The end of the year is typically a good time to evaluate your financial situation and determine if you’re doing the right things to meet your long-term goals. While many clients tend to focus on portfolio performance and managing their retirement accounts, an equally important aspect of financial planning is often overlooked— estate planning.
Creating a legacy that can help family members maintain their lifestyle and live comfortably for years to come should be a top priority, including the role life insurance can play in the equation.
Since the death benefit is passed to their beneficiaries generally income tax free, clients can use life insurance to help replace lost income to their family. The death benefit can also assist with other expenses, such as their children’s education, paying off their mortgage or other debts, and simplifying the transfer of assets.
While traditional life insurance is certainly a good option to use within estate planning strategies, fixed index universal life (FIUL) insurance can be a great way to build additional flexibility into your client’s overall financial strategy.
Before we address the advantages of FIUL, it’s a good idea to understand the basic benefits of using life insurance in estate planning.
Prompt payments—When your client selects a specific personal beneficiary, it not only makes it more likely that the death benefit will be paid promptly to their loved ones, but also that it will be distributed according to your client’s wishes.
Help with estate taxes and bills—Life insurance can be used to replace wealth lost due to taxes and expenses. Your client’s beneficiaries can use the life insurance proceeds to help replace the assets in your client’s estate that are used to pay costs of settling your client’s estate, including taxes and fees. If your client has an estate tax concern, one way to use life insurance is to have it owned by an irrevocable trust.
Charitable giving—Life insurance allows your client to give to their favorite charity by naming the charity the beneficiary of their life insurance policy. If the charity is the owner and beneficiary of the life insurance policy, and if your client gifts cash to the charity to help it pay the policy premiums, the cash gift may provide them with an income tax deduction. Alternatively, if your client is the insured, owns the life insurance policy and names the charity as the policy beneficiary, upon their death the death benefit is included in your client’s estate but their estate may receive an estate tax deduction for the amount of the death benefit paid to the charity.
Wealth replacement—When the death benefit proceeds from your client’s life insurance policy pass to their family, they can replace some or all of the wealth they have given to a charity upon their death (or during their lifetime).
Equalize distributions—If your client owns a business, life insurance can be used to equalize estate distribution between children who participate in the business and those who don’t. A life insurance policy can create an asset for your client’s children who are not active in their business.
The Case for FIUL
Clearly, there are many compelling reasons to include life insurance within your client’s estate planning strategy—so what additional benefits does FIUL add?
First and foremost, FIUL offers more flexibility for the insured to utilize while they are still alive.
FIUL differs from traditional universal life insurance by providing the opportunity for the policy to build cash value accumulation from indexed interest. FIUL can provide an opportunity for the policy’s cash value to increase based on positive changes to an external market index, but the policy’s cash value will never decrease when the external market index is negative (although fees and expenses will apply which will reduce cash value). Although an external index may affect the interest credited, the policy does not directly participate in any equity or fixed income investments—clients are not buying shares in an index.
This means your client can access the available cash value in their policy via income-tax-free policy loans and withdrawals to address more immediate financial concerns like potential tax increases, market volatility and inflation. In fact, a recent study* found that inflation is currently the number one economic worry for the majority of Americans, with 32 percent saying they were either “panicked” or “very worried” about it.
Your client can also use available cash value from the policy for things that may be a bit further down the line such as supplementing college funding, supplementing retirement income, or even taking that once-in-a-lifetime trip they’ve been planning forever. With a policy loan or withdrawal from an FIUL policy, they can use available cash value to take their dream trip and still have the reassurance their loved ones will receive the death benefit, minus the loan, as long as their policy is still in force.
Keep in mind that taking policy loans will reduce the death benefit and cash value, and may cause the policy to lapse, which may make those loans taxable. So, it’s important to carefully manage policy values while taking loans. Withdrawals up to cost basis are income tax free.
Another reason your client should consider FIUL as part of their estate planning strategy is the health care benefits that are available—via optional policy riders—for emergencies in case the insured is diagnosed with a chronic or terminal illness. In exchange for an extra cost, and certain restrictions including underwriting, your client can add this additional level of protection that they can access during their lifetime should they experience serious health complications.
Using life insurance within an estate planning strategy can help solve a variety of problems resulting from the loss of a family’s primary provider. Adding FIUL to the equation should be considered as part of this conversation because it can give your client greater flexibility for today, while still providing the protection benefits necessary for tomorrow.
*The Allianz Life 2017 Inflation Study was conducted by Ipsos via their eNation Online Omnibus in March 2016. The survey was completed via Ipsos’ iSay/Amario Panel with 1,005 U.S. adults age 18+, and was commissioned by Allianz Life.
This content is general information for educational purposes, and is not intended to constitute fiduciary advice. Clients should consult their financial professional for a specific recommendation about purchasing this product.