Monthly Archives: August 2018


Generating Wealth to Leave a Lasting Legacy


The greatest strength of life insurance lies in the ability to provide money to a family when someone passes away. Sometimes this amount can be many multiples of the premiums that were paid into the insurance policy.
Many people think of life insurance only as a way to provide for a family after the loss of a breadwinner. But some families are also using life insurance as an “asset” to ensure that an inheritance can be passed on to their family, regardless of how their other assets perform. This is increasingly important to many families, still uneasy after the 2008 market crash and unsure of where the market is headed. A badly timed down market can devastate a planned legacy for years. The chart below shows market fluctuations in recent years, based on the five-year S&P 500® Index, without dividends.
By taking a portion of your assets each year to cover the cost of life insurance premiums, you may be able to hedge a portion of your portfolio against fluctuations in the marketplace, because payment comes from the life insurance company, not your assets directly. Knowing that your beneficiaries will be cared for may also allow you to make other choices with your remaining assets — perhaps a more aggressive, growth-oriented strategy, or you might invest more conservatively, knowing you don’t need as much growth.


how does the strategy work?

A hypothetical example of how the strategy works can be seen in the chart below. It shows what you might expect from the same dollars if they were paid into a life insurance policy as premiums, or if they were placed in a hypothetical investment account.
In the early years, life insurance death benefits typically offer substantially more than the hypothetical investment. As time goes on, the leverage offered by life insurance may be reduced as the non-life insurance assets grow and compound. At some point there is a crossover, where the growth in the investment account outweighs the benefit provided by the life insurance policy. Of course, it’s hard to know which strategy is more beneficial unless someone knows their precise life expectancy and whether it is before or after this crossover point.
However, this is a conversation you can have with your Financial Professional. They can run numbers for you and estimate the Internal Rate of Return in the years before and after your life expectancy.

For you to get the most out of your policy’s life insurance benefit, it has to stay in force until you pass away. If your policy ends or terminates, or if you otherwise dispose of your policy before your death, your beneficiaries would receive a substantially reduced benefit, and any proceeds they would receive could be subject to income taxation.


Life Insurance as an Asset: in Action

  • 60 years old
  • Widowed
  • Portfolio of $3,000,000 in real estate and equities
Helen’s Objectives: Helen wants to make sure that her children and grandchildren receive a meaningful inheritance. While Helen expects to receive a 7% return on her investments over time, she is concerned that, in today’s environment, the assets might underperform. For example, if her assets receive only a 5% average annual return over time, her beneficiaries might receive substantially less than her expectations. Assuming a blended income and capital gains tax bracket of 27.50%, that 2% difference in return rate over 28 years could result in a difference of over $3,000,000 in the legacy for her children. A down market near Helen’s death could have that type of effect on years of wealth accumulation.

Helen’s Wealth Transfer Strategy: As a hedge against that risk, Helen’s financial professional suggests she take $30,000 each year, or 1% of her accessible assets, and direct the funds to a life insurance policy on her life. She can own this policy outright, although she may want to consider using a trust. If structured properly, life insurance owned by an irrevocable trust will generally keep the proceeds of the life insurance out of the insured’s estate. This will prevent the proceeds from being subject to estate taxation. Estate taxes aren’t an issue for Helen, but for others they could be an issue.
Helen’s Results: Assuming a policy on Helen’s life (a 60-year-old female who receives an underwriting category of Preferred non-tobacco user), her beneficiaries might see the following results. Each year’s life insurance premium is $30,000. That may purchase a life insurance benefit of $2,300,000. Helen’s portfolio is reduced slightly due to the premium expense, but the life insurance benefit gives her a potentially more effective transfer strategy.
Additionally, the death benefit will ensure a return of the funds contributed, something few other financial assets can offer.
In effect, by using her assets to buy life insurance Helen is giving up some upside potential for greater safety in her wealth transfer strategy — By directing this relatively small amount of her net worth into life insurance, she adds a stabilizing element to the dollars ultimately transferred to her family (provided the policy stays in force).

If Helen received a lower rate of return, using life insurance could help offset the risk of loss or underperformance. Through the purchase of life insurance, Helen has, at least in part, shifted the risk of underperformance from her to the insurance company.


Make a Difference with Life Insurance

Ultimately, at her life expectancy, Helen’s purchase of life insurance increases the amount passing to her beneficiaries.
  • If Helen continues to receive the expected pre-tax return of 7% average annual growth, her beneficiaries would gain an additional $437,040.
  • If Helen receives a lower pre-tax return of 5% on her assets, the gain to beneficiaries would be $833,325. In fact, if Helen had invested the $30,000 annual premium at a 5% return, she would have to wait until she was age 92 before the funds would grow to a level greater than the $2,300,000 life insurance death benefit.


Other Considerations

Although using life insurance as a part of your wealth transfer strategy may make sense, you should weigh this against other considerations relative to your long-term financial strategy. Points to consider are:
  • By purchasing a life insurance policy, you will consume a portion of assets that might otherwise grow in your investment portfolio. Although life insurance has the potential to offer leverage in the early years, leaving the premium dollars in your portfolio might provide more to your beneficiaries over time. This is particularly true if you live beyond your life expectancy. You should not dedicate excessive amounts of assets to life insurance. Instead, consider life insurance as only one aspect of your overall financial picture.
  • The effectiveness of this technique depends on the underlying pricing assumptions in the life insurance policy. Should the life insurance fail to meet the pricing assumptions, or should you live significantly beyond your life expectancy, the anticipated death benefit may not provide your beneficiaries with the anticipated leverage.
  • Your ability to purchase life insurance is conditioned by financial and medical underwriting. Based on your overall medical and financial profile, the total amount of life insurance protection you might be able to purchase could be limited or cost prohibitive.
  • The ability of the life insurance carrier to pay its obligations will also affect your planning. You should be certain that you are working with a sound carrier and monitor the carrier’s overall financial ratings on a periodic basis.


You have choices.

Life insurance is one of those choices. When used properly, it can not only protect your family from the unexpected loss of a breadwinner, it can help ensure your beneficiaries a predetermined death benefit. In turn, you will have other choices for the balance of your portfolio.

Thinking Retirement? Enhance Your Benefits with Pension Maximization


Retirement is a time for you to reap the benefits of a lifetime of planning and saving. But what if your preparations aren’t enough? What if the pension you primarily counted on to maintain your lifestyle for you and your spouse isn’t as much as you thought it would be? Consider this: At or prior to retirement, you may be required by your employer to make an irrevocable choice of either a “maximum pension benefit with no survivor benefits,” or a “reduced pension benefit with survivor benefits.”



The first option maximizes the retirement income from your pension or profit-sharing plan while you’re alive, but benefits cease upon your death. Should you elect this option at retirement and die shortly thereafter, your spouse may be left with no source of continuing income.
The second option provides a smaller retirement benefit while you are both living, but ensures that your spouse receives an income in case you die first. But in many instances, if your spouse dies before you, you will continue to receive the lower pension benefit for the rest of your life, even though your spouse never received any income.
Neither choice sounds very appealing, does it? Fortunately, there may be an additional choice called Pension Maximization.

Important Note….

At retirement, the spouse must sign a waiver to make it clear that a single life pension is acceptable.


Pension Maximization: What You Need to Know

The Pension Maximization technique combines purchasing a life insurance policy with electing the “maximum pension benefit with no survivor benefit” option for your pension. With this technique, you may be able to:
  • Maximize your pension benefits during your lifetime.
  • Help provide for your spouse’s financial independence through the life insurance coverage.
  • Use existing savings to help supplement your retirement income with a tax-deferred product.
This concept can work if the insurance is purchased at the time of retirement (ideally, the premiums are lower than the pension gained by taking a “single life” option), but you should note, it may not work if there are any health problems at that time. Therefore, it is generally better to ensure that the proper insurance is in place to help provide a secure retirement income for your spouse.


How Pension Maximization Works

This graph illustrates how pension maximization works while both you and your spouse are living, or when only one of you is living.


Pension Maximization in Action

Carl Robinson, age 52, married to Catherine, age 50, has been working for Company XYZ for the past 25 years and is planning to retire at age 65. Recently, Carl received an estimate from his representative in Human Resources who told him that at age 65, he would receive $2,500/month from his pension plan, provided he doesn’t elect a survivorship benefit. Carl is concerned that if he dies first, Catherine will not see any of his remaining pension benefit. Without survivor benefits, Carl’s early death would mean that most of his pension will be wasted.
If Carl elects the survivorship benefit, his payments will be reduced to $2,100/month, but Catherine will receive a predictable income of $1,050/month (based on a 50% survivorship benefit) after his death. The problem with choosing a survivorship benefit is that if Catherine lives for a short period of time and dies before Carl, Carl will face a lifetime of reduced pension income, even though Catherine and he never received any financial benefit from electing this option. If they both live full lives and die within a year or so of each other, little benefit is ever realized after years of a reduced pension.
Alternatively, Carl can choose to take the maximum pension benefit ($2,500) with no survivor benefit and purchase a life insurance policy prior to his retirement. It is recommended that Carl select an amount that would provide Catherine with a similar income benefit to what it would have been if he had chosen the survivorship benefit ($1,050/month).
The life insurance premiums can be paid while Carl works, or paid using discretionary income. As previously mentioned, it is better for Carl to purchase the life insurance policy sooner than later to reduce the cost of insurance and to take advantage of his current good health. If Carl continues to work and accrue benefits, he needs to consider whether the life insurance policy will be large enough to provide a real choice upon actual retirement at a later date.


In this scenario, the advantages are:

  • Carl and Catherine receive larger pension benefits while Carl is alive.
  • If Catherine dies first, Carl can surrender the policy for cash surrender or leave a death benefit to his children.
  • If Carl dies prior to retirement, Catherine gets the face amount of the insurance policy.
  • Catherine controls how the death benefit is invested if Carl dies first.
  • A portion of the death benefit proceeds (payable in monthly installments) will be income-tax-free if the death benefit is used to buy an annuity. Typically, pension income is fully taxable.
  • Loan capability may be available on the life insurance policy, but, if outstanding, will reduce the net death benefit payable.
  • Flexibility to change the beneficiary under the life insurance policy that you may not have under the pension benefit.


Points to Consider about Pension Maximization:

  • If your pension annuity payments have a cost-of-living adjustment, you will need to factor the cost to purchase a much larger amount of insurance in order to provide your spouse with a comparable retirement income.
  • By not electing the reduced pension survivorship benefit, in some cases your spouse may lose all rights to any retiree medical coverage if your employer sponsors the coverage. Sometimes this coverage is linked to receiving pension benefits, which would terminate when Carl died if he selects the maximum pension benefit.
  • The person on whom the insurance would be issued must be able to qualify for the purchase of life insurance before any further analysis is done.
  • You may want the spouse who signs the waiver to own the life insurance in order to ensure the insurance policy remains in effect.
  • Failure to keep the life insurance in force up to the insured’s death will result in no death benefit proceeds for the spouse.


Is Pension Maximization Right for You?

It depends on a number of factors, such as your financial situation, health, objectives, and the options and benefits you have under your employer’s retirement plan. Your financial, legal and tax advisors can assist you with your decisions and in developing the strategy that is most appropriate for you.

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