This article is dedicated to giving you an insight into problems that families often face when choosing the right life insurance advisor. Here are the major problems families face in terms of financial planning:
1. Lack of liquidity:
Not enough cash to pay death taxes, administrative costs, attorneys’ fees, appraisal fees, and other death-generated expenses as they fall due. (This is one of the major and most obvious reasons for life insurance.)
2. Improper disposition of assets:
The wrong thing goes to the wrong person at the wrong time in the wrong manner. Many times the awesome responsibility of safeguarding, investing, and distributing the income from complex property or the task of running a business interest is thrust upon persons who are unable or unwilling to handle it. (Life insurance is often used as a substitute for such property, i.e., life insurance can be paid to or owned by a trust for the benefit of a beneficiary who cannot or should not manage a complex portfolio or run a business while the more competent, capable, and willing beneficiaries can be left securities or business interest.)
3. Inadequate amounts of income or capital at the client’s death, disability, retirement, or for special needs:
College costs continue to climb. This in turn exhausts funds that might otherwise have been used for retirement and leaves many facing retirement with debt rather than assets. Clients are living longer, and having greater medical expenses during retirement and surprisingly higher (rather than as expected lower) standards of living and consequent maintenance costs. In many cases, they have more leisure time to travel, try new hobbies, and spend money than they did before they retired and less of their expenses are paid for after retirement by their companies. (Cash value life and disability insurance are obvious answers to part of these problems if the protection is coordinated with other investment planning.) This should all be considered when selecting a life insurance advisor.
4. The value of the client’s assets (particularly real estate portfolios or business interests) has not been stabilized or maximized:
When all or the bulk of an estate consists of real estate, the cash required to pay taxes often far outstrips the cash available to pay those taxes. The result is often a forced sale of the real estate at the worst possible time. Likewise, a business that loses a key employee through death (or disability) often loses value needlessly. Without a “buy-sell” agreement, the client’s family will seldom obtain a full and fair price for a business interest. The result of the absence of a buy-sell agreement between business owners is a total lack of a market for the business interest or at best a forced sale at pennies on the dollar (a “fire sale”). (Life and disability income insurance have been the traditional means of “shock absorbers” to stabilize a business at a key employee’s death or to buy-out and bail out the heirs of a shareholder-employee.)
5. Excessive transfer costs:
The cost of transferring wealth from one generation to another continues to increase because of increasing federal and state taxes, probate costs, attorneys’ fees, and other “slippage.” When a property is owned in more than one state, “ancillary administration” (multiple probates) results in unexpected aggravation, delay, and expense. In many cases, the ownership of property is set up in a manner that aggravates rather than minimizes the tax burden and other costs. (Life insurance can be set up in a manner that avoids all of these problems.)
6. Special needs:
Successful clients often express a strong desire to “give back” to their schools, churches, synagogues, communities, or other charitable organizations. Many clients have spouses or children with certain gifts or handicaps which require larger than usual amounts of both capital and income—or who have asset management needs that would not be served by an outright disposition of property to them. (Life insurance is often the most effective means—and sometimes the only way—of raising large amounts of cash to create financial security for an organization or an individual.)
Only when the life insurance advisor has started with and identified the need(s) and the client has expressed preference as to the order of needs should the planner attempt to formulate a strategy. Few clients can solve all their financially-oriented problems simultaneously. Resources must therefore be allocated to the tools or techniques which are most cost-effective in solving these problems.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM