Life Insurance as a Retirement Asset
October 5, 2017 by John Dallas
One of the notable changes in the American economy over the last couple of decades has been the virtual disappearance of the steady 40-year career with one employer. It has been replaced with a culture where workers move from job to job, sometimes combining multiple part-time gigs to stitch together a required income. This new workforce reality is a challenge for financial advisors to navigate because it leaves in its wake a significant amount of “income volatility” that must be managed for clients.
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A new report from the Center for Financial Services Innovation (CFSI), a non-profit group that aims to increase the quality of financial products in the marketplace, found that 48% of Americans have expenses that are equal to or greater than their income, causing them a significant amount of financial stress.
This income volatility makes it difficult for pre-retirees to plan and budget, but it also raises stress and anxiety on those clients who have exited the full-time workforce altogether. For seniors, it can mean an exacerbation of physical health issues, as research proves that higher financial stress levels have worrisome health implications. For financial advisors, it creates the dual challenge of providing their clients with sound retirement funding counsel and also helping them to manage their emotional stress.
Unfortunately, many retirement planning experts and industry think tanks tend to focus on mutual funds and other conventional investing products as strategies for dealing with these income volatility challenges – while there is a powerful retirement planning asset often sitting right under their noses.
Life insurance is one of the most poorly understood retirement assets in most seniors’ portfolios. As ThinkAdvisor readers know, life insurance is personal property, so your clients can sell it just like any other property or security they own. The buyer of the policy gives your client a lump-sum cash payment, takes over all future premiums on the policy and then receives the death benefit when your client passes away – a transaction that enables your client to obtain roughly five to seven times the amount of the policy’s cash surrender value, according to the Life Insurance Settlement Association.
So what are the kinds of life insurance policies that will have the best “exit liquidity” for your clients, if they find they no longer need or can afford the policy during their retirement years? Which life insurance products serve as the optimal retirement assets to help offset income volatility and which ones are less valuable for this purpose?
The secondary market for life insurance will purchase most types of life insurance — universal, variable universal, term and whole life policies may all have value, depending on some underlying variables. The most important of these variables are, first, future premium costs to maintain the policy for the life of the insured, and, second, the insured’s future life expectancy. These two factors will be the have the largest impact on the eventual cash payment a policy owner might receive.
Advisors will also want to understand that a thorough understanding of the policy could uncover policy riders that can allow the insured to keep their policy while receiving benefits today. These could include long-term care riders, accelerated benefit riders or waiver of premium riders. Periodically assessing the value a life settlement can provide — as well ensuring all potential benefits a policy may contain — are an essential part of helping consumers hedge against income volatility they might encounter in life.
