Over the holidays I was chatting with a group of people when Joe asked me what I do for a living.
“I sell life insurance,” I said.
I braced myself for the typical response—a flatly stated, “Oh yeah, I already have life insurance,” as if I were suddenly making a sales pitch on the spot. Or the other common response, which tends to be a long series of questions about whether they need life insurance.
However, to my surprise, his eyes lit up with excitement.
“I just bought life insurance,” he said enthusiastically.
I learned how Joe’s advisor worked their way backward in explaining life insurance benefits and positioned a cash value life insurance accumulation strategy without losing the client to all the jargon or product analysis. Instead of trying to sell Life Insurance Retirement Planning (LIRP), Joe’s advisor presented the “Insurance Wrapper.”
Joe’s advisor took a more creative approach to prospecting a client than we traditionally see. All too often I see presentations explaining reasons why one product is better than another, but rarely do I see a presentation on how to prospect a client and present them with the idea of an accumulation strategy.
As insurance experts it’s easy to take for granted complexities of life insurance and thus leave a potential client confused about what their investment is. In my experience with people who have bought cash value life insurance, they still feel hesitation and usually lapse the policy due to a lack of understanding of what and why they purchased cash value life insurance.
While talking to Joe, I learned he recently purchased some permanent life insurance and felt confident it was the best move he made in his financial plan. I wanted to know how his advisor left him feeling assured and confident with his investment, so I asked him why he purchased. Joe said, “2008, taxes, and bonds.”
2008
Joe is an investment banker, and in 2008 he saw a large portion of his equity-based portfolio drastically fall in value—this was his first major loss in the market. His strategy was always aggressive and, as a result of this loss, he realized that one major event prior to retirement using his current strategy could leave him in a poor position to retire on time. He wanted to maintain an aggressive qualified portfolio, but also wanted to back it up with a more conservative piece; therefore, he knew in times of poor performance he had another asset to pull income from while he let his equities rebound. He also knew he wanted to keep equities inside his qualified plans because he could limit the tax implications of short term capital gains. He needed to find a vehicle where he could put away assets that would experience moderate growth, that had similar tax advantages to qualified plans, and would diversify his overall portfolio.
Taxes
His current income disqualifies him for a Roth IRA, and through uses of different qualified plans he maxes out the 415(c) contribution which was $53,000 for 2016. Currently his assets sit in qualified defined contribution plans that will be taxed upon distribution. He realized his problem would not be accumulation but would be the taxes on the distributions coming out of his qualified plans. He was looking for another way to secure more for retirement that would at least allow him to accumulate tax free without having to use the funds inside his qualified plan to do so.
Stock Market and Bonds
The stock market is at an all-time high. We have been in a bull market for over eight years, one of the longest in the last 100 years. We all know this won’t last forever and that there must be a correction. We also know that the longer the bull market lasts, the harder the bear market can hit. But there is another issue that makes this problem more unique. Most financial advisors place their clients in a financial plan that has a 60/40 approach (equities/bond ratio). The issue with a 60/40 approach at this point in time is that interest rates are rising.1 With rising interest rates bonds that have been purchased will be negatively impacted. If there is a mere one percent change in interest rates over the next year, the average corporate bond will be negatively impacted by -7.05 percent based on the MorningStar Category Averages.2 This would be the first time during a bear market where equities and bonds would be negatively impacted. Based on this analysis, the client wanted to diversify his overall plan, and specifically a portion of his bond portfolio, so that he could mitigate risk away from the guaranteed income side of his financial plan.
Making life insurance work for the client
Joe’s advisor looked at his problems and saw a potential solution. The advisor also realized that if he showed the client a cash value life insurance policy proposal first, Joe would immediately shut down the idea due to his preconceived notion of life insurance. Therefore, the advisor broke down Joe’s goals before showing him a step-by-step plan.
- Client wants to position a portion of his retirement assets in a low risk solution so the rest of his qualified money can grow aggressively.
- Client wants to position those assets in a tax-friendly vehicle to reduce his taxes on accumulation and possibly distribution.
- Client wants to diversify his bond portfolio due to the negative impact interest rates will have on his bond portfolio.
Presenting the “Insurance Wrapper”
Now the advisor has Joe’s attention, and Joe asks “so what is the solution?” The advisor didn’t say you need a cash value life insurance policy, he said, “We need to allocate funds into an ‘Insurance Wrapper’.” The advisor went on to explain that, due to the unique qualities of cash value life insurance, Joe can use an insurance wrapper to grow assets tax free, reduce or eliminate taxes on distributions, and diversity his portfolio to mitigate some of the risk we see on the horizon. The advisor broke it down into steps again:
- I have a solution that will allow your money to grow moderately and will allow you to continue to be aggressive inside of your qualified plan while still providing a financial backbone to your retirement.
- This solution will grow tax free. If you decide to take distributions, if structured correctly these distributions can come out tax free. What most people do is use this solution when the market is underperforming. This allows you to take a distribution from this account while letting your other assets rebound. (American College “Smooth Sailing in Uncertain Times”)3
- You can reposition your bond portfolio using this solution to limit some of the risk you will face as interest rates start to rise, helping you diversify your bond portfolio.
The advisor showed the client that there was a solution that provided him with the answers to his problems. Instead of positioning it as cash value life insurance from the beginning, he worked his way backward and he positioned the plan as an insurance wrapper on his retirement assets. This helped the advisor show what the advantages to cash value life insurance are without the client being turned off to the solution due to preconceived notions.
When you have a client looking for a solution, and the answer is a cash value life insurance policy, rather than starting out with the product, first work your way backward. Instead of presenting the solution as cash value life insurance, present the solution as an “Insurance Wrapper”. This will help you clearly present what it is you are solving without turning the client off from the beginning.
References:
1. https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
2. http://news.morningstar.com/fund-category-returns
3. http://retirement.theamericancollege.edu/sites/amcol-nylcri/files/TWCMFall2014_25_29.pdf
