Financial Planning


financial literacy chart

A Huge Disconnect

Paula Vasan in Financial Planning magazine highlights a striking FINRA Investor Education Foundation report about consumer attitudes toward, and need for financial literacy. The findings show a huge disconnect between consumers’ perceptions vs. reality when it comes to financial planning:
  • 75% of Americans have “positive perceptions” of their own financial knowledge and math skills.
  • Yet just 14% were able to correctly answer five financial literacy questions compiled by FINRA’s investor education foundation.
These startling findings are based on surveys of more than 25,000 adults conducted across the US between 2012 and 2009, in which an online test was used to evaluate the financial knowledge of participants. You can view the full results of FINRA’s quiz here.

Who’s Most At Risk?

FINRA’s survey found that financial capability varies by geography and demographic groups:

Geographical Disparities: The Coastal States Do Better

  • Citizens of California, Massachusetts and New Jersey were the most financially capable, ranking in the top five in at least three of five measures of financial capability.
  • Mississippi was the least financially capable state, placing in the bottom five in four out of five measures, while Arkansas ranked in the bottom five in three out of five measures, and Kentucky ranked in the bottom five in two out of five measures.

Generational Disparities: Younger Americans at Risk

  • Younger Americans, especially those 34 and under, are more likely to show signs of financial stress, including taking a loan or hardship withdrawal from their retirement account or making late mortgage payments.
  • Younger Americans are more likely to have unpaid medical bills. The breakdown is as follows:
    • 31% of those aged 18-34.
    • 17% of those aged 55 or older.

Gender Disparities: Women at Risk

Other studies have shown women to be at risk.  A report by workplace financial education provider Financial Finesse, 2012 Gender Gap in Financial Literacy Researchshows women still lagging in in key areas of financial planning, and, further, the report identified that the gap between the genders is widening in nearly every area of financial planning.

A Widespread Societal Problem

Despite these disparities, the national averages show a serious across-the-board need for financial planning help.  Of the five basic financial literacy questions tested, the national average was just 2.88 correct answers.

  • Only 41% spend less than their income.
  • 26% report having unpaid medical bills.
  • 56% do not have sufficient savings to cover three months of unanticipated financial emergencies.
  • 34% paid only the minimum credit card payment during the past year.

Unfortunately, these are not isolated findings, but have been corroborated by numerous studies over the years. For instance:

  • A 2012, the SEC report on financial literacy concluded that “American investors lack essential knowledge of the most rudimentary financial concepts: inflation, bond prices, interest rates, mortgages, and risk.”
  • 69% of 1,664 participants in a 2010 Northwestern Mutual Life Insurance study to determine Americans’ general financial knowledge  failed the quiz.
  • In a 2008 study of high school seniors, only 36.2% knew that “retirement income provided by a company” is called a “pension.”
  • An Ariel study of 401(k) savings disparities found that African-American and Hispanic workers in the U.S. have lower 401(k) balances and participation rates than their white and Asian counterparts.

Serious Economic Implications

This paints a grim picture of the state of American financial literacy. The implications of the financial literacy disconnect are twofold:

  1. Consumers who are unable to understand their financial planning needs are unlikely to realize their full financial potential.
  2. An uneducated public lowers the bar for financial planners, leaving consumers at risk.

Ms. Vasan interviewed fiduciary advocate Ron Rhoades, program chair of the Alfred State Financial Planning Program. He emphasized the need for a strong fiduciary standard of conduct requiring planners to act in the best interests of the client. According to Mr. Rhoades:

Sadly, 80% or more of ‘financial advice’ and ‘investment advice’ provided today is not provided in the best interests of consumers, but rather is — often unknown to the consumer — designed to sell expensive investment products to unsuspecting consumers.

A 2009 National Financial Capability Study found that only 15% of respondents indicated that they had “checked an advisor’s background or credentials with a state or federal regulator, ” and an alarming 43% of investors in a 2007 MoneyTrack/IPT Investing Secrets Survey demonstrated a susceptibility to fraud.

An April 9, 2012 Op Ed by Time Business and Money titled Improving Financial Literacy is Essential to Our Nation’s Economic Health written by Roger W. Ferguson Jr., president and CEO of TIAA-CREF, and a former vice chairman of the U.S. Federal Reserve, sums it up well:

Why It Matters: People with low levels of financial literacy suffer from that lack of knowledge at every stage of their lives: Another study from the TIAA-CREF Institute shows that people with a high degree of financial literacy are more likely to plan for retirement, and that people who plan for retirement have more than double the wealth of people who don’t.

Conversely, people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. They are less likely to invest, more likely to experience difficulty with debt, and less likely to know the terms of their mortgages and other loans. 

The cost of this financial ignorance is high, leading many people to incur avoidable charges and fees from things like making late credit card payments or paying only the minimum amount due, overspending their credit limit, and using cash advances.

Calling All Planners

Consumers Need Help: The problem is likely to become worse as Generations X and Y head into middle age. And the educational response has been negligible. 26 states have no financial literacy requirements at all in their K-12 education systems, and only four states require students to take a personal finance class in high school.

The Disconnect Makes Financial Planning a Hard Sell: A more complex financial environment coupled with an enormous disconnect between consumer needs and attitudes creates a huge challenge for financial planners. The services of Financial Planners are more needed than ever, but getting people to face these sensitive matters remains a hard sell.

What Planners Can Do: Given this disconnect, astute financial planners can help to bridge the gap between need and perception by offering to conduct financial planning classes at local schools, civic groups (like Lion’s and Rotary), local businesses and other public forums.

A Business Development Opportunity For Planners Too

Not only does this meet a vital need, but it provides invaluable opportunities for financial professionals to increase their business in the community. Financial literacy classes can help financial planners to :

  • Introduce and advertise their practice.
  • Differentiate themselves as credible, trusted professionals in a crowded field.
  • Network within community-based associations and organizations where they can increase their visibility, gain referrals, and become trusted, influential resources.

Financial literacy classes provide an entry point for planners to get involved with community organizations and expand their influence, and can open up opportunities that can lead to networking, referrals and sales, by:

  • Serving on organization committees.
  • Buying tickets or a table for their functions.
  • Buying adds in their programs.
  • Submitting an informational article to their newsletters.
  • Assisting in or sponsoring events.
A financial literacy program provides opportunities for planners to be seen as thought leaders and trusted resources, making organization members receptive to a request for a networking meeting or an appointment to explain the services they provide. At the same time, planners will gain great confidence that they are helping consumers to make better financial choices, starting with the choice to engage a trusted advisor for the support they need.
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Q&A: Maximize Your Legacy for Your Grandchildren

hands-note

You’re a financially successful grandparent who wants to leave a big legacy for your grandchildren. You would like to maximize the legacy you leave them while minimizing taxes. Here are some questions you’ll need to consider:

Q. Will the Generation Skipping Transfer Tax (GSTT) limit what I can give to my children?

The IRS imposes a transfer tax at each family generation:

  • If an asset passes from a parent to a child, and then from the child to a grandchild, estate tax is imposed in both the parent’s and the child’s estates.
  • If a parent passes the asset to the grandchild to try to bypass the child’s estate and avoid estate tax,  it may be subject to another transfer tax, the generation-skipping transfer tax.
  • This tax is particularly onerous because it is imposed in addition to the estate tax incurred in the parent’s estate and is assessed at a flat 45% rate.

As a result, when the GSTT applies, it may result in more than 75% of the assets passing to the grandchild being consumed in estate taxes and generation-skipping taxes.

Q. At what amount does the tax kick in?

The IRS provides each individual with a “GST exemption” of $5.25 million. In other words, each individual may engage in generation-skipping transfers of up to that amount without subjecting those assets to the GSTT.

Q. Can I leave even more without losing much to taxes?

Many individuals who might otherwise leave their entire estates to their children allocate their generation-skipping exemption – currently $5.25 million – to generation skipping trusts for the benefit of their children and grandchildren.

Q. Would a trust help if I don’t have that many assets?

The trust advantages go beyond tax savings. Using the generation-skipping tax exemption offers two important advantages:

  • The trust will escape all transfer taxes when the children die and will pass to the grandchildren tax-free.
  • The trust may be protected from the claims of creditors and, to some degree ex-spouses. (some states protect inheritance in divorce proceedings.)
  • Gift, estate and generation skipping tax laws are constantly changing. The exemption amount has been as low as $1 million and the tax, as high as 55%.

Historical Generation Skipping Transfer Tax Exemptions and Rates

Year GST Exemption GST Tax Rate
1997 $1,000,000 55%
1998 $1,000,000 55%
1999 $1,010,000 55%
2000 $1,030,000 55%
2001 $1,060,000 55%
2002 $1,100,000 50%
2003 $1,120,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 No generation skipping transfer tax N/A
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%

In view of the uncertainty in tax laws and of the erratic nature of lawmakers in the United States, any grandparent with assets totaling more than $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.25 million gift and GST tax exemptions. Even individuals with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.

Q. How Do I Set Up a GSTT Trust?

1. Establish a trust. Appoint a trustee

2. Fund it up to the GSTT exemption.

3. Leverage the trust assets through life insurance.

The example below provides a brief summary of what a Dynasty trust can do for you. Please note that states may limit the term of the trust:

dynasty_trust_l

Leverage Your Legacy

If you and your spouse are healthy and qualify for life insurance, the trustee can also purchase life insurance on you. The advantages:

  • The death proceeds go to your children and grandchildren, exactly according to your wishes.
  • The proceeds are generally received by the trust both income and estate tax free.
  • You can provide for multiple generations – including both children and grandchildren.

Speak With a Planner

Estate and GST taxes can be avoided using other useful techniques. For example, interests in a family limited partnership (FLP) or family limited liability company (FLLC) can be transferred to succeeding generations by simply gifting the assets to family members. Valuation discounting of family business interests can lower exposure to gift taxes. Under circumstances, a personal residence can be efficiently transferred using a qualified personal residence trust (QPRT). These other techniques, however, do not offer the asset protection and long-term wealth preservation and management possible with an irrevocable dynasty trust.

Takeaways

  • The uncertainty of tax laws means that any grandparent with assets over $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.2 million gift and GST tax exemptions.
  • Grandparents with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.
  • If you are healthy enough to qualify for life insurance, it can greatly multiply the amount that you leave to future generations.

Note: 2013 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

Under ATRA, the federal estate tax exemption has been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, but the estate tax rate for estates valued over this amount has increased from 35% in 2012 to 40% in 2013. In addition, the lifetime gift tax exemption has also been indexed for inflation and increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum gift tax rate has increased from 35% in 2012 to 40% in 2013. The generation skipping transfer tax exemption has also been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum generation skipping transfer tax rate has increased from 35% in 2012 to 40% in 2013.

Warning & Disclaimer: This is not legal advice.

Is There a Ready Market for Your Business?

small businesses for sale

According to The Complete Guide To Business Brokerage By Tom West, the number of small to mid-sized, privately owned businesses for sale in the United States is estimated to be approximately 1 million – or 20% of them at any given time. But only a small number of them get sold:

  • 1 in 5 small businesses sell
  • 1 in 4 small to mid size businesses sell
  • 1 in 3.5 mid-size companies sell
  • 1 in 3 large companies sell

Shut Happens

There may be no ready buyers for your business, and you may lose your most hard earned asset. Consider this example.


out of businessExample:
 You and your partner  are 50/50 partners.  Your partner dies, and his wife or child inherits his share of the business.

  • Do you have the right or the obligation to buy them out? 
  • If so, for how much and on what terms?  
  • Can you strike out on your own, or are you stuck with the baggage of the old one? 

What if you die instead of your partner?

  • Will your partner pay your family a fair price for your share of the business?
  • Will he just walk away and start up a new business on his own?

The 3 Problems of Business Continuation


1. No buyers offering a fair price
 – There may not be a ready market for your business in even the best of economic times, and unforseen events like death or sickness can force a fire sale. You may work hard all your life to build a business, but have nothing to leave your family.

owner's son2. Forced Partnership with a spouse or child – If you don’t have the cash to buy out your partner’s interest,  you may find yourself in business with a spouse or child who may actually be a drag on the profits and viability of your business.

3. Can you leave a family legacy? – If you die before your partner, what assurance do you have that your surviving partner will pay your family a fair price for your share of the business?

Robert W. Wood, who writes about taxes and litigation issues for Forbes, sums up why a  buy-sell agreement is so important for anyone who owns any kind of business:

Without it, a closely held or family business faces a world of financial and tax problems on an owner’s death, incapacitation, divorce, bankruptcy, sale or retirement…A buy-sell agreement can ward off infighting by family members, co-owners and spouses, keep the business afloat so its goodwill and customer base remain intact, and avoid liquidity problems that often arise on these major events.

Creating a Market for Your Business

Business-succession specialists and financial planners often recommend an insured buy-sell agreement to ensure that your family can receive a fair value for the business you worked so hard to build, and allow you to buy out your partner’s share and continue the business as a going concern. It does two things:

  1. It creates an immediate market for your business (your partner or a successor employee.)
  2. It  can create immediate funds for a fairly valued buyout through insurance.

The 5 Guarantees of A Properly Structured Agreement

buysell.png

A properly-structured agreement will guarantee the following:

  1. guaranteed purchaser
  2. guaranteed sale
  3. guaranteed price
  4. guaranteed time
  5. guaranteed funding

1. Guaranteed Purchaser

Who will buy?

  • the surviving partners must buy

2. Guaranteed Sale

Who will sell?

  • the estate of the deceased partner must sell

3. Guaranteed Price

What is the price?

  • have a formula or outside valuation

4. Guaranteed Time

When to transact?

  • automatically at time of
    • disability
    • retirement
    • death

5. Guaranteed Funding

How to pay?

Implementing A Simple and Cost Effective Solution

Cross Purchase vs. Redemption:  One type of agreement is a cross-purchase:  If you or your partner/successor dies, becomes disabled, goes bankrupt, etc., the other can buy his share.  With a redemption style agreement, the business itself would make the purchase so the owners don’t individually go out of pocket.

With either type of buy-sell, there’s lots of flexibility.  The price might be fixed, determined by appraisal or formula.  The price might be paid in cash or installments over time.  There can be different terms for different events, one price and terms for retirement, one for disability, one for death.

Insurance:  Insurance features prominently in many buy-sell agreements.  You don’t have to use insurance, but it can ensure there’s cash available when the time comes.  For example, whether you or your partner/successor dies first, a life insurance policy on each of you can fund the buyout so your business stays afloat and the spouse/heirs are bought out as agreed.  A buy-sell agreement is funded with life insurance on the participating owners’ lives can guarantee that there will be money when the buy–sell event is triggered. Using insurance to fund the buy/sell agreement has these advantages

  • funds are available when needed
  • least expensive solution
  • new owner does not incur debt when buying the business

Reciprocal Planning:  While you may find it difficult to face these issues and to make some of the decisions, any buy-sell agreement is better than none.  The best thing about buy-sell agreements are that they are reciprocal.  No one knows for sure if you or your partner will be the first to go by death, disability, retirement, or for other reasons, and this reciprocal nature makes negotiating and agreeing on these issues easier to do.

How to Get Started

You’ll need a business or tax lawyer experienced in buy-sell agreements to draft it.  However, these agreements can be surprisingly simple and cost effective. Whatever you pay for it and the insurance premiums on an insured arrangement will be small in comparison to what it can save you. 

One of the best starting points is a financial planner or insurance specialist. They may have prototype documents to recommend to your attorney, but, more important, they may have invaluable experience and can give you guidance in thinking out the key decisions before you meet with an attorney to get it done, which will save you time and money.

Additional Resources:

 

Benefits Are More Costly – But More Important

employee-loyalty-declines

Employers are struggling with employee benefit decisions.

In addition to the challenging economic  and competitive environment, employers now face three key difficulties

:

  • healthcare reform, 
  • precipitously rising benefit costs,  and 
  • a less loyal workforce.  

The conundrum employers face is that employee loyalty has been steadily declining, while employees are demanding benefits more.  The ninth annual MetLife Study of Employee Benefits Trends, respectively, showed that employees reported:

  • a 12% decline in “strong loyalty” to employers from 2008 to 2011.

Voluntary Life Benefit Programs Help Bridge the Gap

There is renewed interest among employers in voluntary benefits as a means of  promoting loyalty and retention while curtailing benefit costs. And the eleventh annual MetLife Study of Employee Benefits Trends reports that employees are keenly interested in them as well:

  • 61 say benefits meeting their individual needs would make them more loyal.
  • 51are willing to bear more of the cost to have more benefits to choose from.

Voluntary life insurance benefits are highly valued.  A special advantages of life insurance benefit programs is the flexibility that they provide employers in structuring a plan to meet their needs:

  • Avoids complicated reporting and nondiscrimination requirements, giving employers control over whom to reward. 
  • Costs and benefits can be split among employer and employees to fit the needs of the business. 
  • Employers can control the incentives by designing their plan with or without “strings.” 

Here are 3 popular ways that employer-sponsored life insurance benefits are  offered to select key employees

1. Split-dollar – for Cost and Benefit Sharing

RestrictedAccessBenefits: The costs and benefits of a policy are shared between the employer and a select key employee.

During employment: The employer and a select key employee each pay an agreed percentage of the premium.  This could be called a “consumer-directed plan” because it allows the employer to provide an executive with a life insurance benefit with low outlay.

At death: A tax-free death benefit is paid to the employee’s beneficiary,  and a portion goes to the employer to recoup it’s contributions.

At separation from service:  the policy’s cash value may reimburse the employer for his share of the premiums and allow the employee to purchase and keep the policy.

According to National Underwriter, this  continues to be a vital and popular planning tool.

Anticipated Results: Costs and benefits can be split according to the employer’s needs. The “rollout” of the benefit to the employee upon separation of service can be used to tie the employee to the company for a long period, encouraging loyalty and retention.

2. Deferred Compensation – for Executive Retirement

quote_executivesBenefits: Non-qualified Deferred Compensation plans can create tax-leveraged financial security for key employees by allowing them to defer a portion of their income into a cash value life insurance policy. The plan can provide benefits in lieu of or as a supplement to a qualified pension plan.The employee elects to receive less current compensation and defers receipt of that amount to a future tax year.

  • The cash value can provide supplementary retirement benefits, even if the employee is already receiving the maximum benefits under the company’s qualified plan.
  • The employer gets a tax deduction when the employee receives the compensation.  
  • The employer can avoid the cost and administration of a qualified plan and the cost and complexity of covering all employees.
  • The death benefit can allow the business to recover costs.

Anticipated Results: The deferrals provide a way for employees to save for retirement. The employer can select who receives benefits, when they receive them and how much they receive, and there are fewer administrative issues than under unlike tax qualified plans –  since the Department of Labor has ruled (Advisory Opinion Letter 90-14A) that this arrangement is not subject to Labor Regulations Section 2510.3-102, which requires participant contributions to an ERISA pension or welfare plan to be held under a formal trust arrangement.

3. Executive Bonus – for Trusted Key Employees

exe_bonusBenefits: The employer provides additional monthly compensation to the employee, and receives an annual tax deduction.

The bonus pays for the premiums of a life insurance policy owned by the key executive – a valued personal asset  giving the employee access to the cash values and providing a death benefit for his/her beneficiaries.

Anticipated Results: A Section 162 Executive Bonus Plan is one of the simplest and most transparent plans. For a more personal organization, it provides transparency and trust. It’s tax deductible to the employer, and provides a fully paid, fully vested life insurance benefit for a particularly important and trusted key employee.

A Good Broker/Benefit Specialist Is Key

Given the flexibility of these plans, it is important to have a qualified benefits specialist or broker, knowledgeable in life insurance planning to:

  • help the employer select the implementation strategy that fits its specific needs and objectives.
  • provide a prototype agreement for plans that require one.
  • promote participation and appreciation for the employer’s sponsorship.

Research indicates  that 68% of employees spent little time or effort in making their benefit selections; however,  employers who provide outstanding communications are more highly effective in enrollment and are more likely to report that their employees are highly satisfied with their benefits (82% vs. 61%.)

Voluntary Life Insurance Benefits can help give employers an edge in retaining valued, qualified key employees –  who are often the engines of growth for a business or practice. Retaining superior key employees also means retaining a superior benefits broker who can help with the planning, the implementation and the communication.

Related Posts:

advisor-trust-chart2

Who Do You Trust?

 notes in HealthLifePro, that Americans’ trust in advisors has declined. A study by Hearts & Wallets, Hingham, Mass titled “Trust-Building Practices: Updated Empirical Analysis of What Drives Trust,” gauged trust on a scale of one to ten (one signifies very little trust and ten very high trust.) The study’s findings:

  • Just one in five Americans fully trusted their financial advisor in 2012 – a four-point decline since 2010.
  • Those awarding their advisors 9 points declined from 18% in 2010 to 13% in 2012.
  • Those awarding their advisors 8 points declined from 21% in 2010 to 17% in 2012.

The most trusted advisor practices are full-service brokerage and insurance practices versus self-service brokerages and banks:

  • 74% rate  insurance and full-service brokerages a 9 or a 10 (37% each.)
  • Only 60% rate self-brokerages and banks a 9 or a 10.

What Drives Advisor Trust?

The top trust drivers of trust were ranked as follows:

  • improving investor understanding of how the provider earns its money (by a wide margin)
  • the perception that an advisor is unbiased
  • clear and understandable fees
  • responsive
  • understands and shares the client’s values
  • has made money for the client
  • has produced a “positive experience” for friends and family members.

Takeaway:

Transparency, responsiveness, understanding the client’s values and putting the client’s interests above one’s own are all core to trust in an advisor.

Needed: Versatility for Multiple Life Stages

Research Findings:

A survey conducted online by Harris Interactive on behalf of Northwestern Mutual from August 10-14, 2012 among 2,097 American adults ages 18 and older, featured in Insurance Newsnet finds that the motivation behind life insurance purchase and ownership differs considerably by age and lifestyle. Key findings:

  • Younger Insureds (18 – 34) are most likely to have purchased life insurance due to the birth of a child (28%)
  • 55+Insureds: 36% were prompted to buy as a result of marriage; 31% as part of a retirement plan
  • 45 – 54 Year Old Insureds – were prompted by marriage (39%) ; Retirement planning (25%) and homeownership (25%).
    • This group had the highest percentage (69%) of those who said they feel secure as a result of owning life insurance

Implications: Life Insurance Serves Different Functions by Consumer Life Stages

David Simbro, senior vice president at Northwestern Mutual believes this illustrates the great versatility of life insurance products: Life Insurance Serves different functions by life stage:

It is important to have a financial plan that can both support you and evolve across the span of your lifetime as your financial situation changes. Life insurance can be a stable and yet flexible cornerstone of a financial plan – protection if you need it while also helping you meet financial goals at various life stages.

When asked what aspects of life insurance provide peace of mind, responses differed by generation:

  • Debt Settlement- 18 – 34:  35% are significantly more likely than those ages 35-54 to have peace of mind as a result of knowing all their debts are paid
  • Family Protection- 35 – 44 (34%) and 45 – 54 (36%): derive the greatest peace of mind knowing that their family will be provided for in the event of their unexpected death.
  • Retirement- 55+: 31% find the most peace of mind in knowing that they will have enough money to live in retirement

Takeaways: In summary,

  • Young people focus on building wealth and paying down debt,
  • Those heading into retirement are concerned with managing their longevity risk.

This range of concerns shows why it is critical that a long-term financial plan have built-in flexibility. Life Insurance can fit at every stage, and is necessary at every stage. Unfortunately, many people do not recognize the need for or the flexibility of life insurance as an important part of their financial portfolios.

 Life Insurance Flexibility Not Well Understood

The Harris/Northwestern poll also indicates that people are not always fully leveraging the financial security of life insurance. Few noninsureds understood the role of life insurance in providing for:

  • Education (15 percent)
  • Childcare expenses (11 percent)
  • 33% weren’t certain what expenses they would need to cover at all.

Even among insureds, many still overlook potential uses of life insurance:

  • 52% say they were motivated to purchase it in order to provide for loved ones.
  • Only 6% were motivated to purchase a life insurance policy to fund an inheritance for heirs or charities/non-profit organizations.

Simbro points to an important marketing challenge – to educate the public about the flexibility inherent in life insurance:

A lot of people assume that life insurance is a basic inflexible product, but the fact is that our life products aren’t just flexible, they’re double-jointed – they have both living and death benefits that can be an appropriate foundation for many individuals.

An Approach to Planning for Flexibility

To provide yourself a benefit that will provide an adequate level of benefit to cover your debts and the needs of your beneficiaries, while allowing you the flexibility to plan for cash needs that arise, you should allocate a certain monthly amount of your financial portfolio toward two components:
  • Life insurance component.
  • Savings component.
Finding the perfect mix means that you need to determine how much to allocate to take care of both life insurance and savings elements of your longer term planning needs.
  • A cash value life insurance held for a longer period can provide you funds for unexpected financial needs.
  • A term insurance policy can allow you to maximize the amount you put into a separate savings vehicle, provided you plan for the eventual premium increase.

Is There a Perfect Product Solution?

Don’t Settle For A Stock Answer: I recently attended a seminar in which a local financial planner was asked why it was important to have an attorney draft your will when there are now lower cost online resources for this. His answer:

Sure, you can get a will online. You can also do your own dental work.

The Right Answer: Offering a simplistic stock answer for such a complex a question hurt his credibility.  The planner had likely picked up this answer at a sales seminar in which he had been coached to overcome objections rather than to actually listen, analyze, and provide a thoughtful analysis based on a client’s unique life needs.  A more accurate answer would have been:

It depends on the complexity of your situation. For clear and simple family planning circumstances, a basic will should suffice. The more complex your estate and personal circumstances, the more you may benefit from professional advice.

Is There a Right Life Insurance Policy?

This anecdote illustrates that there are various approaches to planning that can involve diferent product solutions. While life insurance products provide great flexibility, planning can be challenging. As Simbro states:

There are many factors that impact what type and how much insurance you need, and getting it right for your personal situation is best accomplished via a thoughtful planning process with the help of a trusted financial professional.

Permanent cash-value policies provide guaranteed level premiums, varying degrees of flexibility in premium payments, cash values you can access during life, and tax deferred growth. They include:

  • Whole life.
  • Universal life.
  • Equity indexed life.

Term life alternatives that provide temporary coverage at lower premiums include

  • Annually increasing premium Term life.
  • Level Premium term life.
  • Term life that provides a return of cash value.

Finding the right product solutions to fit your unique circumstances means taking into consideration the following factors:

  • Your needs at your current stage of life.
  • Your changing future needs.
  • Your ability to pay a sufficient premium level to provide for both.

Takeaways

  • The most important takeaway is that you can’t afford to neglect your life insurance needs. As your situation in life changes, so do your needs, and you need to keep up with them.
  • Analyze your current and future needs to ensure you are providing yourself:
    • Adequate coverage,
    • Flexibility for future and unforeseen changes, and
    • Affordable premium payments.
  • “You get what you pay for” – Too low a premium may compromise your plan: it can cause your policy (term or permanent) to require increased premiums later that you might not be able to afford; or it could compromise your planning flexibility over time.
  • Research resources online to help with your planning, such as these from Northwestern:
Snap! principle of life insurance premiums:
While you shouldn’t overspend, remember this principle: skimping on life insurance premium is only cheating yourself.

Signs That You Might Need a Better Value Proposition…

 

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