Master the three phases of life insurance

In this article, we review:

• A planning approach based on the age of clients can help position you and your customers for the best outcome.
• How a client's needs and concerns change depending on their phase of life, and as they move from one phase to the next, they'll need different products and guidance.
• Holding regular policy reviews to help you ensure their policies are serving their purpose.

Life insurance protection is often best understood as having three distinct phases. As a client moves from one phase of life to the next, their insurance needs and the appropriate solution will change - making it essential for agents to understand this progression.

A planning approach based on your clients' ages and life stage helps position both you and your clients for success. It shows you understand their broader financial picture and care about their long term security. In the sections ahead, we'll explore the three phases of life insurance and provide solutions designed to address client needs as they progress through life.

Phase one: Protect future needs

Typically under age 40

Clients in this phase are typically younger and focused on building wealth at this age. They may have children, a mortgage, tuition debts, and are often an essential source of income for their family. If they were to pass away unexpectedly, their family would benefit from an inflow of cash to help maintain their lifestyle. Life insurance is a foundation for a solid financial plan for these clients. It protects those who rely on your client's paycheck.

Focus on the protection it provides by quantifying the financial risk if a wage earner dies. There are two ways to do this:

1. Income multiple - Use a multiple of income approach with limits corresponding to Transamerica's income replacement underwriting guidelines.
2. DIME method - List the total debts, income, mortgages, and expenses that heirs should pay off or replace if a primary breadwinner dies.

Many clients only have two-to-three times their annual income in life insurance coverage because that's what they get for free through their workplace group life plan. Whether it's term or permanent life insurance, if your client is married or has dependents who would require a cash inflow upon death, life insurance may make sense. A good rule of thumb is to have at least 10-15 times annual income, or possibly more depending on a client's unique needs. Again, use the Transamerica income replacement underwriting guidelines as a starting point.

How long should coverage last? Clients should at least be insured until any dependent children are on their own.

Consider this example:

A female physician, a sole wage earner earning $200,000 per year, has a husband and a 2-year-old son. Assuming they will have no more children and their son will be on his own in his early 20s, she should consider securing $2 million to $3 million of death benefit for 20-25 years. It may be prudent to secure a little more coverage than needed and for a little longer than anticipated.

Don't forget - clients in this phase may also need to accumulate additional savings to supplement their retirement. Cash value life insurance can be an option for accumulating additional funds with flexible access to the cash value as needs arise. When structured properly, policy cash values may be accessed tax free and may be a source of supplemental income that can be used for multiple purposes.*

Phase two: Preserve accumulated wealth

Often between the ages of 40 and 65

In this phase, clients often have a stronger financial foundation but haven't yet retired. Their needs are distinctly different on the personal planning and business planning sides.

On the personal planning side, individuals are often concerned about retirement planning and the possibility of requiring long term care. Clients in this phase may have paid off their mortgage and sent children through college. As they accumulate and grow their retirement assets, it is essential to regularly review existing life insurance coverage to ensure it remains appropriate for their needs.

If clients are behind on retirement savings or they have maxed out their qualified retirement plans, a supplemental, over-funded IUL policy may help, as long as the policy is not a modified endowment contract.** Explore using the Social Security bridge sales concept, illustrating a delayed claiming strategy in conjunction with an over-funded IUL policy may increase total cash flow, from Social Security and life insurance, by over 65%.

On the business planning side, business owners are often focused on succession planning or business growth. Owners may secure life insurance to fund buy-sell agreements, guarantee business loans, or monetize illiquid business assets in the case of early death. Don't forget executive bonus plans for key executives or owners who may want to supplement retirement income savings.

Finally, you should consider long term care insurance. Many think long term care is only an elderly concern; however, the Family Caregiver Alliance estimates that 40% of the 13 million people receiving long term care services are between the ages of 18 and 64. Clients may be concerned about how an extended healthcare event, like long term care, may impact their retirement. A policy with a living benefit or long term care rider may help protect their retirement savings.

Consider this example:

A soon-to-be retiree has earmarked $300,000 in savings to pay for future long term care expenses. Using a portion of those savings as a premium for an IUL policy with a long term care rider may increase the total amount of funds available if she requires long term care in the future. If no care is needed, she retains access to the cash surrender value, and the policy provides an income tax-free death benefit for her heirs.

Phase three: Create and transfer wealth to future generations

Those who are in retirement

Upon retiring, income replacement life insurance may become unnecessary while long term care becomes a primary concern. Wealthier individuals may believe they are self-insured for long term care expenses; however, you and your client should consider multiple factors before making this decision.

First, determine the cost of care and the estimated length of care. The cost may be surprising. Second, is it reasonable for your client to retain the entire risk or transfer a portion of the risk to an insurance company? In the end, remember this doesn't need to be an all-or-nothing decision.

If long term care is a concern for your clients, then consider replacing old cash value life insurance policies with newer policies that allow access to the death benefits through living benefit and long term care riders.

Clients of any age with larger estates

These clients are often concerned about the impact of income and estate taxes. Consider utilizing insurance as a tool to mitigate income taxes, transfer wealth efficiently, or provide liquidity for estate taxes. Life insurance can be an economical way to discount the impact of taxes or leave a legacy for future generations.

Conclusion

Regularly reviewing existing life insurance policies ensure they continue to serve their purpose. Insurance has been used to protect wealth for hundreds of years- use it properly to help protect your clients. As needs change in each phase of life, the appropriate solution may also change. Remember, it's up to you to make the action happen for your clients. Reach out to your Transamerica RVP for more information.

• For clients under 40, focus on the protection that life insurance can provide their family by quantifying the financial risk they face if a wage earner dies.
• When they're between 40 and 65, they may have distinctly different needs for life insurance from the personal and business planning sides.
• In retirement, income replacement life insurance may not be necessary, but long term care is a primary concern for which you should discuss coverage options.

* Loans, withdrawals, and death benefit accelerations will reduce the policy value and the death benefit and may increase lapse risk. Policy loans are tax-free provided the policy remains in force. If the policy is surrendered or lapses, the amount of the policy loan will be considered a distribution from the policy and will be taxable to the extent that such loan plus other distributions at that time exceed the policy basis.

**Clients may access the policy's cash value to receive tax‐free supplemental income when needed, as long as the policy is not a modified endowment contract (MEC).

Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker-dealers. Transamerica Resources, Inc., does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical, or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.