By Alan Jahde, JD, LLM (taxation)
My first experience with life insurance was as a recent college grad: single, no kids, and no pets. Did I need insurance? I have no idea why I bought life insurance at the time, other than the agent was a friend and I thought it’d help my chances of going on a date with her. It took me a few years to figure out the answer, and I dropped the policy. The premium I had paid was wasted, no cash value had accrued, and I should have realized I did not have an insurance need in the first place. It was an expensive lesson.
Unfortunately, experiences like mine and the variability of costs associated with traditional life insurance products has contributed to many advisors being unable to get past their dislike of insurance products. Because the “i-word” has become taboo, they may not even consider how non-traditional insurance solutions, like private placement, could help with wealth preservation planning for their ultra-high-net-worth clients.
Before analyzing costs, one must determine the insurance need, the timing of the need, and the type of life insurance that works best for the client. All greatly influence the costs.
The buying formula for most permanent insurance purchasers is the least amount of annual premium, the largest death benefit possible, and lasting the longest time. Such a formula generally does not work out well in the long run as the client ages.
Private placement life insurance (PPLI) starts with a different premise. Essentially, the buying formula is the exact opposite. Most agents take small to no commissions, policies are institutionally priced, and the lowest death benefit is purchased while putting in as much premium as possible to keep the tax-advantaged status.
Since the costs are low and premiums are at a maximum ratio to the insurance required, this allows for cash value growth, typically in the first year. There are no surrender periods or early withdrawal penalties. Your clients have access to their money when needed.
What’s the lesson in all of this? Take time and figure out why you, or your clients, need life insurance. You don’t have to overpay because your friend sold you a policy that didn’t fit your needs.
If we can help you learn more about the third category of life insurance, private placement, please reach out. We can also run a financial projection for your clients to help quantify the costs and benefits.