Demonstrate your value when planning with insurance products

A recent Advisor.ca article discusses the costs and planning aspects of long-term care (LTC). The costs are such that clients may be left with the choice of either planning for that eventual need or simply hoping for the best. The cost of LTC insurance products can have a big impact on your clients’ cash flow and may require clients to redirect savings to fund these plans. How can advisors help clients plan for the day they will need LTC in the face of these costs and limited competition in the market?

When we address the value proposition that insurance-based products provide, it’s vital to move the conversation away from discussing which product has the lower premium or offers the higher payout on death. Basic comparisons such as these commoditize not only the products but also the value that the advisor provides. If we continue along this path, we’ll eventually make insurance planning as simple as a market analysis website, and artificial intelligence chatbots may be able to provide these kinds of services in a few years.

Here are a few examples of the ways you can look beyond premiums to build a plan that takes into account variables such as sudden disability and the need for flexibility.   

A case study

Let’s look at a 45-year-old medical professional who is the owner of a professional corporation. He has a projected capital gains liability of around $1.5 million. In this case, you position an earlier cash-value whole-life policy with a guaranteed premium of $25,000 a year for 20 years. You run your projections, which demonstrate that by age 85, the death benefit will be in the range of almost $1.95 million at current scale, $1.71 million at current -1% (see graph below), and $1.46 million at current -2%. 

From a risk perspective, the product should be able to address the projected capital gains need. It also addresses the concern regarding earlier cash value in the event something unexpected happens.

However, is that really the only metric you must consider? At the very least, should you not have a conversation about what variables could change to alter the outcome? What about gains or losses from mortality, lapses, expenses, taxes or hurdle rates? (For more on those conversations, see Managing expectations when clients have older whole life plans.)  

Life happens

Your client may ask you what will happen if they can’t afford to pay the premiums because of illness or disability. You could easily pivot to talking about a waiver of premium rider, but that’s just an additional cost to address a hypothetical situation that may or may not arise.

Consider the basics, such as how flexible or adaptable a product is. If circumstances change, you might suggest a non-forfeiture option, such as reduced paid-up (RPU); or the ability to switch the cost structure from a guaranteed 20 to a life pay based on the client’s issue age, so that they can adapt to their new cash-flow realities. These are some of the things to bring into your discussions to provide some context to your decision-making. 

Sudden disability or illness

Suppose your client has asked what would happen if they suddenly became unable to work. If this event were to occur at age 58, the client would be a little too young to retire, and his retirement portfolio would be adversely affected if he were to make some earlier-than-planned withdrawals. 

In this case, the client decides to elect RPU and officially submit his claim for disability thereafter. The election of the RPU will force some cash out of the contract to maintain policy-exempt status. This results in $36,102 being paid out of the contract, leaving $34,861 net of taxes (assuming 50.17%) inside his corporation. That translates to a 23.32% pre-tax equivalent yield. Then, the election of the disability provision in the contract allows up to 100% of the cash surrender value to be paid out on a tax-free basis, rather than being treated as a taxable disposition.

In this example, the client elects another $57,559 to be paid out of the policy on a tax-free basis, which is equivalent to a pre-tax yield of 38.5%. Now, the corporation has $93,661 of cash on hand, which could be paid out as a dividend, a bonus, or a tax-free payout should there be any shareholder loans owed to him by his corporation. Alternatively, it could be used to pay down a corporate line of credit facility rather than liquidating his investment portfolio inside the corporation, which may be a taxable event.

Another benefit of this solution is that the disability payout reduces the adjusted cost basis (ACB), dollar for dollar. This could be of interest if the client would like to accelerate the ACB reduction in order to maximize capital dividend account (CDA) credits in the event he has a shortened life expectancy due to his medical event.

The CDA credit is a unique aspect of life insurance that is not available in traditional living benefit products such as critical illness (CI) or disability insurance. (It’s also worth noting that the disability payout cannot be included as part of the CDA calculation.)

Now, let’s assume the illness shortens his life expectancy to age 78 (year 33).

No disability event			Disability event
Death benefit (-1%)	Net to estate (47.74% dividend tax)	Net to estate IRR*	Death benefit (-1%)	Net to estate (47.74% dividend tax)	Net to estate IRR**
$1,545,515	$1,405,031	4.76%	$662,904	$607,278	3.98%

*Internal rate of return

** IRR adjusted to reflect the adjusted cash inflow due to the payout of cash values at time of event

The client’s projected capital gains liability under the original financial plan is around $1.1 million by age 78. So, the death benefit payout does fall short at current -1%, but these are the kinds of conversations that are important to help the client understand the trade-offs.

This client also could have added a term or permanent CI rider to the policy, which would have provided an alternative way of receiving living benefits to fund lifestyle costs post-disability or illness.

Life insurance is a powerful planning tool and a unique asset class, and it is important for clients to engage with an insurance advisor and move beyond determining which quote is cheaper. We are now moving the discussion away from basic metrics toward a more nuanced conversation about product flexibility and addressing unexpected life events. These kinds of conversations separate you from others and show that you have a deeper understanding of financial planning issues, and that you can incorporate the product features to address your client’s unexpected needs.