of income,” he says.

Krisann Miehe, co-owner of Blackhawk Wealth Management in Jamesville, Wis., adds, “The guarantees help ensure that a spouse is taken care of. Once we have discussed their options, my older clients [55 years and older] tend to prefer universal and whole over variable products.”

Another issue is liquidity. According to Kerzner, many clients have estates that can't easily generate cash because they are largely made up of illiquid assets like business interests and real estate. “Life insurance provides the needed cash to cover taxes and liquidity needs, and guarantees ensure that the death proceeds are sufficient to satisfy the intended uses,” Kerzner says.

Developing Trusts

An important element of comprehensive financial planning involves establishing trusts, and where there are trusts there's life insurance. Says Radloff, “The trusts need to be funded with life insurance products that will not lose value.”

There are many trusts that can be funded, or even created, with life insurance. They include grantor-retained income/annuity trusts, irrevocable life insurance trusts, charitable remainder annuity/uni-trusts and qualified personal property trusts, just to name a few.

Funding these trusts with term life insurance is rarely a reasonable approach. Funding them with variable life insurance policies, which can lose 30 percent to 40 percent of their value, is risky.

Radloff is seeing reps increasingly working with clients to set up trusts to reduce current and future taxes using whole and universal life policies. “Clients are going away from ‘wait-and-see’ to proactive tax and estate planning. Clients still deal with state death/estate taxes, and there is the looming issue of the return of federal estate taxes.”

As the deadline for extension or sunset of the estate tax laws nears, many clients are beginning to realize they have a potential tax or liquidity problem that could erode their hard-earned assets. How likely is it that we will revert to the $1 million exclusion from taxes and 55 percent tax rate that was the law until 2001? Radloff ventured a guess, saying, “The votes aren't there to do permanent repeal of estate taxes. I expect a compromise of perhaps a $2.5 million exclusion and a 45 percent top rate for federal estate taxes.”

So, unless your clients can plan on dying in 2010 (or earlier, if Congress changes the law sooner), there is likely to be a big tax bill for the wealthiest of them. For some clients it could come on top of state death or estate taxes.

The Alternatives

Clients in their 20s and 30s often have very large life insurance needs — to protect and provide for a growing family, to cover debts such as mortgages and to provide for children's educations, among other things. These clients are great candidates for term life insurance in large amounts. It's cheap and can be tailored to cost a fixed amount for a fixed time period.

As your clients enter their 40s they may have more disposable income to put towards life insurance, and they may be the ideal candidates for purchasing variable or variable universal life insurance.

Still, while guarantees are not for everyone, they suit far more situations than you might think. Look through your book for clients with lots of real estate, pensions that die when they do, clients who favor the assurances of bonds and certificates of deposits and clients who might be faced with estate taxes when the current laws sunset after 2010. Look for business owners whose businesses might not survive their deaths without a large cash infusion. The market for guaranteed life insurance products is huge, and the names are right there in your book.

Writer's BIO: Janet Arrowood is the author of several insurance industry publications, including The Professional Advisor's Insurance Desk Reference.

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