Life Insurance For The Living; Accelerated Death Benefits And Long-Term-Care Riders Are Breathing New Life Into Cash Value Insurance Policies

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August 2008

FINANCIAL PLANNING; Pg. 24 Vol. 15 No. 8

1337 words

Life Insurance for the Living; Accelerated death benefits and long-term-care riders are breathing new life into cash value insurance policies.

Rob Garver

As long as whole and universal life insurance policies have existed, personal finance gurus have disparaged them as a waste of investable assets.

Jerry Hunsanger, an investment consultant with Harbor Financial Services, (an affiliate of Sterling Savings Bank) in Spokane, Wash., is typical: "I feel portfolios should be real portfolios and insurance should be used to cover risk." Like many of his peers Hunsanger justifiably believes that asset growth in a typical cash value life insurance product "falls far short of a properly allocated portfolio." When clients come to him with whole or universal life insurance policies, he looks at the policies to see if he can break them up and get them cheaper term that offers more coverage, leaving assets that they can invest for better returns.

Bern Mahon, president of Union Investments in Fredericksburg, Va., agrees. Life insurance has a place in estate planning, he says, but it's often unnecessary as part of an individual's overall financial plan. "You can really load up and buy all the insurance you need while you have kids and mortgages," he says. "But after that runs its course, most people don't need life insurance. Cash value products combine insurance and investments, and that gets to be expensive."

TAX-FREE SAVINGS

But these warnings appear to have gone largely unheeded among consumers, who have been buying increasing numbers of cash value life insurance products. According to the National Association of Insurance Commissioners, 60% of life insurance products underwritten in the U.S. in 2005 were cash value policies marketed as whole or universal life insurance. Cash value plans made up 56% of all policies sold in 2004 and 53% in 2003.

One reason for this increase has been a push by insurers to add "living benefits" to their policies. Living benefits, although they vary among insurers, are basically additions to a policy that let the insured reap some payout before death. These range from the standard feature of a whole life plan, which lets the insured withdraw money tax-free from a plan's cash value to more recent innovations, such as accelerated death benefits payable in the event of a diagnosis of terminal illness, long-term-care riders that can help fund inflated living expenses for the elderly and disabled, and riders that waive the insured's premium obligations in the event of disability.

John Zeumer, national director of insurance sales for Independent Financial Marketing Group (IFMG), says the typical bank-based financial advisor is failing his clients if he doesn't explore how life insurance can benefit clients in life-not just their beneficiaries at death. "I'm not sure planners really look at these products and understand what they can do," he says.

Zeumer may be biased-IFMG's parent company is insurer SunLife Financial-but he insists that the benefits are real, especially for affluent clients who have maxed out their qualified retirement plans. "That's when it really makes sense," he says. "You can plow a lot of money into these policies and pull out a completely tax-free stream of income."

Lorraine Griswold, insurance services manager for CUSO Financial Services in San Diego, says that while her company's credit union reps are trained to make sure their clients aren't overinsured, sometimes life insurance riders make sense. For example, term policies with a return-of-premium rider that guarantees that at the end of the term the insured will receive the money paid in premiums back in a lump sum (without interest or appreciation). While these are more expensive than regular term, they can be attractive to clients who balk at buying life insurance that they fear they will never need. The prospect of getting their money back removes the impression that the money is being wasted.

Griswold's reps may also encourage clients to convert savings vehicles, such as long-term certificates of deposit, into single-premium life insurance policies with a return-of-premium element. Clients who hold a lot of liquid or semi-liquid assets against unlikely future needs can convert to a single-premium life policy that lets the client access the liquidity in the fund and provides a tax-free death benefit for beneficiaries. With the single-premium life policy, a client's assets can grow tax-free and if assets in the policy are invested in equities, there's a potential for the cash value to appreciate more than the typical CD.

"Cash value life insurance can be a good thing, but I think of it in terms of a hierarchy of needs," says Stacey Hyde, a vice president with First Tennessee Brokerage. "Do you have your basic protections in place? This includes a term-life policy, disability insurance, education savings and an emergency fund. Have you maxed out your 401(k) plan? If the answer to those questions is yes, and you still want to save, then overfunding a life insurance policy can be an effective way to do that."

But when the answer is no, advisors can make a big mistake by putting clients in cash value policies. "It makes me crazy to see someone with a need for a $1 million in life insurance who, instead of buying a term policy buys a $100,000 whole-life policy because it is somehow 'better,'" Hyde says. "They may generate some cash value, but they leave their family with $900,000 of exposure."

LONG-TERM CARE

One intriguing new rider pays some long-term-care benefits to policy holders. "The long-term-care rider is a new story to bring to the public, and it will spark new premium growth," says Lou Mastropietro, the program director for IFMG at Astoria Savings Bank in New York. He is finding the rider particularly popular with the middle-market and mass-affluent clientele he sees. Many of them either can't afford, or are dubious about, the benefits of a full-blown long-term-care insurance policy.

"Customers are concerned about the long-term-care issue, but they want to know if they can afford it and whether, if they buy it but never need it, it's worth the expense," he says. The long-term-care rider attached to a life policy offers a middle-of-the-road approach for those unable or unwilling to buy a full long-term-care policy. But the advisor must make sure that clients understand what the rider provides. "There is a limited amount of funds in the benefit, and you don't get all the protections you would with a long-term-care policy," he says.

But insurance can protect an investment portfolio from being decimated by unexpected events, such as healthcare costs for older clients or, for younger clients, a disability that reduces or eliminates income, says Hyde.

One client, a healthy widow in her mid-seventies, wanted a trust to support her, and to leave her assets to charity. Hyde was concerned that long-term-care expenses would wipe out the trust. Two insurance policies were the solution. The first contract was a $500,000 policy with a long-term-care rider that provided an accelerated death benefit if the client needed care, and an added provision doubling the benefit to $1 million if she should exhaust the original $500,000. It was cheaper than a regular long-term-care policy and adequate for all but the most unlikely needs of the client.

But the policy premiums could also deplete the trust. So the charity took out a second policy on Hyde's client designed to accumulate cash value with annual bond market returns. The plans were structured so that at the death of the client the charity would recoup what it had paid in premiums, leaving the amount of the trust unchanged.

Some think long-term-care riders will give life insurance sales the boost they need. The total value of insurance premiums has been flat for the past few years, and many new policies are simply replacements for older, less efficient contracts, says Zeumer. Riders that help people protect their savings from healthcare bills have the potential to "revitalize premium growth."

Rob Garver is a freelance journalist in Northern Virginia.

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August 12, 2008