At its core, a wealth plan is simple. It models a funding source at a given point in time against a funding use. More funding sources than uses leads to increased wealth, but more uses than sources leads to failure unless corrected.
Common sources used to fund a client’s needs and goals are cash and income (working or retirement) for short-term needs, and wealth in the form of portfolios and property for the mid- to long-term horizons. Often sitting orphaned in the investment plan are a client’s insurance products be they property and casualty, disability, life and long-term care.
Incorporating adviser-focused insurance products affords the adviser an opportunity to develop an added-value component to the overall investment plan.
The concept of spreading risk for a catastrophic event across a large number of people, with each individual contributing a relatively small amount of money compared to the protection provided, is one of the great inventions for wealth sustainability. It’s not a stretch to say that our ability to live with much less anxiety, and, even, for our economy to function efficiently, accrues through various insurance applications.
For those who have suffered the loss of a home to fire, a lengthy illness or caused a serious car accident, insurance protection is not a concept but a literal wealth saver.
Since clients may forget the value insurance provides, it’s essential to produce scenarios that illustrate the gaping hole left in the family’s wealth should a catastrophic event occur with no insurance coverage. The insurance money paid at these times has enormous monetary value on par with any other financial program.
Conflicts to Usage
Nearly all insurance has an event trigger such as an accident, illness, incapacity, or death in order for financial benefits to be delivered; these benefits flow into the wealth plan as a direct financial resource to compensate for what was lost. It’s a double-edged sword: “I get a financial benefit, but only when something bad happens.”
Moreover, life insurance and annuity products often come with many obstacles that sap the benefits they deliver. Sales commissions, complexity and loss of control keep advisers from embracing these products as important tools in delivering the investment solutions clients need.
Embracing Added Value Benefits
Life insurance and annuity products are quickly evolving with an emphasis on fee-based advisers. Indeed, the soon-to-be-implemented DOL fiduciary rule is speeding the shift from commission-based compensation to AUM-based fees aligned with a fiduciary standard. And, these products come with low costs and simplicity.
Variable products (dedicated portfolios backing the insurance or annuity benefit) with stripped down expenses and adviser-compatible compensation keep the adviser as the wealth shepherd and not the insurance company. This control is essential for an adviser to deliver a practice management solution that forms a total investment program based on its ability to solve a client’s needs, anxieties and aspirations uncovered during the wealth planning process.
This table identifies the many benefits an adviser-focused variable universal life policy (VUL) provides in addressing key planning tasks for an adviser’s high-income clients.
With these benefits supporting multiple planning needs, while producing financial benefits, the adviser can draw a common thread from service application to a client’s ROI.
Life Insurance as a Funding Source
Comprehensive wealth management drives to an executed solution that considers all available tools from cash management to investment products to insurance to trusts.
VUL is a portfolio container in which its structure and associated benefits are created through laws and regulations; this is the same formation for mutual funds, 529 plans, IRAs and 401(k)s.
Unlike these other vehicles, VUL allows tax-free cash access via premium withdrawals and/or loans against the cash value (i.e. the policy owner borrows from him or herself), and this opens up a number of high-efficiency funding options for other wealth needs. VUL is like a Roth plan without restrictions.
Connecting the Generations
As noted in the table above, the flow of adviser-focused VUL benefits can touch not just the primary client, say, mom and dad, but downstream generations through beneficiary designations or the parents paying the premium for adult children’s policies. Note that such strategies are best discussed with the client’s insurance consultant and/or trust and estate attorney.
These wealth transfer and planning tasks keep the adviser as the builder, manager and monitor of the policy’s underlying portfolio. In this way, insurance shifts from an orphaned position to one that is fully integrated in the investment plan’s execution.
Wealth Planning Consulting Inc.
Princeton Junction, New Jersey
Editor’s Note: Other Financial Planning Association content that may be of interest to you includes:
- This Journal of Financial Planning article by Vern C. Hayden, CFP®, “An Insurance Bias Re-examined.”
- This Journal of Financial Planning article by Jon J. Gallo, J.D., “Retirement Planning and Life Insurance: Some Traps.”
- This Journal of Financial Planning article by Brian I. Gordon, CLTC; and Murray A. Gordon, “7 Long-Term Care Insurance Trends to Watch.”