This article is not meant as an endorsement of any particular concept, product, or life insurance carrier.  Its intent is to make the advising attorney aware of the evolving nature of the life insurance industry.  A responsible advisor cannot simply settle for the business-as-usual products and solutions often offered.

We will explore several planning ideas and insurance products that readers may not yet have seen, including life insurance, annuities (yes, annuities; hear me out), and long-term care that you cannot afford to overlook.  The ideas contained within this article are designed to provide you with a new and expanded set of tools to present for your client’s consideration and enhanced planning outcome.  This is not a recommendation for all or any one particular client.  Just as every client engagement for legal services calls for a different approach and solution, so does the world of insurance planning. 

While your clients may throw up their hands at the sheer number of products and choices available to them, and to the fact that every agent seems to represent the “best” company and “best” products, proper guidance on the front end will result in a more predictable outcome, more peace of mind, and less liability for advisors and trustees.  So here we go into the “have it both ways” world of insurance planning.

Have It Both Ways: Long-Term Care Insurance

“It’s a waste of money if I don’t go on claim.”  “If I don’t use it, my money is gone.”  “At these rates, I’ll self-insure.”  These are just a few of the many objections offered for not purchasing long-term care insurance, even from those clients who understand and recognize this as a need for their own planning.  Nobody can refute that the demographics, the cost of care, and the likelihood of requiring care at some point in the future are working against us all in the long-term care arena.  So why aren’t clients lining up to insure against this almost inevitable risk?

The insurance industry has listened and responded, much to the consumers' benefit, with asset-based long-term care insurance.  With this unique design, a single, lump sum contribution into an annuity that is specifically tailored for this planning need will provide a multiple of the initial contribution to cover long-term care costs and to allow individuals to retain the entire initial contribution, plus a modest earnings factor, as a personal asset should they not require the money for long-term care services.   Under certain circumstances and client portfolio makeup, there may even be some substantial tax benefits to considering this alternative to long-term care insurance.  Consider the following scenario:

1. Client owns an existing annuity purchased for $50,000.
2. Annuity has grown in value to (pick a number) $100,000.
3. Client 1035 exchanges the existing $100,000 annuity (watch out for surrender charges) into a new, asset-based long-term care insurance policy.
4. Client retains annuity value and also utilizes the product’s substantial leverage by creating a $300,000 pool of long-term care funds (the product works on a three times contribution basis), if needed for long-term care expenses.
5. If funds are needed for long-term care expenses, the money comes out of the asset-based long-term care insurance policy on a tax-free basis.
6. Absent this product, if funds are needed for long-term care expenses, the money may have come out of the originally purchased annuity on a withdrawal basis where it might be taxed up to a 40 percent rate.
7. If long-term care is never needed, the client retains the value of the annuity as a personal asset.
8. If the original annuity is a core component of the client’s overall retirement plan, a comparison of rates of return between the two annuities needs to be evaluated.

For the right individual, this one idea may solve several planning issues, and provide the long-term care benefits that many clients want, but don’t want to pay the premiums to secure.  With this option, your client will not feel like premiums are simply vanishing, because they aren’t.  It is rather a transfer of funds from the client’s left pocket to the right pocket due to the asset-based structure of the product.  

Have It Both Ways: Wealth Transfer

“What if I purchase this policy now and don’t need it in the future?” “What if estate taxes go down or go away altogether?” “What if my kids disappoint me?” “What if I need the money?” Again, these are just a few of the questions that clients ask (or, more importantly, wonder, but don’t express) when considering the purchase of life insurance for the purpose of wealth transfer.  The significant premiums contributed to a policy can feel wasted if the laws or planning goals change and the policy is no longer a meaningful asset to own.  Many insureds have felt the disappointment of surrendering an unneeded or unwanted policy for a cash surrender value far less than the cumulative premiums paid or the projected cash surrender values assumed at the time of policy purchase.

Certain carriers under certain circumstances now make contractually available, a full return of premium, not subject to policy performance or cash value accrual.  This what-if feature alone can remove some of the uncertainty of future tax law and family dynamics creating more comfort for your clients to move ahead with planning they would like to do but balk at in an uncertain environment.

Have It Both Ways: Income

At the other end of the “have-it-both-ways” spectrum, is “have-it-both-ways” income.  This idea addresses the concern of spending down assets at the expense of disinheriting the kids or a beloved charity.  How does one “live it up,” enjoying the assets that one worked so hard to accumulate over a lifetime, and still leave wealth behind?  As with most plans, the solution involves the right client, the right plan, and the right timing.  When the three “rights” line up, however, these little-known outcomes can be very effective as dual purpose, have-it-both-ways plans.

The purchase of single premium immediate annuity (SPIA) to fund a life insurance policy is not a new idea.  Locking in a guaranteed income stream in order to ensure the premium payment is always available is a long-subscribed-to “sleep-at-night” concept.  Historically, however, the annuity payment, based on standard mortality tables left little, if any, residual income to the insured once the life insurance premium has been paid.  Enter “have-it-both-ways” income and “rated” or “medically underwritten” SPIAs.  For clients in an age range of mid-70s and above, there exists the possibility that a SPIA may pay out a substantially higher and also guaranteed lifetime stream of income that will not only support the life insurance premium each year, but also may create an after-premium rate of return that is very appealing to the client and competitive with other portfolio holdings. 

The rationale behind the rated SPIA is due to the unique life expectancy of any individual client based on medical underwriting.  If determined that the client’s life expectancy is less than the traditional, standard mortality tables, the insurance company may pay out the income at a faster pace, thus increasing the rate of return.   Sometimes referred to as “annuity arbitrage,” this result is difficult to achieve in the current interest rate environment.  As compared to other investments in this same environment, however, it can add a very favorable component to an overall plan.  The often-asked question to poke holes in this concept is “If the payout is increased based on compromised health, won’t the life insurance policy also be too expensive and require the entire annuity proceeds to support it?”   The answer is “Not necessarily,” and requires working closely with the client’s life insurance agent in order to coordinate and successfully transact.

Have It Both Ways: Charitable Giving

Are your clients looking for leverage for their charitable giving interests?  Maybe they want their names on the door, or on that new wing?  “Have-it-both-ways” charitable giving is the next generation of planning after “have it both ways income.”  A recent $21 million gift was completed for far less out of pocket than the client ever imagined was possible.  A “life only” SPIA in the amount of $2.5 million was purchased, generating enough income to fund a $4 million individual life policy on the husband and a $21 million second-to-die policy on both the husband and wife.  At the husband’s death (assuming he does in fact die first), the annuity stream stops and death proceeds from his individual policy are collected.  This death benefit in turn is sufficient to fund the second-to-die policy through the wife’s age 121, if needed.  The bottom line result of this gift was to leverage a $2.5 million contribution into a deferred $21 million gift. 

If the wife is the first to die, the annuity on the husband’s life keeps paying the income stream and the death benefits of his individual and second-to-die policy will simply be deferred.

As a “have-it-both-ways” bonus, the premium check for the initial annuity purchase was written to the charity (write-off for the donor) that in turn purchased the annuity and received tax-free income with which to pay the premium (no exclusion ratio applied given its 501(c)(3) status).

Have It Both Ways: Policy Surrender Inquiry

In the current environment and with new tax law, many insureds ask their advisors if they need their existing policy, and consider surrendering it for the cash surrender value.  For some, surrendering their policy may be appropriate while others ought to keep their coverage in place, given that the current legislation can be amended again in only two years.  For those considering a policy surrender, what insureds often object to is not the life insurance policy itself.

What they are objecting to is paying the ongoing premium if they don’t perceive an ongoing need for the coverage.  In these cases, there are still options, such as a reduced, paid-up policy, where the existing cash surrender value keeps a reduced level of coverage in force forever within their existing policy and with no additional out-of-pocket premiums.  Or, if the client is open to new underwriting, a reduced, paid-up policy transferring the 1035 exchange funds from the existing policy into a new, lower cost, lower expenses policy producing a larger death benefit than in the prior option, but again using only the cash value available from the policy being considered for surrender and with no additional out-of-pocket premiums.

One of these options will meet the client’s planning goals.  But too often, unaware of such options, clients make the decision to surrender a policy without even consulting their advisors, thus limiting their own options by not having these alternatives presented and explored.

Have It Both Ways: Term Insurance

Term insurance is considered by many advisors as the ultimate “have-it-both-ways” product.  When the need for life insurance can be quantified in terms of the number of years needed, how else can an insured provide for short-to-intermediate term level of protection for so little out of pocket?  Under the appropriate circumstances, term insurance can’t be beat for the protection, peace of mind, and the cash-flow friendly premiums that are assessed.  Term insurance serves an important purpose, fills a need, and—when circumstances warrant—ought to be put in place rather than the more premium-rich alternative of permanent coverage.

Here’s the rub.  Often term insurance is elected over permanent insurance for reasons such as: “I won’t need it once my assets grow to $X,” “We won’t need it for buy/sell funding once the business is sold,” “When the kids are on their own and self-sufficient, the coverage is no longer necessary.”  While these and other very reasonable and well-thought-out rationales can make a great deal of sense in the pre-supposing world, real life often gets in the way.  Many 10-, 15-, and even 20-year term plans are coming to the end of their guarantee period with premiums scheduled to increase by multiple factors in order to keep the policy in force.  Given the economy, fluctuating stock market, and general climate for selling businesses, many clients have not seen their assets grow to $X.  Many buy/sell agreements are still needed and require continued funding.  Many adult children, not finding employment, are not self-sufficient and still require the safety net of life insurance.  When a term policy “explodes” prior to the planning goal being met, a new policy is needed.  This often occurs only when the post-guarantee-period premium comes due and an invoice is received for an alarming premium figure.  Underwriting at that point becomes a fire drill even under the best of circumstances if no new health issues have arisen.  Imagine the challenges and urgency if new health issues have manifested themselves.

The “have-it-both-ways” appeal of term insurance solves a number of planning issues, but only if kept current, reviewed regularly, and timed alongside the goals of retirement savings and/or events such as sale of a business that it was purchased to protect.  Don’t be lulled into a false sense of security simply because term insurance has no “moving parts” such as projected rates of return, sub-account selections, and flexible funding levels.  If not monitored, term insurance has a “blow-up” component of its own and puts the carrier in the driver’s seat, exactly where we want our client to be.

The life insurance industry is not stagnant, but rather an ever-evolving, dynamic industry.  Ideas, concepts, and products are developed at a rapid pace, often to the benefit of an aware client.  Never have our clients needed us to think more creatively on their behalf than they do right now.  In the “what-you-see-is-not-always-what-you-get” financial services industry, the ability to increase a client’s options, control, and sleep-at-night security will produce many more satisfying planning results.  As advisors, advocates, and problem solvers, we need to be continually aware of the resources and planning concepts available to our clients so that they can, indeed, “have it both ways.”