In my September 2022 article, “The Advanced Life Insurance Market May Soon be in Retreat,” in Trusts & Estates, I discussed why a shifting paradigm about the need for estate tax and liquidity planning should cause some life insurance professionals to reassess their sales process and marketing approach. Based on what I’ve seen out there since I published the article, I’m now going to double down on that notion.
Here’s why. We’ve learned that the federal estate tax exemption for 2023 increases from $12.06 to $12.92 million. A married couple will have a combined exemption in 2023 that nudges $26 million. This increase alone continues to chip away at the base of individuals who will even think about estate taxes or the life insurance to pay them.
But wait a minute. Isn’t that exemption going to be cut way back in 2026 when the tax laws “sunset”? Technically, yes. But the premise of that paradigm shift I referred to is that the working assumption of more and more wealthy individuals will be that there’ll be no sunset.
It’s Not Just About Taxes
There’s much more to this story. Clients and prospects are now regularly told to expect lackluster growth of their money for the next several years, at least. Sadly, what's not lackluster is the growth of political uncertainty and incivility in society. Is this a backdrop for wealthy individuals to give away their money, even at low gift tax cost? Is this a backdrop for them to spend large on premiums for estate liquidity? Or is this a backdrop for them to hold their money dear and keep their options open for what might be over the horizon? I’ll go with the last one. and so could many clients and prospects.
Life insurance professionals needn’t be hindered by this paradigm shift if they’re nimble enough to shift with it to the extent necessary to stand their ground. Some of that shift will be tactical, in the sense that it’ll represent a timely response to newly expressed client concerns. Other steps will be more strategic. We’ll consider both.
Response to Concerned Clients
Let’s assume that you’re a life insurance professional who’s starting to get pushback from clients and prospects about the need for, let alone the wisdom of, doing any estate tax or liquidity planning that could impair their personal control of capital or their cash flow. In fact, their comments and questions increasingly revolve around how to shore up their positions and defenses for what they perceive are some difficult times ahead. Let’s refer to these individuals as “concerned clients.”
How will you respond? Some in your business will counter with time worn talk tracks about economic and political cycles that “smart” individuals simply ignore as they press ahead with their planning and, of course, purchases of life insurance. My advice? Don’t go there. It will be needlessly contentious and counter-productive for your relationships.
Here’s what to do instead. In the cited article, I suggested a few areas of life insurance planning that could show concerned clients that they have a skilled, empathic advisor who brings a broad range of solutions to a broad range of concerns.
Tactically Speaking
- Dealing with a life insurance policy that’s no longer needed, wanted or supportable at a reasonable outlay - This is bound to be a topic of conversation and consternation among concerned clients. You should be able to explore and present the full range of options for the policy. That means going way beyond just bringing in a life settlement specialist or company. It means, for example, collaborating with the client’s other advisors on an analysis of whether a sale, net of taxes and expenses, makes more sense than supporting the policy to the indicated life expectancy at the lowest feasible outlay. Of course, this analysis will have different components depending on whether the policy is owned personally or in an irrevocable life insurance trust. This is real value-added for a concerned client and a great way to network with other advisors. If you can’t orchestrate this analysis, well, now’s the time to learn.
- Give that policy to charity - This option for the policy has a different set of optics, obviously, from a sale that will generate cash. But it’s an option that could fit nicely within a policyholder’s view of what constitutes the “right thing to do” with an asset that they no longer want, need or are willing to support. There’s a lot more to charitable giving with life insurance than meets the eye. For one thing, the tax aspects of the transaction present some interesting questions these days. What’s more, there can be an element of political intrigue in the process. And, of course, there’s the whole gamut of planning issues and opportunities associated with many charitable gifts, the selection and design of which present great opportunities for networking with other advisors and even the charities themselves. The bottom line is that you should understand this process and be able to guide the client through it.
- Give me your tired and poor split-dollar arrangements - Now here’s a topic that’s been covered to within an inch of its life or, at least, should have been by now. See my article on this topic. Clients dealing with unsustainable split-dollar arrangements housing unsupportable policies will only find the situation that much more insufferable as the paradigm continues to shift. Again, if you aren’t able to collaborate with the clients’ other advisors to bring about a least worst resolution to the problem, now’s the time to learn. And by the way, those life settlements and maybe even some charitable strategies could have a role in that collaboration.
Strategically Speaking
- Stress test your sales process for weaknesses in case of loss of the tax tail wind - I talked about this in the advanced markets article, but now I attach a heightened sense of urgency to it. If your sales process doesn’t intuitively encompass non-tax needs for life insurance and, just as intuitively, involve advisors other than clients’ estate planners, you‘ll be at a significant disadvantage in the months and years ahead.
- Bring your marketing, especially your networking, into the shop for a tune-up - This was also addressed in the article, when I talk about diversifying your base of centers of influence. The centers of influence that you’ve traditionally relied on for referrals are likely to exert less influence in the days ahead. You’ll need a new set of criteria for selecting advisors who will have more influence and more capacity for referrals. I suggest some criteria in the article. I would also refer you to my article about what investment advisors should look for when establishing a life insurance connection.
My closing message is pretty simple. It’s time for life insurance professionals in the estate liquidity market to do for themselves what they’ve always advised clients to do: assess carefully and act accordingly.