Charles Arnold

At The Leaders Group, we see three to four private placement cases a month on average, usually as a variable universal life policy but sometimes as a variable annuity. That may not sound like a whole lot, but it is significant due to the sheer size of the cases (minimum premium of $2 million). Although we only have a handful of brokers and BGAs who write these cases consistently, it has been a product that significantly helps our registered reps attract new prospects as it works as a differentiator. I like to think of it as having a nuke in your military arsenal; you may rarely use it, but the fact you have it puts you on a whole new level of significance.  In our nearly 25-year history as a broker/dealer for wholesale distributors and agents, we have rarely seen such interest and enthusiasm for a product group. 

Who are the players in this marketplace and how do you become involved either as an agent, a BGA, or both?
Private placement is a product for a specific type of clientele and is exclusively suitable for the ultra-wealthy ($20 million+ net worth). About two years ago, we decided to position ourselves as a leader in the PPVUL/VA market. It is a black and white market in which you are either “in” or “out”; our decision to be “in” the market resulted in our becoming 100 percent engaged in understanding, developing, and promoting that business.  

It is logical to start with identifying the insurance carriers offering private placement products. There are several, and they all are equally capable of delivering a terrific private placement solution for clients. Outside of Prudential, most BGAs and insurance agents likely haven’t had a whole lot of contact with the carriers listed below.

Private Placement Carriers

• Crown Global
• Great West
• Investors Preferred Life
• Lombard International
• Prudential
• Zurich

(Source: VULSource.com/private-placement)

The path to getting involved in the market is similar to most products you work with: Reach out to each carrier directly to get a regional rep to come to your office, conduct an online presentation, or get you the necessary product specs. The first step to being able to offer this type of solution is finding a partner to help you at the carrier level. Private placement is a complicated product, and it is best to work in tandem with the carriers or an agent/BGA actively involved in the space to tap into their knowledge and resources.

A second logical step is to understand the type of client for which private placement is good, because it isn’t for everyone. Even if a client has a couple million dollars in net worth, they’re not going to cut it.  You could simply use a standard accumulation design VUL product for their needs and make it easy on yourself. For private placement, we are talking about clients with $20 million in net worth and above who are accredited investors. Particularly, someone who can dedicate at least $5 million to a PPVUL/VA strategy and has interest in hedge fund or advanced investment strategies within a tax-favored wrapper. Individuals who qualify for hedge fund strategies and are invested in a few already are the best type of prospects. A broker may only have one or two of this type of clients in their book if they are lucky. As a BGA, one probably will have a handful of agents with client profiles that fit. However, this is also a great solution to bring to a prospective client, especially that uber-wealthy friend-of-a-friend you’ve been trying to get ahold of for years. As a BGA, it is something that will enhance your credibility and image as being able to serve the highest echelon client type and will set you apart from the competition. 

The biggest misconception that I think agents and BGAs face is how private placement compensation works. This isn’t a standard off-the-shelf VUL product. There usually isn’t any built-in override, for instance, for the BGA. Prudential is the only PP carrier that offers a standard wholesale override and trail, the rest are all negotiated on a case-by-case basis. Don’t let that deter you, they are all willing to work with you on crafting a solution that works. The compensation isn’t front-loaded like most standard insurance products—it is spread out over years with basis-point trails based on AUM (most often). The design is also different than most standard products because it is built for efficiency and low cost, usually either an overfunded MEC or non-MEC design depending on the client need. About 95 percent of the time this isn’t built for death benefit, but rather for accumulation and maximum investment buildup within a tax-advantaged wrapper. So for those agents and distributors who are used to selling no-lapse guarantees and death benefit, this will be a shift from that mindset but one that can be made. This sale is about the investments, so understanding what carriers offer the hedge fund your client is looking for is equally important. The carriers also have some standard investment options that are more commonplace if the client chooses. Otherwise, if the investment manager isn’t offered, the carrier may be willing to conduct the due-diligence to bring them on board for this sale. If the client isn’t particularly insurable, or prefers something other than a life insurance contract, a private placement variable annuity may be a good solution. You lose the tax-free death benefit, but maintain the tax-deferred accumulation potential for those otherwise tax-inefficient investments. 

There are additional solutions some of these carriers have developed that step outside of the traditional private placement solutions. One, for instance, is called Catalyst, offered by Lombard International. It is a product where you can take an existing GUL policy and add-on a cash value bucket for accumulation without the need for additional underwriting. So it gives the BGA and producer an additional solution in the policy review process, to make use of some of that fixed insurance that normally can’t be 1035’d or enhanced. You would have to talk with Lombard for more information about it, but it undoubtedly will be a great solution.  A few other carriers are also working to develop a similar reinsurance style product to help make private placement products more accessible, so keep any eye out as the marketplace continues to develop.  

Being able to offer these types of solutions will set you apart as a producer or agent, even if you rarely use them. Having an understanding of the concept along with access to a couple of key carrier relationships to help you in the event you have a case is the critical part. The main thing to understand here is that you aren’t alone. You have resources at the carriers to tap into, to guide you through the sales process and client meeting. On our Private Placement page of VUL Source, we have listed available resources (www.VULSource.com). Reach out to them and get an understanding so you can begin to carry the big stick even if you don’t swing it very often. 

Approximately $30 trillion in assets will transfer from Baby Boomers and Generation X to Millennials over the next couple of decades. A massive shift of wealth that will go primarily two places: The US Treasury and beneficiaries (Millennials or charitable causes). Of course, a part of any plan regarding the financial transfer of assets should attempt to minimize the amount due Uncle Sam and maximize the benefit provided to loved ones or charities of interest. A simple way to think about this opportunity is my “LOUIS and HENRY” presentation. LOUIS stands for “Loved Ones with Unnecessary Income Streams” (targeting Baby Boomers and Generation X) and HENRY stands for “High Earners Not Retired Yet” (targeting Millennials). 

There are many potentially unneeded or unnecessary income streams that retirees have access to: Social security, pension income, IRA required minimum distributions, annuities, and many others. The strategy is really two-fold. The first is to take some of that unneeded income and begin to transfer that to the next generation in a tax-advantaged manner, which would be from LOUIS to HENRY pre-mortem. The other is for LOUIS to purchase coverage on themselves to prepare for the post-mortem transfer. 

Let’s start with the unneeded income side. Everyone has heard of an IRA or annuity max strategy. If you haven’t, the concept is very simple. Required Minimum Distributions from an IRA that begin at age 70 1/2, force the client to take income which is taxed as ordinary income. Often times, the client doesn’t need that income to support their lifestyle, so they can choose to gift that income, spend it, or use it to purchase a life insurance policy. Same thing with an annuity max strategy, where a client can choose to take a withdrawal or annuitize and use the income to fund a particular plan. In more than 70 percent of variable annuity sales historically, the first distribution ends up being a death benefit. That is because the client doesn’t need the income and they keep it invested inside the annuity. 

The annuity industry perpetuated this problem by offering the annual five to seven percent guaranteed build-up in some of these policies, creating an incentive for clients to let the funds ride as opposed to withdrawing or annuitizing. The annuity carriers paid heavily for that post 2008 as we all know, but those guarantees existed and, to some extent, continue to exist today whether it is an index or variable annuity. The same max strategies can apply to any income source, such as pension income, social security, or any other source. We, as the life insurance industry, need to help advisors identify these LOUIS maximization strategies and efficiently transfer assets to HENRYs both to minimize taxation and to create a sticky relationship for the advisor to maintain clients through the wealth transfer process. About 90 percent of children leave the financial advisor when the primary clients (parents) die. About 70 percent of spouses leave when the primary client dies (usually the husband). So this type of planning can help forge a “sticky” household bond that exceeds the scope of just one client relationship. 

The first option is the annual gift exclusion amount that just increased to an even $15,000 per year. LOUIS (acting as a husband and wife couple) can gift the premium payment of $30,000 to HENRY who can then, in turn, purchase a cash value life insurance policy. They can do this every year for 20 years, amounting to a tax-free transfer of $600,000. The lifetime exclusion amount is $10,000,000 or $20,000,000 for a couple, so clients will likely have capacity to continue gifting as long as they wish. 

With the great accelerated underwriting programs available today with Principal’s Accelerated Underwriting (AU), Lincoln’s LincXpress, Hancock’s ExpressTrack, and Pacific Life’s Executive Underwriting, getting a policy issued is easier than ever. If the client is between the ages of 20 and 60, and in good health, they can get a policy issued in as little as 10 days with no medical tests. These overfunded, accumulation designed policies, particularly IUL and VUL, can offer a tremendous opportunity for young people to save in a tax-advantaged manner while protecting their families with a death benefit. Advisors like this idea because they dig through their LOUIS clients, which many large institutions have programs to screen these people, and identify opportunities to bring new clients into their business, e.g. HENRY. It creates a new bond to the existing client and ensures that when LOUIS dies, the advisor will hopefully retain HENRY as a client. Including HENRY into this transfer planning process can strengthen the “stickiness” of that relationship because it starts to build the trust factor. It also helps to begin the planning process with HENRY for their own children at a time when the insurance cost (COI) is significantly less. This is all good for business from an advisor standpoint. With fee compression across the industry, making some life insurance commission on the side is good for the advisor’s bottom line as a supplement. 

The second option is for LOUIS to gift a larger amount, over and above the annual $15,000, and incur the gift tax. Or for LOUIS to be the owner of the policy, with HENRY as the insured. That way LOUIS can purchase the policy on HENRY, who can go through an expressed underwriting process, and pay the premiums directly. This is a tad more complicated, having the insured and the owner different people, but it can easily be done. We just need to be able to prove an insurable interest, which isn’t hard in this family-centric situation. Additionally, for more complicated families, an irrevocable life insurance trust (ILIT) can be set up to own the policies and distribute any proceeds in accordance with what LOUIS wants. That requires some estate planning, but certainly is a way to achieve the desired outcome. 

The point here is to get ahead of the game, before it is too late. Financial advisors need to begin to talk to every suitable LOUIS in their book and begin this gradual transfer to HENRY. Of course the more popular and obvious strategy is for LOUIS to purchase a policy on themselves, if they are insurable, for benefit of the HENRYs. The tax-free death benefit can be a great way to transfer wealth to the next generation. The same maximization strategies can be used to fund the LOUIS policy as well as funding the HENRY policies, of course depending on how much income LOUIS doesn’t need. An additional idea would be if LOUIS had a liquid financial asset they wish to unwind and use the proceeds to fund a policy. This would be what I would call the “outlier asset” funding strategy. A great example would be a large mutual fund position in Growth Fund of America by American Funds. That fund has been around a long time and has gathered quite a following. A client could have a $1 million position let’s say, and they wish to hold onto it until death for benefit of the children. They love the strategy and love the American Funds story. 

The idea here would be to unwind some of the tax liability now, sell off a proportionate amount, and either buy a variable life insurance policy on themselves or gift the premiums for the kids to purchase on their own. Using a VUL policy with American Funds Growth ISF as a sub-account option, which has the same objective as the GFOA retail fund and shares some of the same managers, the client doesn’t have to give up the great American Funds story they love—now they own it in a more tax-advantaged manner. Four of the six managers for the Growth Insurance Series Fund also are on the management team for the retail Growth Fund of America and own nearly identical holdings. This could work for almost any major fund family and their respective funds within a variable life policy. 

In conclusion, point of sale folks and BGAs in the field need to use a simple story to help prepare clients for this massive wealth transfer. This involves both pre-mortem and post-mortem planning, but both involve using life insurance to minimize the tax implications of said transfer. There is $30 trillion at stake and financial advisors need help—and my guess is they will be very grateful, as will their clients, that you stepped up to help them.

A few decades ago, someone had the simple idea to tell a unified story that paired investment tax-deferral with living benefits and it launched the current $100 billion a year variable annuity (VA) market. This monster of a market dominates in the institutional advisor channels for insurance carriers. By comparison, it dwarfs the entire life insurance marketplace multiple times over. Why is this? When we take a look at variable universal life (VUL), the equivalent product on the life insurance side of the fence, it exhibits many of the same qualities as variable annuities. The VUL version doesn’t guarantee an income, but it comes with its own form of “living benefits” such as tax-free supplemental income and long term care through LTC and chronic illness riders. It has nearly identical investment options that provide tax-deferred growth and accumulation potential, all while doing so at an equal or lesser cost than their VA counterpart. With a tax-free death benefit that annuities can’t provide, it really becomes a superior product or a “super VA” story. Taking a look at the statistics, in an alarming number of VA sales the first distribution ended up being a death benefit. Arguably, those clients would have been better served with a MEC VUL contract as opposed to a VA. So what’s the hang-up here? The real problem is that no one seems to be talking about this fantastic story and the large institutional BGAs haven’t figured out how to deliver a unified message to financial advisors. Institutions and carriers are thirsty for someone to step up and deliver results, and if the BGA can’t fill that need I’m afraid they will be forced to look elsewhere. For over 40 years, the penetration rate of advisors actively selling life insurance in the institutional broker/dealer channels has remained somewhere in the range of two to five percent. What was that old definition of insanity? Oh yes, doing the same thing over and over and expecting a different result. Perhaps it is time to start looking at a different approach to this longstanding problem. 

The BGA isn’t solely to blame for the lack of advisor penetration and sales; there are other external forces that have existed. Historically, the main issue within the institutional BD channel has been the non-transactional nature of the life insurance sale. This isn’t news, and underwriting in general has never been popular in the wires. This problem should begin to weed itself out over the next 10 to 20 years as big data, predictive analytics and accelerated underwriting processes become more advanced. We have already seen this in a couple of VUL products where a policy can be issued within 10 to 15 days, as long as it is below a certain death benefit threshold and the client clears certain excluding conditions. Other carriers are well down the road to developing such programs and their capabilities and capacities will only continue to expand. This readies the mass-market platform for variable life and creates incredible potential for those willing to embrace it. The overwhelming majority of insurance professionals believe this trend of accelerated underwriting will continue and over 80 percent of general agents who participated in our annual survey believe it is very important or somewhat important to make life insurance more transactional. Easier and faster underwriting will drastically increase the appeal to the investment oriented advisors and especially those who currently market annuities. 

Another issue is that, as an industry, we shot ourselves in the foot because of the way we sold VUL in the past. For too long it was sold as a max death benefit sale, using the minimum amount of premium to leverage the maximum amount of insurance along with an illustration rate north of 10 percent, which we know now to be completely unreasonable. There is no wonder why these policies blew up, and the pain it caused for sales professionals, advisors and clients has not been forgotten. If you want to sell it that way, use a lifetime no-lapse guarantee VUL product or simply stay in the fixed insurance arena. There is another way VUL can be sold, and one that opens the door to a huge marketplace. There are over 125 million people between the ages of 30 and 59 in the U.S., double the size of the 60-plus market of around 57 million (see diagram below). Illustrating VUL as an accumulation or investment vehicle, with an over-funded structure using the maximum amount of premium and the least amount of death benefit, creates an extremely resilient investment product. If you couple that structure with an industry standard 10 or 20 year no-lapse guarantee, overall market volatility becomes almost insignificant. We’ve run multiple scenarios with actual investment performance beginning in and running through the 2001 and 2008 market downturns, and the product not only maintained, but produced enough cash value to provide supplemental retirement income in later years to the client (A five-pay, overfunded scenario, across multiple carrier products). This solution is perfect for those young, healthy, high income clients who have a desire to find a ROTH alternative solution with no restrictions or exclusions. In a recent BGA survey we conducted at the broker/dealer, only 36 percent of BGAs are positioning or selling VUL in such a manner. Although most noted they are seeing an uptick in accumulation sales, the majority remains protection based. In addition to that, VUL makes up only between one and ten percent of a BGA’s total product mix in general. For a product that is ideally positioned to bridge the gap between the insurance and investment worlds, it simply isn’t being talked about. VUL is also a wonderful lead-in product, and once you have earned the advisors trust and attention you can always pivot to indexed or fixed solutions. 

If underwriting becomes less of an obstacle and we can embrace the investment story tied to VUL, all of a sudden this becomes a wholesale product as opposed to a point-of-sale product. BGAs are not set up to be wholesalers, nor do they have an immediate desire to become one. It is a part of the culture in the life brokerage world where we are resistant to becoming a “product” wholesaler and don’t want to tell just one story. We need to get past that mentality if we are going to drive any real results. In the wires, around 90 percent of all life insurance sales are client initiated, which means BGAs and sales professionals have become predominantly order takers and spreadsheeters as opposed to proactive marketers. Incorporating wholesale activity into the point-of-sale model will inherently help the real underlying issues: activity levels and advisor penetration. 

In order to boost the number of advisors seen, a wholesale framework needs to be introduced to the BGA distribution model. The question is how do we effectively do so? One true partner to the VA wholesaler has been the investment company counterparts with which they work. They have helped sell the investment story within the tax-deferred wrapper of the VA. The same can be done for VUL; it is just a matter of bringing the parties together and talking about the story of tax-free asset planning. At The Leaders Group, we have launched a couple of wholesaling programs together with leading investment companies where a scripted VUL presentation is delivered side-by-side with an investment presentation in front of large advisor audiences. These are the first true wholesaling programs of their kind in recent memory to market VUL to financial advisors. Having the investment companies involved in the presentation brings a familiar face and voice into the conversation and it ties the advisor into what they are already doing for a living: constructing and managing portfolios and investments. 

The keys to effectively wholesaling:

• Activity, activity, activity
• Tell a unified, scripted story
• Repeat, repeat, repeat

As BGAs and life insurance professionals, we need to begin to think bigger and on a mass-market scale. We have far too good of a product story to not be telling it. One way to widen the scope of exposure to financial advisors is to appeal to their investment nature. Marketing VUL with an over-funded, accumulation design to clients age 30 to 59 is potentially a way to do just that. Using a simple, unified VUL story alongside the investment fund partners will lead to new advisor relationships and increased penetration levels across all advisor channels. BGAs need to bring a common story together, across all of their salespeople, and begin to embrace traditional wholesale techniques and practices. The bottom line is we need to protect the BGA distribution model for years to come and the way to do that is through increased activity and advisor penetration across the board. 

There are only a handful of insurance carriers that play in the corporate owned life insurance (COLI) and business marketplace, yet actively working with them can identify significant opportunities for brokerage general agencies (BGAs) and their sales professionals. The market opportunity remains strong, with 24 million family businesses in the United States contributing 50 percent of the gross domestic product and creating over 75 percent of all new jobs. Additionally, the family owned business market makes up 60 percent of the nations workforce.

Due to its accumulation qualities, variable life insurance has been the preferred product for business planningkey person insurance, non-qualified deferred comp, executive bonus plans, and buy-sell agreementsand each carrier in that market caters to it with specifically designed product features.

The Company Valuation Entre and Buy-Sell Review
As a point of sale professional in the field, there are many advisors in your territory that work in the 401(k) and retirement plan space, either by accident or intentionally. Most advisors have a few 401(k) plans that they service per the request of a client, who is a small or medium sized business owner in the community. These clients are good opportunities for you and the advisor to address business insurance needs. However, it is challenging to approach these clients with something substantial that will open the door to further discussions. All businesses, regardless of their size, need to thoroughly consider their business insurance needs before proceeding with any other aspect of their company. This is so that they are protected if anything should happen to them which is out of their control. By looking at EINSURANCE or other insurance companies in your area in detail, will allow you to get all of the information you need before deciding to come to a final decision when it comes to insurance, as this could prove to be valuable in the future.

The business owner is usually accustomed to working with consultants, accountants, and attorneys specifically for his business planning needs. Some financial consultancies like Holland Parker provide customizable financial planning and forecasting solutions for a company. A great way to break the ice with a business owner client is to offer a complimentary, informal company valuation. Two industry-leading insurance carriers offer informal company valuations free of charge. These valuations have proven to be quite accurate, even when compared to formal valuations conducted by expensive business consultants. There are some prequalification metrics for those valuations and the company needs to be of adequate size, but if they are large enough for a 401(k) plan, they likely will exceed those requirements. The advisor should be more than willing to incorporate this new valuation tool into their product offering during their regularly scheduled review meetings with those specific clients. Once the information is gathered, and a valuation is completed, a meeting can be set to review the results and determine if insurance applications exist. You are there to help the advisor and the business client along the way and to uncover those opportunities.

The most natural follow-up to the business valuation is to inquire about the existence of a succession plan and buy-sell agreement. In the family owned business market, 60 percent do not have a succession plan or dont have a defined, written plan in place. The other 40 percent have a plan incorporated into the estate plan or have a written succession plan. The buy-sell agreement, if it exists, may not be funded or may need adjustment to reflect a new company valuation. If one doesnt exist, then that can be addressed with the client, together with their attorney, making it clear that you and the advisor have the product to serve as the funding mechanism. In the event of an owners death, a funded buy-sell agreement within a succession plan can create immediate cash for purchase and ensure the successful ownership transfer of the business entity.

Possible Buy-Sell Scenarios:

There is not a buy-sell agreement in place.

There is a buy-sell agreement; however, it is not properly funded.

It has been many years since it was updated or the company value has changed; needs review.

There is no need for one or an adequate, funded agreement exists (explore other opportunities).

The buy-sell review is a valuable first step in developing a deeper relationship with the business client. The company valuation created a follow-up opportunity for you and the advisor to gather more information about the business entity and the client. You have provided a valuable service to the client, enhanced the advisors service offering and proven yourself to be a helpful resource to the advisor for future engagements. Other insurance applications such as non-qualified deferred compensation, key-person insurance and individual insurance needs for employees or owners can also be uncovered.

Networking with 401(k) Carrier Wholesalers
Outside of the typical advisors, there are unique advisors in your territory who specifically focus on 401(k) plans; the retirement plan specialists who are either a part of a large branch and service those needs, or have a separate practice affiliated with an independent broker-dealer or registered investment advisor (RIA). These advisors are perfect to approach with business insurance applications and company valuation offerings with the majority of their clients being plan sponsors and business owners. It just may be difficult to get a meeting with such advisors because they dont deal with you on a regular basis or they are outside the normal advisor channels you frequent. This is where collaboration with the insurance carrier resources proves to be invaluable. The insurance carriers that have the greatest presence in the business or COLI markets are also those that have significant retirement plan assets through their 401(k) platform. It is likely that these specialty 401(k) advisors use that platform, among many others, to service their clients needs. The carriers have dedicated 401(k) wholesale teams who call on retirement plan advisors every day and have existing relationships with them. It would be advantageous to find a way to work with these wholesalers through a friendly introduction from the insurance carrier.

What if there was a way for you to network with these wholesalers, share leads, and conduct joint meetings with these carrier wholesalers across the territory? They bring the 401(k) expertise and you bring the wealth of insurance applications that can be applied la carte to the advisors existing book. It makes perfect sense to approach this marketplace in such a collaborative manner. As the point of sale professional in your territory, it would make sense for you to reach out to your carrier 401(k) counterparts, introduce yourself, and inquire about joint opportunities.

Opportunities with the Plan Participants
Working with advisors that specifically work in the 401(k) space can lead to opportunities beyond the business owner clients and plan sponsors. These advisors are typically very active with the plan participants (employees) in the plans they manage, or at least interact with them during enrollment and educational meetings throughout the course of the year. It is a terrific opportunity, with the plan sponsors permission, to work with some of the employees on their financial planning and insurance needs. As the life insurance specialist, you can propose to the advisor that they conduct financial assessment meetings to gather information about the needs of the participants through means of a confidential survey. You may then review these opportunities for individual life sales and planning needs. This technique has generated a lot of success among retirement plan advisors and life insurance specialists in the field. Particularly if the plan sponsor is in a potentially high income generating industry such as medical, finance, or engineering, it creates a fantastic opportunity for planning needs with that advisor. Some of the carriers also have programs to help you implement these campaigns and offer sample surveys.

Conclusion
Broadening your exposure, using your carrier partner wholesalers, and approaching the 401(k) advisor marketplace with an open mind will lead to more opportunities for business planning. Most of these advisors simply dont know this is something you offer, so it must start there; approaching your existing advisor clients and uncovering those business valuation and planning opportunities with them. As you gain some traction and develop a comfort level with it, then you can begin to prospect in your territory for those retirement plan advisors who may be open to discussion. At the same time, networking with the carrier 401(k) wholesalers in the area may be a terrific opportunity to increase your exposure. As you become established and develop deep relationships with these advisors, you can begin to implement the plan sponsor and participant campaigns to uncover more opportunities.

Footnotes:
Statistics from multiple sources: Mass Mutual, Kennesaw State University, & Family Firm Institute: American Family Business Survey, 2007. The Connecticut Business and Industry Association (CBIA): 2013 Survey of Business Families, 2013. Conway Center for Family Business: Family Business Facts, Figures, and Fun, 2015.

Positioning the Need

Mr. and Mrs. Client, what do you think about the prospect of moving in with your children and/or “gifting” them a six-figure annual bill? This is a real and powerful question. If it doesn’t come to that, Mr. and Mrs. Client, the cost will chip away at the value you meant to leave your children by depleting your investment accounts. Most advisors are afraid to bring up the long term care discussion, but afterward find that their clients are very appreciative that they did. It strengthens the relationship between the advisor and client by tackling a very real need head-on.

From the client’s perspective, they have only a few choices without having a predetermined plan. They either withdraw the money to cover those expenses from their investment and savings accounts, or they burden their children with the task of care and/or providing the source of payment. Along the same lines, the advisor needs to be asked tough questions by the life insurance sales professional in order to relate to and realize the impact of the long term care need:

Mr. Advisor, what would happen if the spouse of your top client called you today: “John has had a stroke, he is in bad shape. He will need significant care. What is the plan?” Do they have a plan? Have you even offered them a plan?

The average cost for a private nursing home in 2014 was around $77,745 per year. In 20 years, assuming a modest 3.2 percent interest rate, that figure will be $145,970. Depending on what statistic you follow, there is about a 70 percent chance a person over the age of 65 will need long term care at some point, whether at a home or in an institution. With 76 million baby boomers  turning 65 during the next 15 years, that is around 53 million people who will likely have a need. These statistics translate directly to an advisor’s book of business. Those clients over the age of 65 generally have the most assets and thus have the most impact on the advisor’s overall assets under management (AUM). Advisors need to have an interest in protecting those assets and, furthermore, need to understand how long term care planning can help them do that.

As a financial advisor or life insurance sales professional, it comes down to asking the tough questions to strike an emotional chord. Only then have you created enough discomfort to inspire action.

Quantifying the Value for the

Financial Advisor

As a life insurance professional, not only do you need to personalize the long term care need for the advisor, you need to quantify the value of providing it. Many advisors today are fee-based, and many more will be moving in that direction. What’s critical to their paycheck and their business is protecting their AUM. If you don’t plan for this need, Mr. Advisor, where do you think those funds are going to come from? They are likely going to come from your AUM, which is still invested across various asset classes. I use your AUM because it is important for the advisor to take ownership, and thus responsibility. Systematic withdrawals from a volatile portfolio can be devastating to an account value and can have a negative effect on the viability of a client’s retirement plan. Insurance isn’t taking away from a financial advisor’s AUM, it is protecting it. Once the advisor understands that insurance is about protecting his business, you will find he is open to opportunities to grow it. At that point the conversation can move beyond just long term care, and you have begun to form a valuable partnership.

Mr. Advisor, now that you have agreed that there is a need and you’d like to work with me on this project, let’s commit some time to it and define a revenue goal. Devoting 50 hours per year, less than an hour a week, I believe it is reasonable to generate between $50 and $100 thousand in gross dealer commissions. Does that sound like a good use of your time?

Long term care insurance is a way to protect AUM while a client is alive, but what happens when that client dies? Seventy percent of married women fire their financial professionals within one year of their husband’s death. If the spouse isn’t in the picture, children likely inherit a portion of that wealth after Uncle Sam takes his piece, fight over it, spend it, and/or use a different advisor for their planning needs going forward. An estimated $30 trillion in assets will flow from baby boomers to Generation X and Y over the next few decades. Mr. Advisor, you need a way to make your AUM sticky; a way to incorporate the entire family into the planning process. This will help solidify you as the family’s primary advisor, and there is no better way to do this than through life insurance planning. A way to lead into the life insurance conversation may be through an LTCI conversation or vice versa. Mr. Advisor, what if I told you there was a way to incorporate both long term care planning and life insurance planning into your book of business? From a liability standpoint, if you don’t offer these options to clients who are suitable, it may come back to haunt you—especially if the industry ends up moving to a common fiduciary standard.

Reviewing the Options

Let’s say we have identified a need and convinced an advisor that long term care/life insurance planning helps protect and grow his AUM, now what are the options? Stand-alone LTCI plans are expensive, and they seem to be only getting more costly as time goes on and carriers reassess their risks. On top of that, if a client doesn’t end up having a need, those premiums are lost. According to an article from The American Association for Long-Term Care Insurance, there is a 50 percent chance someone who buys a policy at age 60 will use his policy before he dies. So according to that statistic, it is a flip of a coin if he ends up needing that coverage. Hybrid LTCI products are a better solution than stand-alone policies, and we have seen some development in that space; however, when you compare those hybrid products to cash value (CV) life insurance policies with a long term care rider, the overall benefit is clearly in favor of the CV life insurance policy. If a client doesn’t need to accelerate the death benefit for long term care, then there still exists cash value and a death benefit that passes to a beneficiary on a tax-favored basis.

Two CV life insurance options that would work for this type of approach would be indexed universal life (IUL) or variable universal life (VUL). In that market there are three carriers that offer a long term care rider to their IUL/VUL lineup. We are talking about a true long term care rider, not critical illness, which is an important distinction to make. Two carriers have an indemnity style long term care rider, which can also be incorporated into trust planning as well as serving individual needs. The other has a reimbursement style long term care rider. A fee-based investment advisor will be able to understand and relate to IUL and VUL much more than a fixed product. Particularly with VUL, it gives the advisor the opportunity to manage the underlying investments and portfolio much like they do in other client accounts. VUL sits somewhere between the investment and insurance worlds, offering application to both as a registered investment product and an insurance product.

For the client, there are two primary advantages to using a CV life insurance policy with a long term care rider. The first is protection against both longevity and inflation, which are the primary risks facing retirees. For a couple who reaches age 65 there is a 50 percent chance one of them will live to age 94 and a 25 percent chance one of them will live to age 98. Permanent life insurance lasts for the duration of the client’s life, and the required premium payments remain predictable and steady. Due to their tie to the financial markets, indexed life and variable life are far more likely to keep up with inflationary pressures than a fixed product. The second advantage is offering the client the power of choice. Given all the factors that can come into play over a 30-year potential retirement period (age 65 to 95), isn’t it better to have a product with options? If a long term care need arises, the client can accelerate the death benefit. If supplemental income is needed instead of long term care, withdrawals and/or loans can be taken out against the cash value of the policy. If they don’t need either, then they have just hedged their risk against rising estate and/or income taxes and a death benefit goes to their beneficiaries on a tax-favored basis.

For positioning the actual sale, the long term care need can be addressed on a client’s primary life insurance policy if he doesn’t already have an LTCI policy in place, or sold as a secondary policy specifically to address long term care planning. If a client already has an LTCI product he has been paying premiums on, is it enough? Does he need something more to supplement that pool of funds?

Conclusion

Bridging the gap between the life insurance world and the investment world is a difficult task. As life insurance professionals, we have not done a good enough job of conveying the value to advisors. In the institutional channel, fewer than 4 percent of advisors sell life insurance on an ongoing basis. For independents and banks that number is higher, but still not where we need it. These penetration rates haven’t changed for 30 years. Especially for fee-based advisors, we need to begin to speak their language and quantify the value for them as it relates to protecting and growing their AUM.

Cash value life insurance with a long term care rider is a great solution for both clients and advisors. For the advisor, it brings the spouse and children into the planning process and creates a value past the primary client’s death. It protects their business from not only an asset standpoint, but from a liability standpoint as well. For the client it is a great option to combat inflation and longevity, provide long term care funds if the need surfaces, and provide a wealth transfer vehicle for remaining funds on a tax-favored basis. The most important thing is that it gives the client and his family flexibility and security with a product that addresses multiple needs at the same time.