Insurance is meant to protect ourselves and our loved ones from loss, but life insurance is more than just an “in case” policy; it is an important part of every wealth strategy. Offering life insurance to your clientele is an added value to their financial success, as well as their businesses and families. Whether you own a business or work as an advisor, Advisor's Resource Company creates easy to comprehend life insurance solutions.
What Is Life Insurance?
A life insurance policy is a contract with an insurance company. By agreeing to pay routine premiums for the policy, the insurer provides a sum of money, otherwise known as the death benefit to beneficiaries upon the insured’s death. The main purpose of a life insurance policy is to provide financial protection to those dependent on the deceased. It is the only way to guarantee the exact amount of money needed (the death benefit), exactly when you need it (at death).
How Premiums Work
A premium refers to the amount of money paid to a life insurance company in exchange for coverage. For many policies, premiums can be paid monthly, quarterly or annually. If you are not able to pay your premium, you will be at risk of losing your life insurance protection. That’s why it’s essential that you work with your clients to choose a policy that best fits their current situation.
When working with clients to determine the best policy for their situation, there are a variety of things to consider:
- Amount of Coverage
- Purpose for the Coverage - Temporary or for your whole life
- Length of time coverage is needed
- Current Age
- Health and Lifestyle
Many times the budget will dictate which solution is appropriate. Once you establish a budget, the premium payments will become a habit, just like other insurance purchases.
Types Of Life Insurance Policies
Your clients have many different options when it comes to buying life insurance. Life insurance can be split into two broad categories: term or permanent. The best option depends on your objectives.
Term Life Insurance
Term Life Insurance tends to be the most affordable type of life insurance. A term is a predetermined period of time in which a set amount of premium is paid and a death benefit be paid to the beneficiaries if the insured dies. Once the term expires, so does the coverage unless the policy is renewed or a new policy is bought. However, the renewal will require significantly higher premiums AND you will have to re-qualify for the coverage.
Annual Renewable Term (ART)
Annual renewable term insurance (ART) is a form of term life insurance which offers a guaranteed period of insurability for a set period of years without reapplying or taking another medical exam. During the stated period, the policyholder will be able to renew each year up until a certain age - varies by state. The premium also increases every year as the insured gets older.
10, 15, 20, 30 Year Term
Other forms of term life insurance are available in increments of 10, 15, 20 or 30 years. It is important to consider the term length based on the years your family relies on you financially.
The primary benefit to term is the cost. You can purchase significantly more death benefit when choosing term insurance versus a more permanent solution. Therefore term insurance is ideal in two situations.
- The first being that the need is temporary. For example, you may need coverage to secure a loan. Once the loan is paid off, the need goes away. Another example is the need to cover your family. Once your children are out of college and no longer dependent on your income, the need goes away.
- The other situation is when your cash flow is tight. You may have a need for permanent coverage, but you cannot afford the premiums today. Term insurance is a great option as it locks in your insurability, and allows you to convert to a permanent policy at a later date - when your cash flow improves.
The downside to term insurance is that it typically expires before you do. Most term policies do not payout as a death benefit (less than 5% of term policies pay out as a death benefit) because the coverage period runs out or the policy is cancelled by the owner/insured.
Life happens and needs change. If you have an extended need for coverage, you may not qualify. And even if you do qualify, the premiums at your current age may be more than you can or are willing to pay.
Permanent Life Insurance
Unlike term life insurance, permanent life insurance policies provide lifetime protection, as long as their premiums are paid, or in the case of universal life, there is sufficient cash value to cover the annual cost. Permanent life insurance offers a death benefit, the money that is paid to the beneficiaries after the insured dies, as well as cash value.
Cash Value Life Insurance
Cash value is a separate savings component that is designed to grow in total value at a specified rate, which can be declared, variable, or guaranteed, depending on the type of permanent policy. Cash value can be accessed at any time by the owner of the policy while the insured is still living.
- Whole Life Insurance provides lifetime coverage at a fixed cost. It provides guaranteed death benefit as well as guaranteed cash values, with a fixed level premium. Whole life also pays a dividend. The dividends are a return of excess premiums paid, and can be used to either increase the cash value and death benefits or reduce the required premium.
- Universal Life Insurance provides greater flexibility than whole life policies, allowing insureds to adjust their death benefits and fluctuate premiums once a sufficient amount of cash value is accumulated. Universal life is also more transparent in that you can see what the internal cost and how the cash value grows. Cash values are increased by premiums paid and interest credited less policy expenses like COIs.
- Variable Universal Life Insurance includes a cash value component that is invested in mutual funds, rather than a fixed account. It has the potential to grow at a much higher rate than whole life, but there is no guaranteed growth and risk of the cash value decreasing due to market losses.
- Indexed Universal Life Insurance allows the insured to allocate their cash value amounts into a fixed account or an equity index account. These indexed accounts will give you the upside of the market (such as the S & P 500) subject to a cap, with downside protection or a floor typically 0%. These policies have a minimum guaranteed interest rate, but rather than being fixed, they are based on the index chosen.
The benefit to permanent life insurance is that the coverage will be there when you need it. In addition, if you have a need for the cash value, you can accumulate cash value with significant tax benefits. These benefits include tax deferred accumulation, access to your cash values tax free, and a tax free death benefit..
Death Benefit Focused
Purchasing a life insurance policy secures a death benefit made payable to the beneficiaries of the insured once they are deceased. It is used to financially provide for those that relied on the insured person as a provider.
- Guaranteed Universal Life Insurance (GUL) is a type of life insurance policy designed to last or stay in force for the insured’s life. These policies are typically designed in a way that they have very little if any cash value. By design, the premiums are typically very low in comparison to whole life or other cash value type policies. The premium periods can vary, however once they are set they are typically required to maintain the guarantee of the policy.
- Current Assumption Universal Life is the oldest form of universal life. In general, universal life stays in force by having enough cash value to pay the internal expenses. As expenses rise, you have put enough into the cash value account so that the growth in the cash value covers the expenses. In current assumption UL, the insurer declares an interest rate that is credited to the policy. This interest rate typically has a guaranteed minimum and has a current rate that is declared. This declared rate can change overtime.
Choosing which permanent plan should be based on both your objective and risk tolerance. Your objectives can include, but are not limited to, cash value build up, retirement income needs, death benefit needs (increasing need versus level). There is also a trade off between risk tolerance and cost. If you are willing to take investment or return risk, then an indexed or variable universal life plan would provide either cheaper coverage or greater cash value build up. If however, you are risk averse, then a guaranteed universal life would be a better choice.
Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. Each has its own benefits, so it’s important for your firm to educate and offer solutions specific to their current situation and future goals.
Benefits of Life Insurance
While the main purpose of life insurance is to protect loved ones in the event of death, it offers many other solutions to building wealth while your clients are still living. The team at Advisor’s Resource Company partners with firms to provide their client’s strategies tailored to their needs and future goals.
Life Insurance Strategies for Individuals
Life insurance serves as a fundamental risk management tool to secure financial lifestyle. It’s important to understand its benefits and uses to make best use for each individual client.
How Much Insurance Do You Need?
This is not an uncommon question for your client to ask! How much life insurance do I need? It’s important to factor in the income a family would need to maintain their standard of living. According to the American Institute for Economic Research, “a prudent starting point is 3 to 5% of assets”. Most advisors recommend that you withdraw no more than 5% per year from your assets throughout retirement.
Looking to calculate your goals for life insurance: download this (need to create a landing page for resource, How Much Life Insurance)
Cash Value Life Insurance vs Buy Term Invest the Difference
Cash value life insurance is a form of permanent life insurance that features a cash value saving component. Buying term and investing the difference refers to a strategy of comparing the cost of a permanent life insurance policy to a term life insurance policy with the same death benefit and investing the difference in the taxable investment (like mutual funds, CDs, equities), rather than allowing it to accumulate as cash value within the life policy. Which is the better option?
Wealth Transfer - Insured Family Legacy
With proper planning, it is possible for older generations to utilize assets that are not needed for everyday living expenses and make more efficient use of them for the benefit of future generations, while still maintaining control over these assets. Learn more about our Insured Family Legacy solution for grandparents who want to provide for future generations.
Learn More - https://advisors-resource.com/insured-family-legacy
Effective Tax Rate vs. Marginal Tax Rate (Private K)
The Private K Plan is an easy to understand concept that allows you to take advantage of pre-tax and after-tax savings options. The federal, state and local tax systems in the United States have been marked by significant changes over the years in response to changing circumstances and changes in government. Tax rates are far different than they were 50 or 100 years ago.
Individuals who make the lowest amount of income are placed into the lowest marginal tax bracket, while higher earning individuals are placed into higher marginal tax brackets. However, the marginal tax bracket in which an individual falls does not determine how the entire income is taxed. Instead, income taxes are assessed on a progressive level. Each bracket has a range of income values that are taxed at a particular rate.
Learn where you fall: Document (Private K)
Comparison of Alternatives
Life insurance has many uses; however, it’s primary purpose is to provide financially for a family in the event of death. Your clients have a variety of options when it comes to planning for your family’s future. In this article, we discuss the potential advantages and drawbacks of the most common strategies. - https://advisors-resource.com/comparison-of-alternatives/
Premium financing involves the lending of funds to a person, company, or trust to pay an insurance premium. These loans are often provided by a third party, typically a bank, at favorable loan rates. This allows the owner to attain a large amount of life insurance without dramatically impacting their cash flow and/or liquidating investments to pay for it.
By using this financing option, individuals maintain the use of their cash flow for other needs (ideally where they can earn a higher rate of return than the cost of the premium finance loan). Thereby taking advantage of today's low tax environment.
Life Insurance for Business Owners
There are more than five million small businesses in the United States; yet only 47% of those businesses have any form of business life insurance (U.S. Small Business Administration, 2006). Without proper protection, adversities like the loss of a key employee (death or competitor), a lawsuit, or a natural disaster could be devastating to the business and the owner.
A deferred compensation plan is when an employer allocates a portion of an employee’s compensation and sets it aside to be paid to the employee at a later date, most commonly at retirement. Employees can defer tax liability until the payout is received and earn interest on the portion of income that is deferred. These types of plans are typically used to incentivise an employee to stay at the company and reward them for staying.
Leveraged Deferred Compensation
The Leveraged Deferred Compensation Strategy (LDCS) utilizes an Indexed Universal Life (IUL) contract offered by a top-tier insurance company. In addition to a permanent death benefit, this strategy leverages loans into the policy’s to provide tax-free income in retirement. The LDCS is designed to enhance a traditional deferred compensation plan through leverage. This leverage is provided by utilizing premium finance (PF BLOG)
Business Owner Succession Strategy
If you are a business owner looking for ways to reward yourself or key employees with a tax-advantaged retirement program, Business Owner Succession Strategy or B.O.S.S is a program worth considering. It is a non-qualified benefit plan for business owners and key employees. Learn how by reading the article below:
Benefit plans are often the leveraging tool that makes the difference and puts you ahead of the competition. As you consider the many options available, expand your thinking to be certain you are also rewarding yourself in the process, consider the executive bonus.
Split Dollar life insurance allows businesses to take advantage of differing tax rates and is a strategic way to retain key employees. When properly set up, Split Dollar is a tax beneficial arrangement in which a company and a person split and share a life insurance contract.
Buy/Sell Agreements funding by life insurance give business owners the reassurance their business and family will be taken care of in their absence. This funding creates rules for what will happen when a business owner needs to transfer his or her interest in the company or when a business owner ceases to be an owner of the business for any reason. If more than one person owns a business, those partners should have a buy-sell agreement in place.
Choosing a Life Insurance Brokerage General Agency (BGA)
Your clients deserve honest advice regarding their existing policies or even policies they need to protect their family or business. Many advisors may think they’re getting the most out of their FMO (Field Marketing Organization), but what do they really provide? Most will compete over who offers the best commissions, but rarely provide any other support. Advisors should seek to partner with an FMO that can provide the three Fs:
- FIDUCIARY - They act as a FIDUCIARY for life insurance.
- FOCUS – They only FOCUS on life insurance.
- FREEDOM – They have the FREEDOM to work with any carrier.
No one can do it alone. By partnering with someone who can provide the three Fs, advisors who sell life insurance can help their clients while drastically increasing revenue.
Why Advisors Don’t Sell Life Insurance
There are many reasons advisors do not sell life insurance, including:
- Advisors don’t think their clients need it. A tactical marketing plan to help you spot opportunities where life insurance can improve your clients’ situations
- Their clients have a need but don’t know how to solve it - the tools to develop creative solutions for your clients unique situations
- They know how to solve the problem but don’t know how to explain it - the ability to provide easy-to-understand, branded presentations centered on your clients’ common problems
- Taking an app is too much of a hassle - the experience in the industry to streamline the application process, ensuring a smooth transition from case submission to paid commissions
Each of these issues can be addressed through our Leverage Life Process:
- Maximizer - a tactical marketing plan.
- Case Resource System - resources that will find the right solution matching your clients needs.
- Case Prep Resource - customized branded client piece that simplifies the complex.
- Life Made Simple - a streamlined application process where you spend less time taking an application and more time serving your clients.
Our mission is to provide trusted advisors with unbiased information and advice regarding life insurance in order to better serve their clients’ needs. Learn if our team of advisors is the right fit.