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Choosing the right life insurance can be overwhelming, but it doesn’t have to be. Edison Risk is here to break down the essentials and help you understand the different types of policies available. From term life to whole life, understanding how each works is key to ensuring you’re well-covered. To dive deeper into various life insurance strategies, we encourage you to visit our partner, The Policy Shop, for expert insights and detailed information. Their resources will guide you through the decision-making process, so you can secure the protection you need for you and your loved ones.

  How IULs Maximize Wealth – Discover the wealth-building potential of Indexed Universal Life Insurance. Link

  Navigating Life Insurance with Confidence – Confidently navigate life insurance decisions with expert guidance. Link

  Life Insurance and Taxes: Unlocking the Tax Benefits – Explore tax-saving benefits of life insurance for your financial plan. Link

  What Is a 529 Plan? Everything You Need to Know – Learn about 529 plans and how they compare to other college savings strategies. Link

  Term & Whole Life Insurance – Understand the differences between term and whole life insurance policies. Link

  529 vs IUL: College Planning Comparison – Compare 529 plans with Indexed Universal Life for better college funding. Link

  Unlocking Financial Security with IULs – How Indexed Universal Life Insurance can safeguard your financial future. Link

  RetirementPAYDAY Annuity: Safeguarding Your Future – Protect your retirement income with RetirementPAYDAY annuities. Link

  Top 11 Must-Read Blog Posts for Life Insurance – A curated list of must-read life insurance blogs for better financial understanding. Link

  RetirementPAYDAY Annuity – Explore how RetirementPAYDAY annuities secure your retirement income. Link

  Exploring Riders and Add-Ons for Life Insurance – Learn about life insurance riders and how they customize your policy. Link

  The Policy Shop – Explore a wide range of life insurance solutions at The Policy Shop. Link

  Protect Your Retirement Income with RetirementPAYDAY Annuities – Safeguard your retirement income with our RetirementPAYDAY annuities. Link

  Unlocking Liquidity: Financial Flexibility with Life Insurance – Learn how life insurance can provide liquidity and financial flexibility. Link

  Life Insurance Strategies Under TEFRA, DEFRA, and TAMRA – Discover life insurance strategies under these key regulations. Link

  Understanding TEFRA, DEFRA, and TAMRA – Learn how these laws affect life insurance strategies and tax planning. Link

  IUL vs Roth IRA: Which is Best for You? – Compare Indexed Universal Life Insurance and Roth IRAs for financial growth. Link

  Advanced Estate Planning with Life Insurance – Use life insurance to minimize tax liability in advanced estate planning. Link

  RetirementPAYDAY Annuities in Retirement Planning – Learn how RetirementPAYDAY annuities fit into your retirement planning. Link

  TEFRA, DEFRA, and TAMRA Explained – Understand the impact of TEFRA, DEFRA, and TAMRA on life insurance. Link

  Planning for Your Child’s Future: College Funding with CollegePLUS IUL – Explore CollegePLUS IUL as an alternative to 529 plans for funding education. Link

  401K to Annuity Conversion: RetirementPAYDAY – Learn how converting a 401K to an annuity can help with long-term healthcare costs. Link

  Navigating the TEFRA Test in Life Insurance – Explore the TEFRA test and its implications for life insurance policies. Link

  Maximize Retirement Savings with RetirementPAYDAY Annuities – Secure your retirement by maximizing savings with RetirementPAYDAY annuities. Link

  Shop at The Policy Shop – Shop a variety of insurance options that suit your financial goals at The Policy Shop. Link

Choosing the right life insurance can be overwhelming, but it doesn’t have to be. Edison Risk is here to break down the essentials and help you understand the different types of policies available. From term life to whole life, understanding how each works is key to ensuring you’re well-covered. To dive deeper into various life insurance strategies, we encourage you to visit our partner, The Policy Shop, for expert insights and detailed information. Their resources will guide you through the decision-making process, so you can secure the protection you need for you and your loved ones.

Life Insurance & Financial Planning

• TEFRA, DEFRA, and TAMRA in Life Insurance Explained: Understand the impact of TEFRA, DEFRA, and TAMRA on your life insurance policy.
• Qualification Process: Questions Life Insurance Companies Ask: Learn what life insurance companies ask in their qualification process.
• Exploring Cash Value in Life Insurance: Discover the financial benefits of cash value in life insurance.
• Life Insurance Premiums: Learn what determines life insurance premiums and how to manage costs.
• Protecting Your Legacy: How Life Insurance Ensures Generational Wealth: Use life insurance to protect your legacy and provide wealth for future generations.
• The Power of Life Insurance Cash Value: Explore how cash value in life insurance can be a powerful financial tool.
• Liquidity Benefits of Life Insurance: Understand the liquidity benefits life insurance offers for financial flexibility.

Indexed Universal Life (IUL)

• Maximizing Financial Growth with WealthX IUL: Unlock the growth potential of WealthX IUL for superior financial planning.
• The WealthX IUL Policy: Unlocking Financial Freedom: Learn how WealthX IUL unlocks financial freedom and security for the future.
• Exploring the Benefits of Indexed Universal Life Insurance (IUL): Dive into how IUL enhances your financial strategy with growth and protection.
• The WealthX Indexed Universal Life (IUL) Policy: Maximizing Financial Growth and Security: Maximize growth and security with WealthX IUL, a choice for strategic planners.
• What Are Indexed Universal Life (IUL) Policies?: Understand Indexed Universal Life (IUL) policies and their advantages.
• Top 10 Benefits of Indexed Universal Life Insurance (IUL): Discover the top benefits of IUL and why it’s a smart financial tool.

Premium Financing & Annuities

• Is the BespokeFINANCE Policy Right for You? Custom Solutions for High-Net-Worth Clientele: Find custom solutions for high-net-worth individuals with BespokeFINANCE.
• The 8 Common Misconceptions About Annuities Debunked: Debunk common myths about annuities and make informed retirement choices.
• Demystifying Annuities for Financial Stability: Understand how annuities provide financial stability and security.
• Fixed vs. Variable Annuities: Understanding the Key Differences: Learn the key differences between fixed and variable annuities for smart planning.
• Annuities vs. Other Retirement Income Sources: Compare annuities with other retirement income sources to secure your future.

Policy Shopping & Contact

• Contact Life Insurance Experts: Reach out to our experts at The Policy Shop for personalized life insurance guidance.
• Welcome to The Policy Shop Life Insurances: Explore the variety of life insurance solutions available at The Policy Shop.
• Protecting Your Dreams: The Policy Shop’s Commitment to Your Financial Future: Learn how The Policy Shop protects your dreams and secures your financial future.
• Seasoned Insurance Veterans Launch The Policy Shop in South Florida: Meet the experts behind The Policy Shop’s South Florida launch and our commitment to service.
• About Us: Meet the team at The Policy Shop and learn how we help secure your financial future.

Education & Planning

• CollegePLUS vs. Traditional 529 Plans: Making the Right Choice: Compare CollegePLUS and 529 Plans for the best educational funding strategy.
• CollegePLUS Policy: Your Ultimate Solution for Future Education Expenses: Plan for your child’s education with CollegePLUS and secure future expenses.
• The Importance of Life Insurance for Young Families: Young families, protect your loved ones with the right life insurance policy.
• Choosing Life Insurance Beneficiaries: What You Need to Consider: Learn what to consider when choosing life insurance beneficiaries.
• What is Indexing & How Does it Work?: Understand indexing and how it enhances your financial strategy.

At Edison Risk, we understand the importance of securing your financial future with the right life insurance policy. Whether you’re looking for coverage to protect your family or planning for retirement, life insurance is a crucial tool. In this blog, we provide a quick overview of the key considerations when choosing a policy. For more in-depth information, we’ve partnered with The Policy Shop to offer expert resources, and information on life insurance options that best suit your needs. Explore their comprehensive guides to ensure you’re making informed decisions about your coverage.

Tax Cuts and Jobs Act (TCJA) Impact
How does the Tax Cuts and Jobs Act (TCJA) impact your life insurance? Get the insights you need to navigate these changes. Learn more #TaxPlanning #LifeInsurance #TCJA #ThePolicyShop

TEFRA, DEFRA, and TAMRA Explained
TEFRA, DEFRA, and TAMRA—what do these acronyms mean for your life insurance? We break it down in simple terms. Learn more #LifeInsurance #TEFRA #DEFRA #TAMRA #ThePolicyShop

Cash Value in Life Insurance
Unlock the power of cash value in life insurance. Learn how it can enhance your financial strategy. Learn more #CashValue #LifeInsurance #WealthManagement #ThePolicyShop

3 Resolutions for Financial Security
Start the year off right with these 3 resolutions to safeguard your financial future. 💼 Learn more #FinancialGoals #LifeInsurance #ThePolicyShop

IUL vs. Annuities
IUL vs. Annuities: Which is the better option for your retirement? We help you weigh the pros and cons. Learn more #RetirementPlanning #IUL #Annuities #ThePolicyShop

WealthX Indexed Universal Life Insurance
Discover the potential of WealthX Indexed Universal Life Insurance. 💡 A smart choice for long-term wealth building. Learn more #WealthX #IUL #WealthManagement #ThePolicyShop

IUL Terms Glossary
New to IUL? Our comprehensive glossary of Indexed Universal Life Insurance terms will get you up to speed. Learn more #IUL #LifeInsurance #FinancialLiteracy #ThePolicyShop

Whole and Term Life Insurance Terms
Confused by life insurance jargon? Our glossary of key terms for whole and term policies will help clarify. Learn more #LifeInsurance #WholeLife #TermLife #ThePolicyShop

Fixed vs. Variable Annuities
Fixed vs. Variable Annuities: Understand the key differences to make an informed decision for your retirement. Learn more #Annuities #RetirementPlanning #FixedAnnuity #VariableAnnuity #ThePolicyShop

Term vs. Whole Life Insurance
Term vs. Whole Life Insurance: Which one is right for you? We break it down to help you make the best choice. Learn more #LifeInsurance #TermLife #WholeLife #ThePolicyShop

Roll Over Your 401(k) Into RetirementPAYDAY Annuity
Looking to secure your retirement? Consider rolling over your 401(k) into a RetirementPAYDAY Annuity. Learn more #RetirementPlanning #401kRollover #Annuities #ThePolicyShop

Life Insurance and Loans
Did you know your life insurance can help you secure a loan? Learn how policyholders can unlock financial opportunities. Learn more #LifeInsurance #Loans #FinancialPlanning #ThePolicyShop

Life Insurance Cash Value
Harness the power of life insurance cash value. Discover how it can be a valuable asset in your financial plan. Learn more #CashValue #LifeInsurance #WealthBuilding #ThePolicyShop

Liquidity Benefits of Life Insurance
Life insurance isn’t just for protection—it also offers liquidity benefits. Learn more about this flexible financial tool. Learn more #LifeInsurance #Liquidity #FinancialFlexibility #ThePolicyShop

Explore Life Insurance Solutions
Explore The Policy Shop’s wide range of life insurance solutions tailored to meet your unique needs. Learn more #LifeInsurance #FinancialPlanning #ThePolicyShop

Life Insurance Industry News
Stay updated with the latest news and trends in life insurance. Check out our blog for the newest insights. Learn more #LifeInsurance #IndustryNews #ThePolicyShop

Understanding TEFRA, DEFRA, and TAMRA
Understanding TEFRA, DEFRA, and TAMRA in life insurance is crucial. We simplify these regulations for you. Learn more #LifeInsurance #TEFRA #DEFRA #TAMRA #ThePolicyShop

WealthX IUL Insurance
Unlock the industry’s best-kept secrets with WealthX IUL Insurance. A powerful tool for wealth building. Learn more #WealthX #IUL #WealthManagement #ThePolicyShop

Bespoke Finance Solutions
Discover our bespoke finance solutions tailored for high-net-worth clients. Secure your wealth with expert planning. Learn more #WealthManagement #HighNetWorth #BespokeFinance #ThePolicyShop

DEFRA’s Impact on Life Insurance
Explore DEFRA’s impact on life insurance and what it means for your policy. Stay informed with The Policy Shop. Learn more #LifeInsurance #DEFRA #FinancialPlanning #ThePolicyShop

Life Insurance Strategies Under TEFRA, DEFRA, and TAMRA
Learn about life insurance strategies under TEFRA, DEFRA, and TAMRA. Ensure your plan is compliant and optimized. Learn more #LifeInsurance #TEFRA #DEFRA #TAMRA #ThePolicyShop

RetirementPAYDAY Annuity
Get ready for retirement with our RetirementPAYDAY Annuity. Secure your future with guaranteed income. Learn more #RetirementPlanning #Annuities #ThePolicyShop

CollegePLUS IUL
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LifeENSURE Term & Whole Life Insurance
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As clients age, they can find themselves in an enviable position: Their insurance assets have done what they were designed to do: Provide protection for their loved ones. In the process, they often amass significant policy cash value. As the client’s needs change, however, this insurance asset may not be flexible enough to meet their current needs. In most cases, client’s needs evolve from simple income replacement to a more diverse set of objectives as shown in Figure 1, below.

The Challenge

On the surface it seems rather simple: Reposition the cash value from the current insurance into new solutions that more closely match the client’s updated planning objectives. The reality is that there is no singular product that can accomplish all these objectives, and “splitting” the cash among multiple solutions typically involves a full surrender of the existing policy, triggering what can often be a rather sizable taxable event.

The Solution

Fortunately, there are a handful of insurance companies that offer “all seasons” product portfolios and the ability to “split” incoming 1035 exchanges upon receipt. This ability allows them to allocate funds to three separate solutions that can effectively transform the client’s insurance assets into a portfolio that matches their current needs far better than a single policy solution. In this instance, a 57-year-old male with a $1.5MM policy with $352,176 of surrender value was repositioned as shown in Figure 2, below.

The total death benefit coverage inclusive of both the Protection IUL and Asset-Based LTC policy should the client not need care during their lifetime is $627,402 with no additional premium outlay. The annuity provides guaranteed income of over $322,000 over the client’s lifetime. If the client needs care and exhausts the LTC benefits, “total coverage” including income is $1,429,632.

The contents of this document should not be considered as tax or legal advice. Any information or guidance provided is solely for educational or informational purposes and should not be relied upon as a substitute for professional advice. It is always recommended to consult with a licensed financial or legal advisor for specific guidance related to your individual situation.

* Income begins at age 66, $10,741/yr guaranteed for 30 years

Retired clients have a primary fear: Outliving their assets.

This strategy addresses that fear on two fronts: Providing a growth opportunity while creating a benefit pool to tap should they need care as they age.

The fact that retirees fear outliving their money comes as no surprise. For those earlier in retirement or even pre-retirees, lifestyle changes or increasing their rate of savings can make a big difference in preventing that eventuality. That said, a good planning approach can do even more.

In this case, a retired client has some under-utilize assets that are not delivering any real growth to hedge against a potential increased future income need. A simple solution is to reposition those assets into something like a Fixed Indexed Annuity (FIA) to deliver both growth potential and protect against losses. Of course, if the primary driver of the client’s fears is paying for care when they need it, that strategy does little to put them at ease. The temptation in that instance may be to look at a care planning product as the solution, but even the annuity-based care planning products don’t offer any real growth potential and fail to address the client’s need for future income even if they remain healthy.

The solution here may be to do both. Using a 70-year-old male with $300K in under-utilized assets as our example client, it’s possible to turn that $300K into more than $625K by repositioning the funds. The combination of the FIA and an Annuity-Based Long-Term Care Annuity unlocks a flexible, tax-efficient solution.

The use of a bonus annuity replenishes some of the funds used for care planning at day 1, and the client’s combined account value increased to over $321,000 on day one.

The superiority of the strategy if the client needs care is obvious. The other element, actual growth of the asset even if he remains healthy, is also quite positive. Year one combined surrender value is $321,637 and continues to grow into the future.

The bottom line? A strategy that delivers the growth potential the client desires while hedging the cost of care later in life. Should the client need care, the benefits from the annuity are generally income tax free, making this dual solution approach even more appealing.

A well-crafted and effective estate plan will often span generations. Implementing insurance solutions involving later generations who may not have a significant net worth today, however, can be challenging. The impending sunset of the Tax Cuts and Jobs Act at the end of 2025 increases the risk that comes with waiting until receipt of an inheritance to implement an estate plan.

One of the keys to preserving family wealth across generations is designing and implementing estate plans that involve younger generations of the family. Not only does this create the cohesion required for these plans to be maximally effective, but it also allows insurance solutions to be put in place far earlier than might otherwise be possible. In doing so, it can also address some of the challenges presented by insurability at older ages, easing the sting of a lack of insurability in G1, and/or placing insurance on G2 before their health presents a problem. Additionally, the impending sunset of the Tax Cuts and Jobs Act (TCJA) makes multi-generational planning all the more important as a strategy for addressing uncertainty about the future of estate tax exclusion amounts. All of that said, insurance companies can often be reluctant to approve and issue large insurance policies based on future events that may or may not come to pass. Successfully navigating this process requires a higher degree of specificity and plan documentation, reasonable growth assumptions, and an insurance underwriter with a clear understanding of the wealth transfer market.

Those ingredients serve to document G2’s projected net worth at their life expectancy and justify the insurance amount required to meet the corresponding future estate tax liability. A “safe harbor” of sorts for this calculation involves taking G2’s current net worth, inclusive of the projected inheritance, growing at 6% to the client’s life expectancy.

The projected estate subject to tax is then calculated and multiplied by 40% to arrive at the required amount of insurance. The calculation described above must be supported by additional documentation that meet the financial underwriting requirements of the carrier underwriting the application. See Figure 1, Projected Inheritance Calculation, for additional details.

The result in this instance is an insurance need of $15.6M, an amount far in excess of G2’s current net worth. Placing that amount of coverage would be quite challenging without a well thought out process and a carrier who views estate planning in the same manner as the client and their advisors. In addition, the keen observer will note that the calculation in Figure 1 is based on today’s estate tax law despite the fact the Tax Cuts and Jobs Act will expire at the end of 2025 absent action by Congress. This approach of using current law despite what changes the future may hold has been insurance company policy for quite some time. Rather than attempt to forecast what could happen, most will simply assume current law will be on the books forever. That underwriting approach cuts both ways, either helping or hindering planning efforts depending on the current law.

The challenge presented by today’s legislation and what is at best a 50/50 proposition in terms of an extension of the limits under the TCJA would leave a client like the one in our example with an even larger tax exposure. That possibility drives home the need for this type of planning. If, for instance, the TCJA does sunset at the end of 2025, G2’s projected estate tax could balloon to something in the realm of $21M. For clients who have executed this type of planning, that translates to a need for $6M in additional insurance. For those who have done no planning, that amount jumps to over $21M, increasing the risks associated with failing to act now dramatically.

While tax deductions are available to Long-Term Care Insurance owners the particulars point to a decision between modest tax savings today versus more significant tax savings in the long run.

If we’re honest, there are two things that most people don’t want to spend their hard-earned assets on: Taxes and insurance premiums. That said, the downside risk of not paying either of those expenses is severe enough to motivate many to not only pay their taxes, but also take some risk off the table beyond home, auto, health and life insurance. As an example, Long-Term Care insurance has become another necessity for anyone wanting a high degree of control regarding how they receive care as they age.

That said, Long-Term Care insurance represents one of those rare instances where paying insurance premiums can actually reduce your tax bill. Exactly how to go about achieving those savings will depend on the nature of the coverage as well as the particulars of the client’s tax planning.

In terms of the coverage, there are four factors what will impact how to take a deduction and the size of that deduction:

• The insurance product must fall under section 7702(b) of the internal revenue code.
• It also has to have separate charges related to the acceleration of benefits, continuation of benefits and any inflation protection, as well as no cash value related to these elements of the product. Together, this generally eliminates all the Long-Term Care riders available on traditional life insurance products.
• There are age-based limits to how much a client can deduct. See Table 1 for additional details.
• The client must itemize, and their total medical expenses have to exceed 7.5% of AGI

Table 1

Itemized Deduction Example:

• Male, age 55:
  • Annual LTC premium: $5,000
  • Age-based limit: $1,760
  • Deduction = $1,760
• Female, age 72:
  • Annual LTC premium: $5,000
  • Age-based limit: $5,580
  • Deduction = $5,000

All the factors listed above prevent many from deducting  any of these charges. Fortunately, there is another path for individuals to achieve a similar outcome. If their health insurance coverage includes a Health Savings Account (HSA), the most significant barrier from the list above comes off the table: The need to itemize their taxes.

HSA participants can use their HSA assets to pay the portion of their Long-Term Care Insurance premium attributable to the actual coverage using the same guidelines list above, capped by the age-based limit. Of course, if the client is already max-funding their HSA, then they can simply pay as much of their premium as the age-based limit will allow from those assets, preserving their earned income for other purposes. If they’re not fully funding, however, increasing up their contribution with the express purpose of using those funds to pay their LTC premium is the most straightforward way to achieve a deduction.

There are, however, a number of additional considerations to keep in mind: It may be in the client’s best interest in the long run to let those HSA funds grow versus using them to pay premiums. Long-Term Care costs are not the only costs that rise as the years go by. Out of pocket expenditures increase as well. Further, preserving those HSA funds to pay for treatments that may not be covered by health insurance despite being an appropriate treatment option is also a strategy worth considering.

What’s the bottom line?

Ultimately, there is no single right answer here. If the client is a bit older and itemizes, simply taking the deduction via itemization is a clear winner. Beyond that, it is admittedly a bit more complicated. For clients participating in an HSA or with a seasoned HSA from prior participation, using these funds is a viable tax minimization strategy that should be considered based on not only the particulars mentioned above, but also the balance of their tax planning. In addition, the decision regarding how to pay premiums my vary from year to year as well.

The real advantage of the entire conversation is that these strategies can make Long-Term Care Insurance more affordable, rendering coverage more accessible. In addition, while it is beyond the scope of this discussion, business owners have more tax-advantaged premium payment options available to them, as do employees with access to coverage through their benefits program.

A more thoughtful approach regarding when to take income from downside-protected Life insurance assets can make a massive difference in retirement outcomes for clients. In this case, it prevents the depletion of the client’s assets prior to their death, turning a zero balance into a healthy, $1.5MM portfolio.

History is full of periods of market volatility. Most recently, the extended bull market ended in spectacular fashion in 2019, ushering in a period of volatility that continues to make clients nervous. For those still working to accumulate wealth, it can be argued that this period represents an interesting buying opportunity. Taking advantage of that opportunity can expose clients to swings in both directions, causing some to think twice before committing assets. For others, including those closer to or in retirement, volatility is a threat to a successful retirement.

Volatility at the wrong time can turn what appears to be an adequate rate of return into a portfolio that could be exhausted before the client’s death. This suggests an obvious question: What’s the alternative? Exiting the market in an attempt to avoid market losses is not a viable solution, as market returns remain critical to a successful retirement over the long term. Asset allocation strategies can only do so much, leaving financial instruments with some level of downside protection as a critical element of addressing the risk of excess volatility and sequence of returns. Table 1, Volatility in Retirement, shows what volatility can do to a retirement portfolio in very clear terms.

Table 1: Volatility in Retirement¹

Individuals using life insurance products as part of their retirement planning strategy, however, may have an elegant solution at their disposal regardless of where they find themselves in their retirement planning journey. Clients still accumulating assets can use their life insurance position to either stay in or enter the market with the comfort of some level of downside protection. For those in retirement, a properly designed and funded life insurance strategy can both avoid negative volatility and participate in positive volatility, resulting in a very different retirement outlook.

Over the recent past, the insurance product of choice for this approach was often Indexed Universal Life (IUL), offering a 0% floor and some level of upside, limited by either a cap, spread, or participation rate. While those products remain an option, they are not the only option available from the insurance segment. Today’s insurance market offers not one, but three unique products that absorb or avoid some level of a market downturn while also offering some sort of positive return. They each have their own unique “value proposition” that may ultimately make one more suitable than the others for a specific client’s risk tolerance and other elements of their retirement planning.

• Whole Life: Guaranteed positive return each year. Modest additional upside
• Indexed Universal Life: Complete protection against market risk. Market-linked upside subject to a cap, spread or participation rate. Account values are subject to “losses” based on policy charges in years that hit the floor
• Buffered Strategies in Variable Life: Protection for some level of market risk before client account values are impacted. Market-linked upside subject to a cap. Caps in this segment are typically higher than those in the Indexed UL segment. Like the IUL segment, account values in this category may be reduced by policy charges in years that trigger the buffer.

Clearly, clients can position some of their assets in vehicles that can avoid some or all negative volatility. There is, however, a cost to that downside protection in the form of limits on the upside potential they offer.

What’s less clear is the impact any of the three approaches may have on retirement portfolios broadly, as well as how to think about using these products when in retirement. Table 2, The Impact of Downside Protected Assets addresses the first question of the impact on retirement portfolios.

Table 2: The Impact of Downside Protected Assets²

Table 2 shows the superior outcome for the client. By taking an equivalent, non-taxable distribution from a life insurance contract in the years following a down market, the client not only enjoys the same level of purchasing power, but also has a portfolio value that remains in excess of $1.5MM through age 90. The importance of this can’t be overstated in an era of elevated inflation and the spiraling cost of care later in life. That said, two elements of the strategy remain an open question: How to fund the life insurance strategy and which product type is the most suitable? Before those questions can be addressed, it is critical to understand how much additional capital would be required in the traditional investment portfolio to achieve a similar outcome? In the example used here, the client would need a starting account balance of $2,475,000 to support the desired income stream and a projected ending account balance at age 90 of $1,560,000.

With that additional capital requirement in mind, it is then possible to project how much capital the three insurance strategy alternatives, Whole Life, Indexed UL and a Buffered VUL might require to achieve the outcome shown in Table 2. ³

• Whole Life: $200,000
• Indexed UL: $170,000
• Buffered VUL: $130,000

From a client outcome perspective, all three of the insurance solutions deliver a positive outcome:

• The client’s income goal is met, including a small increase each year to offset some level of inflation
• The client’s assets are preserved, with a projected portfolio value over $1.56MM higher than the original plan
• Based on the lower capital requirements of the insurance strategy (As little as $130,000 versus $475,000), the client may also enjoy more net spendable income throughout the accumulation phase when compared to simply accumulating more assets in a traditional investment account.

There remains, however, one additional topic to consider and that is which of the three possible insurance solutions is the right one to use? As tempting as it is to try to identify an empirically superior solution, the reality is that the best product will vary depending on the client, their risk tolerance, and the rest of their portfolio. While three product solutions are mentioned specifically here, there are some additional nuances to consider based on the age of the client at policy inception.

First, for the younger client, a VUL that offers indexed or buffered strategies may, in fact, be the most appropriate. Given that this strategy does take some time to “season” clients in their 40’s are ideal prospects and would have enough time on their side to consider using traditional subaccounts at policy inception, with a subsequent transition to indexed or buffered strategies as they near retirement. For clients who may be a bit older, full exposure to downside risk may not be appropriate, making one of the downside protected strategies most suitable. Clients getting a later start may need to let the insurance policy “season” a bit longer or allocate more capital to the strategy.

Regardless of how those nuances play out, the end result is yet another powerful argument for the increased use of insurance products in the retirement planning process based on their unique risk/reward profile and favorable tax treatment.

The answer, of course, is no. That said, this is exactly what some clients may think is possible with the “Swiss Army Knife” approach to Indexed Universal Life case design. The typical illustration, regardless of the illustrative rate used, displays the maximum level income possible. One of the underlying assumptions in that illustration is nearly always the use of participating loans. While there is nothing inherently wrong with that approach, it does become a problem when the policy’s living benefit features are an important part of the sale.

When considering these products, most clients will undoubtedly be attracted to the value proposition of a single product that offers death benefit protection, supplemental retirement income and a backstop of benefits should they need care later in life. What they don’t understand, unless the advisor takes the time to fully explain policy mechanics, is all of these benefits effectively come from the same pool of money. Their expectation is that they have all three of these benefits and that they are independent from one another. The living benefits, in their mind, are in addition to any income they may take from the policy. The reality is that the use of loans to take income out of the policy effectively eliminates the client’s ability to access the living benefits like a Chronic Illness or Long-Term Care Accelerated Benefit Rider (ABR).

The primary reason behind this is in the fine print of these riders. Virtually all of them include a provision that requires a partial repayment of any outstanding loans with each benefit payment under the ABR. Even with a modest loan balance, the end result is a net payment to the client, reduced by the loan repayment, that is less than the income they are already taking from the policy. In addition, most ABRs have a provision that forbids taking loans and benefits under the ABR in the same year. Clients have to take one or the other. Figure 1, below, demonstrates how quickly an outstanding loan balance becomes an issue: The net benefit from the ABR can fall below that of the income they are already taking as quickly as the 4th year of the income phase. This essentially eliminates any increased income from the ABR, exactly the opposite of their expectation.

Fortunately, there is a solution. It requires changing the way income is illustrated and ultimately taken from the policy. Rather than illustrate income via loans from day 1, illustrate income via withdrawals to basis before any loans are taken. This immediately defers the onset of one of the factors driving this issue: The accumulation of a loan balance that has to be repaid when on claim. This is but one of a handful of case design and management best practices to follow as well:

1. Illustrate income via withdrawals. This defers the accumulation of a loan balance and produces a lower illustrated income.
2. Begin income later in life. This again pushes out the time when a loan balance will begin to accumulate, preserving meaningful ABR benefits.
3. If and when the clients needs care, resist the temptation to immediately file a claim. Given that most claims last for less than five years, simply beginning to take a larger income projected for five years via loans may produce a larger net payment to the client than available ABR benefits. This also avoids the paperwork and potential delays in accessing funds that can stem from even the most efficient claims process.

As effective as those strategies may be, they do not truly address the underlying issue of all policy benefits coming from the pool of money. For the client who truly wants all three of these benefits, a multi-policy solution that addresses all three needs is undoubtedly going to be a superior solution. It will, however, require a greater financial commitment, which some clients may not be able or willing to make. If that’s the case, then a properly structured and managed single product strategy is a great start to managing these planning risks.