Life Insurance Policy Design

Life insurance can be an effective tool for helping retired clients meet their goals, but it's important to consider the growth potential and funding level of the policy to really determine if life insurance is the right option for your client's specific situation. Learn more about how to make great life insurance policy decisions in our FinPlan Friday conversation with Joe.

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FinPlan Fridays

In our video blog series, FinPlan Fridays, Covisum® Founder and President, Joe Elsasser, CFP®, offers his take on the issues financial advisors see every day. Joe is a practicing financial planner with a unique perspective into the challenges for which Covisum provides technology solutions. Join us on the first Friday of every month for FinPlan Fridays, and get helpful tips to grow your financial planning practice. 


Hi, this is Joe Elsasser, CFP®, President and Founder of Covisum and I'm also a practicing financial advisor. Welcome to another FinPlan Friday. Today, we're going to discuss two key elements of life insurance policy design.

  1. Growth potential
  2. Funding level

I can really, in the context of a client's financial plan, do a lot of things just by manipulating those two key elements, and that's going to tell me a lot about both the kind of policy that I might consider for the client and also whether or not it's going to meet their goals as efficiently as possible.

When to Consider Life Insurance in Financial Strategy

For example, let's say I have a client who has a goal of leaving a targeted amount to their children. They have a high level of certainty that they want to leave at least X dollars to their children, and they're willing to have fluctuations in their own lifestyle in order to make sure that that becomes a reality. Life insurance is an ideal vehicle for this situation.

What should I consider in terms of funding and growth potential? Since the goal is the targeted legacy, I want funding to be as low as possible, while ensuring that they are going to reach their goal. I might think about using a guaranteed death benefit universal life policy in the policy design because that's going to give me exactly the amount of premium that I'll need to fund it in order to ensure that the death benefit will be there. I don't want to fund it with more than that, because ultimately, the death benefit is all I care about. I don't care about the ability to take loans or make withdrawals later in life.

When I consider the growth potential in a policy like that, I'm not worried about the ability to have above-market returns by having a great asset allocation. What I really care about is keeping my premiums as low as possible, so that I don't have to disturb my other investments—or disturb them as little as possible. And if I'm seeking growth, I can seek those in my other investments, because I know that I will have committed as little as possible to achieving this particular goal of the targeted legacy. That's a situation where I might be looking for a very low funding level and also a reasonable growth potential. I don't need the risk that comes with highly fluctuating internal rates of return.

Life Insurance Strategy for Younger Clients

Now, a second situation might be for a younger client. The primary goal for the younger person is the life insurance protection. But for a younger person, there's so much time to recover. If markets don't perform early, you're continuing to fund the policy over time, and as a result, you have the ability to catch up later if you get an ugly turn of events early on. In those situations, I might be looking for a moderate funding level and a high growth potential vehicle, which would necessitate a totally different kind of life insurance—more of a variable policy than I might consider for a targeted legacy situation.

Life Insurance as a Retirement Supplement

Now, a third example might be a retirement supplement. If I have a retired client who has accumulated funds in life insurance over the course of many years (and they know exactly what they're going to use it for), we're going to use life insurance for supplemental income. I can target the idea of funding to the absolute max. I want to have the minimum death benefit that I can in order to be able to hold those that accumulated cash value. I want them to do that, so I can keep my cost of insurance as low as possible.

In terms of growth potential, that's entirely dependent on the time horizon. If I don't need to use those funds for 10 years, then I've got a little bit of room to fluctuate. I might want to use a higher growth vehicle. If I don't have very much time until I'm going to begin taking those withdrawals, then I really want to be thinking about something that's more stable.

As you think about your client's situation,  just think about those two core elements, the growth potential of the policy and the client's need for growth potential, as well as the funding level. That's going to help you make great decisions and also communicate those decisions as far as what kinds of policies you're choosing for your clients.

Managing Multiple Income Streams in Retirement 

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