Life insurance plays an important role in the completion of your client’s financial plans.  Whether it’s to protect their family, fund an estate tax bill, or complete a benefit plan; life insurance is often a necessity in reaching your client’s financial objective. As a financial professional one of the commitments a you make to clients is to monitor the client’s life insurance needs and existing coverage over time. Conducting a Personal Policy Review Analysis once every three to five years is a critical part of that ongoing obligation to make sure your client’s life insurance policy(ies) are keeping pace with their ever-changing needs.

What does a Personal Policy Review Analysis consist of?

A life insurance review consists of two main elements: (1) a review of the client’s current life insurance needs, followed by (2) an analysis of the clients existing life insurance coverage to determine if the death benefit coverage and the type of policy is still appropriate.

The Benefit of conducting a Personal Policy Review Analysis

Conducting a Personal Policy Review represents a great opportunity to further your client advisor relationship; building trust; uncover the need for additional life insurance on the client and or close friend or family member; and create a window for referrals.

EIGHT EASY STEPS TO REVIEWING YOUR CLIENT’S POLICIES:  

1. Determine whom you will contact. In other words, who should receive a review?

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“Crummey” Powers

Crummey powers (named after a man named Crummey whose successful lawsuit validated the technique) are used in connection with Irrevocable Life Insurance Trusts (ILITs) in order to have gifts to the trust qualify for the gift tax annual exclusion. The exclusion is currently $12,000 per donor per donee per year and is indexed for inflation. Only gifts of a “present interest” qualify for the exclusion, and, without Crummey powers, gifts to an ILIT would otherwise be deemed to be gifts of a “future interest”, since the very essence of a trust is to defer enjoyment of the property in the trust until some future time.

Crummey powers need to be carefully drafted and implemented, and we here at Provada are intimately familiar with exactly what is needed in order to make them fully effective. The holders of Crummey powers are typically the primary beneficiaries of a trust, but sometimes these powers need to be given to secondary beneficiaries as well in order to have enough annual exclusions to cover the full life insurance premiums. This can be accomplished by following the “Cristofani” guidelines (Cristofani was another successful taxpayer), and also requires careful drafting and implementation. We are also knowledgeable in this area.

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Life Insurance Awareness Month is a wonderful opportunity for us to remind all of our producers of the remarkable array of benefits and outstanding results that can be achieved with one of the greatest financial instruments ever devised: LIFE INSURANCE!

Life Insurance is the single asset or product that can:

• Guarantee the financial stability of the family of a young breadwinner who dies prematurely from any cause;
• Continue to provide all of its originally intended benefits and results in the event of a temporary or permanent disability;
• Assure that a business can remain a viable functioning entity that employs workers and adds value to the community when an owner dies;
• Enable the other owners of the business to carry on without having to create unmanageable debt or otherwise stretch themselves financially;
• Allow people with second families to provide for their children from a prior marriage without upsetting their current estate plan;
• Provide for special needs children without taking anything away from siblings or other family members;
• Protect estates from the devastating shrinkage that would otherwise occur at death from estate taxes, debts, and other expenses, on a 100% tax-free basis;
• Leverage small annual outlays into tremendous benefits for almost any purpose that are fully guaranteed under today’s products;
• Make it possible for people to be generous philanthropists without having to deprive their families of the benefit of their estates;
• Enable people to accumulate funds on a tax- deferred basis and later receive tax-free retirement benefits while at the same time providing death benefits;
• Allow businesses to provide similar benefits to their top executives on a tax-favored basis and in some cases with no out-of-pocket cost;
• Enable grandparents to provide a legacy to their grandchildren without shortchanging the intervening generation;
• Provide a profit when no longer needed by taking advantage of the opportunity to arrange for a sale in the secondary market.

WOW! Yes, life insurance can do all of these things… and much more. The Life and Health Insurance Foundation for Education (LIFE) is an organization dedicated to addressing the public’s growing need for information and education about life insurance. Check out their website at http://www.life-line.org. And let’s all make this our most profitable month ever by helping those we know achieve these wonderful results.

“C” Stands for Conserving One’s Assets for Oneself and One’s Family

Conserving one’s assets for oneself obviously must occur during lifetime (which clearly also serves to Conserve those assets for one’s family at death). Conserving assets during lifetime will be covered in detail in this newsletter.

Assuming one has done a good job of Conserving assets during lifetime, Conserving those assets for one’s family at death requires careful and thorough lifetime planning, even though this planning may not take full effect until death. This subject will be covered in detail in our next newsletter.

Conserving assets during lifetime - general considerations

One of the major problems facing all of us during our entire adult lifetimes is the possibility of some adverse, or even catastrophic, event occurring that could wipe out all, or a significant portion, of our assets. This is why almost all of us carry homeowner’s (or renter’s) insurance, automobile insurance, and liability insurance. Some of us in earthquake country also carry earthquake insurance, and some of us in low-lying areas also carry flood insurance. But all of these types of coverage protect only our hard assets. They overlook what are really our most valuable assets: ourselves and our future income-producing capacity. Those of us who work in the financial services field are in a unique position to help our clients correct this typical deficiency in their planning.

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Knowing the basic timeline prior to submitting a case allows you to set expectations, which gives you and your client a better idea of what to expect. Below is the process and timeline we utilize at Provada, which is fairly typical of well-run Brokerage General Agencies. The first part of this post is specific to life insurance policies while life settlement processing is discussed at the end.

APPLICATION SUMBISSION:

• Allow 4-6 weeks for a simple application.
• Most Brokerage General Agencies (BGAs) process applications within 24 hours of receipt.
• If medical records are required, allow for 2 additional weeks. This can vary depending on the applicant’s doctor’s ability to get the records out to the BGA.

UNDERWRITING REQUIREMENTS:

• Clients are typically contacted by the paramedical firm with 24 hours of the requirements being ordered.
• BGAs are typically updated weekly by the paramedical facility.
• Once the exam is completed, results are received within 5-7 working days.
• An average turn around time of 10-14 working days for medical records ordered from doctors and medical facilities.

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“B” stands for Benefiting from ones asset accumulation efforts

This is perhaps the one component of estate planning that many estate owners and estate planners tend to overlook. This is surprising since Benefiting from the fruits of one’s labors during lifetime is the one component that has a selfish motive rather than a generous or loving motive, and it is undoubtedly the main reason that most of us work so hard to build our net worths.

Planning for retirement

The need for retirement planning is certainly well recognized in the United States these days, especially with the future viability of Social Security being at least somewhat in doubt and in light of the recent trend of reduced tax-qualified pension plan benefits being provided by most employers. Nevertheless, too many of us defer this important task because of the other pressing priorities we face during our working years. This presents those of us who are in the financial services industry with both a challenge and an exciting opportunity.

Tax-qualified retirement plans

One of the ways we can help fill the retirement planning void is by becoming proficient in the area of tax-qualified retirement plans, both employer sponsored plans such as pension and profit-sharing plans, 401(k) plans, and sometimes even ESOPs, and individually initiated plans such as IRAs, SEPs, and Roth IRAs. Many pension and profit-sharing plans incorporate life insurance into the asset mix. In addition, 412(i) plans in particular (plans fully insured with life insurance and annuity contracts) have become especially popular in the life insurance industry because of the large premiums they can generate. 412(i) plans are also of significant benefit to those clients, primarily small companies, that are in need of a large current income tax deduction. This large deduction occurs because of the conservative assumptions built into the policies that are specifically designed for these plans as well as the generally compressed premium payment schedule. Detailed discussions of these techniques is beyond the scope of this newsletter, but materials and courses are available from many sources, and we here at Provada can certainly be helpful in the product area and with certain design features.

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“A" stands for the Accumulation of asset values

As we stated in our prior post, estate planning really begins with the Accumulation of asset values. That is what we all spend a good part of our lives trying to accomplish, some of us more successfully than others; but all of us have undoubtedly been successful at least in creating an estate at our deaths by purchasing the life insurance necessary to meet our needs and desires for our families.

Planning for young couples

For young couples, life insurance provides essential family protection in the event of premature death and builds an instant estate. It thus represents the first essential step in the client’s overall estate planning process. In order to provide the largest death benefit with limited available funds, most life insurance purchased in these situations is, quite properly, term insurance, but it is always a good idea to try to incorporate some permanent coverage into the package as early as possible, perhaps a carrier- guaranteed universal life policy.

The beneficiary designation

Regardless of the type of policy, however, all too often not nearly enough attention is paid to the policy’s beneficiary designation, even though that designation represents the estate plan for what is typically the client’s single largest estate asset. How often do we simply name the spouse as primary beneficiary and the children as contingent beneficiaries, without giving adequate thought to how this large sum of money will be managed if both the insured and the spouse die leaving minor children? Without other proper arrangements made in advance, this will generally result in a court-appointed guardian, which is not only expensive, but also very time-consuming and cumbersome.

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Many people think that estate planning is only for the wealthy or only for older individuals. They may also feel that it is much too complicated and expensive.

Nothing could be further from the truth!

Bob Burton breaks down estate planning into its essential components — the A-B-C-Ds of Estate Planning. Utilizing this breakdown will give your clients the ability to view their estate planning with a wide angle lens.

A. = Accumulate

Estate planning really begins with the Accumulation of asset values, and actually occurs every time you write a life insurance policy.

B. = Benefit
When sufficient net worth has been achieved and family obligations permit, one should think about reaping the Benefits of one’s wealth accumulation efforts with careful and thorough retirement planning.

C. = Conserve
The uncertainties of life and aging coupled with the high cost of dying make it necessary to take active steps to Conserve your accumulated property for yourself and your family during your lifetime, and ultimately for your heirs and beneficiaries.

D. = Distribute
The final step in the estate planning process is to arrange for the desired and orderly Distribution of your estate to the chosen objects of your bounty; even the beneficiary designation in a life insurance policy or for retirement plan assets is an act of estate distribution of those assets.