Incorporating life insurance into a client’s overall financial plan is not just a prudent choice; it’s a strategic move that provides a more well-rounded approach to managing financial risk and securing future financial goals. Life insurance is often overlooked in financial planning, but savvy financial planners and advisors have learned that an approach combining asset growth vehicles with insurance solutions can mitigate risk without sacrificing liquidity.
For financial advisors, understanding and leveraging the power of life insurance can enhance the value you provide to your clients. It can both reduce taxable burdens for your client while creating a positive, generational relationship with their family. Here’s why you should take a new look at adding life insurance to your client’s financial portfolio.
Too often, the family is overlooked. Don’t become a statistic.
Cerulli Associates research shows that “just 19% of investors use their parent’s advisor.” 4 All your time and effort put into the breadwinner often comes at the expense of creating meaningful relationships with the rest of the family. Getting to know the family can go a long way towards a generational relationship. Fixed income life insurance and annuities may have the added benefit of tax-free cash when the family needs it most. However, interest and fees may apply. Life insurance is a valuable tool for preserving and balancing estates, and it might just be the difference between losing a client and gaining a family’s trust.
Mitigating the risk for the ones they love the most
At its most basic function, the primary purpose of life insurance is to provide financial protection to beneficiaries in the event of the policyholder’s death. This protection is crucial for families who rely on a single income or have significant financial obligations, such as a mortgage, children’s education, or other debts. By incorporating life insurance into a financial plan, advisors ensure that their clients’ families are protected against the financial burden that might arise from the unexpected loss of a breadwinner.
According to a 2023 survey by LIMRA, 52% of Americans report that they need more life insurance, and nearly 41% of respondents say they would face financial hardship within six months if the primary wage earner passed away. 1
These statistics highlight the importance of life insurance in financial planning and underscore the need for advisors to address the needs of their client’s family.
Losing a legacy: When an estate is taxed into oblivion
Life insurance plays a significant role in wealth transfer and legacy planning. Clients often wish to leave a legacy for their heirs, and life insurance provides a tax-efficient way to do so. Unlike other assets that may be subject to probate or estate taxes, life insurance proceeds are typically paid directly to beneficiaries and can be used to cover estate taxes, thereby preserving the value of the estate.
For high-net-worth individuals, life insurance can be an essential tool in minimizing estate taxes and ensuring that a larger portion of the estate is passed on to heirs. Additionally, life insurance can be used to equalize inheritances among heirs, especially when the estate includes illiquid assets such as real estate or a family business. This ensures that all beneficiaries receive their intended share without the need to sell off valuable assets.
According to data from the Insurance Information Institute: “In 2023, life insurance policies accounted for over $831.9 Billion in benefits and claims paid.” 2
These figures illustrate the significant role life insurance can play in wealth transfer and the protection of generational wealth.
How much is enough in retirement?
Certain types of life insurance policies, such as permanent life insurance, can accumulate cash value over time. This cash value can be accessed by the policyholder during their lifetime, providing a supplemental source of retirement income. Unlike traditional retirement accounts, the cash value from life insurance may sometimes be accessed tax-free through policy loans or withdrawals, making it an option for clients looking to diversify their retirement income streams. However, interest rates and fees may apply to policy loans or withdrawals.
Life insurance policies can also offer a source of funds during market downturns when other investments may be underperforming. This strategy allows clients to draw from the cash value of their life insurance rather than selling off assets at a loss during volatile market conditions.
The 2023 Insurance Barometer Study by LIMRA reports that “for 48 percent of Gen X consumers, ages 44 – 59, retirement funding is still a top concern.” 5
This underscores the growing recognition of life insurance as a versatile financial tool, not just for protection but also for retirement planning.
The strategic role of annuities in Retirement Planning
Annuities serve as a powerful tool to address one of the most significant risks retirees face: longevity risk. With increasing life expectancies, many individuals are rightfully concerned about outliving their savings. Annuities, particularly lifetime income annuities, can provide a guaranteed stream of income that lasts as long as the annuitant lives, effectively transferring this longevity risk to the insurance company.
Moreover, annuities offer tax advantages that can be particularly beneficial in retirement planning. For non-qualified annuities, taxes are deferred until withdrawals begin, potentially allowing for more efficient accumulation. In the distribution phase, a portion of each payment is considered a return of principal and is therefore not taxable, spreading the tax burden over time.
Variable and indexed annuities can provide upside potential linked to market performance while often offering downside protection features. These can be valuable for clients seeking growth opportunities with some level of principal protection.
It’s important to note that annuities are not one-size-fits-all products. The suitability depends on individual client circumstances, including their overall financial situation, risk tolerance, and specific retirement goals. As a financial advisor, your role in carefully assessing these factors and potentially incorporating annuities as part of a diversified retirement strategy is crucial.
Death and Taxes? Your client should at least defer the latter
Life insurance offers several tax benefits that can enhance a client’s overall financial strategy. The death benefit paid to beneficiaries is generally income tax-free, which can be a significant advantage in preserving the financial security of the family. Additionally, the cash value that accumulates within a permanent life insurance policy grows on a tax-deferred basis, meaning that the policyholder does not pay taxes on the gains as long as they remain within the policy.
Policyholders can access the cash value through loans or withdrawals without triggering a taxable event, provided the policy remains in force. This feature makes life insurance a powerful tool for tax-efficient financial planning, particularly for clients in higher tax brackets.
A business without a plan is not a business for long
For clients who own businesses, life insurance can provide the necessary liquidity to fund a buy-sell agreement, ensuring that the business can continue to operate smoothly in the event of the death of an owner or key employee. Additionally, life insurance can be used to compensate the deceased owner’s family, providing financial security and ensuring that the business remains within the hands of the surviving owners or partners.
According to a Nationwide commissioned survey of 400 U.S. small businesses in 2024, only 30% of small business owners have a succession plan.3
Incorporating life insurance into a business succession plan can help mitigate this risk and ensure the longevity of the business.
Don’t forget about Key Person Insurance
Have your clients considered what would happen if a key person in their organization were suddenly unable to work? This is where key person insurance becomes crucial. It’s a safeguard that protects their business against the financial impact of losing a vital team member. If an essential employee or owner passes away or becomes disabled, key person insurance provides a financial cushion to help a business weather the storm. It can cover costs associated with finding and training a replacement, compensate for lost business income, or even provide funds to buy out a deceased owner’s shares. By securing key person insurance, they’re not just protecting your business; they’re also ensuring its continuity and providing peace of mind for themselves, their employees, and their stakeholders. It’s an essential part of a comprehensive risk management strategy for any business that relies heavily on specific individuals for its success.
We can help you extend your fiduciary responsibilities
Incorporating life insurance into a client’s financial plan is one step toward ensuring financial security and peace of mind. For financial advisors, understanding and utilizing life insurance strategies can enhance the value you provide to your clients, helping them achieve their long-term financial goals while protecting against unforeseen risks.
Incorporating life insurance into your practice not only broadens the scope of services you offer but it can strengthen the financial foundation of your clients, setting them on a path toward greater financial security. Sowell is here to help you do just that. Book a call today to learn more about Sowell Insurance Services.
Citations:
- LIMRA and Life Happens (2023). “Insurance Barometer Study.” (https://www.limra.com/en/research/research-abstracts-public/2023/2023-insurance-barometer-study/) (https://www.buaweb.com/files/82398/the_file/2023_insurance_barometer_study.pdf)
- Insurance Information Institute (https://www.iii.org/publications/triple-i-insurance-facts/life-annuity-financial-data/benefits-and-claims)
- Nationwide (https://news.nationwide.com/survey-nearly-half-of-us-business-owners-expect-an-interest-rate-increase )
- Cerulli Associates (https://www.cerulli.com/press-releases/cerulli-finds-just-19-of-investors-use-their-parents-advisor)
- LIMRA and Life Happens (2024) “Insurance Barometer Study” (page 20) (https://www.westernsouthern.com/-/media/files/wslife/2024-insurance-barometer-study-report-1.pdf )
