MDRT INSIGHTS
The Million Dollar Round Table is the premier association of the world’s most successful life insurance and financial services professionals.
Living Benefits — Only the Tip of Life Insurance Value P ermanent life insurance can help your clients leverage their assets into cash flow. By Arkady Milgram
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he topic of living benefits in permanent life policies has attracted a great deal of attention recently. Due to continued stock market volatility and a long period of extremely low rates for traditional savings methods, people are seeking alternative ways to boost their savings. The well-known tax benefits of life insurance contribute significantly to the increased interest in these products. But does permanent life offer anything besides cash value accumulation for retirement or other purposes? We’ve all heard the saying, “Life insurance is not for those who die; it’s for those who live!” Although I agree with this, I also believe it doesn’t give a completely accurate description of the situation. Permanent life offers some effective and significant, yet indirect, advantages besides just cash value. Although we can’t take anything with us, we can leverage anything we have — investment accounts, real estate, businesses or charitable intentions, for example — against the future death benefit proceeds. The next step is to turn that leverage into real cash flow.
Start With the Home
The soundest financial planning theories suggest that your clients should pay off their mortgages prior to retirement. The purpose is obvious: It’s not prudent for your clients to have debts while they plan to live off of their savings. But this creates another problem. They now have a large, illiquid asset that they can’t use to provide cash for their current lifestyles. Homes can be passed on to heirs, but it’s sad to think that something your clients may have spent the largest portion of their incomes on doesn’t give them anything besides the actual roof over their heads. After all, they can’t eat a 60
InsuranceNewsNet Magazine » April 2015
piece of their wall, nor can they exchange their granite countertops for cruise fare.
What About a Reverse Mortgage?
This may be quite an expensive option, and you never know how long the settlement will take. The biggest misconception about reverse mortgages is that the bank will take over your client’s property upon death, which eliminates an inheritance to their children or other loved ones. In reality, your clients’ heirs have the opportunity to “buy in” and keep the property title by paying off or refinancing the balances of the reverse mortgage.
The Correlation to Life Insurance
So, you may ask, what does this have to do with life insurance? Well, actually a lot! If your client owns a permanent policy (ideally paid up by age 65), the beneficiaries would receive two envelopes in the mail after the client and spouse die. One will contain a check from the life insurance company and the other a bill from the reverse mortgage lender for the balance of the account. By simply applying one against another, the heirs will keep the real estate title free and clear. The balance due would be much larger than the amount your client originally borrowed — since there wasn’t a single payment made toward the reverse mortgage. However, if you properly calculate the projections of the reverse mortgage balance growth and life insurance premium in advance, your client will be much better off in retirement. When they prepare for reverse mortgage funds as well as policy cash value, retirees can enjoy a much better lifestyle. The advantage to this method is that your clients’ income becomes tax free, and neither they nor their heirs must pay for it. The death benefits will cover both the cash value loan and the reverse real estate loan. During the course of my career, I’ve analyzed multiple scenarios, and this approach almost always offers huge benefits to the insured.
Under the surface, permanent life offers some effective and significant advantages besides just cash value. Second-to-die policies can also work with this arrangement. The only exception is when the life insurance policy is being purchased simultaneously with the application for a reverse mortgage. In this case, there wouldn’t be enough time for the leverage to apply. Besides, at the time your client is able to qualify for a reverse mortgage (at age 62), they likely won’t qualify for life insurance. The earlier they buy the policy, the better. This method of leveraging can be applied to scenarios other than just real estate. With this knowledge, we can re-frame the statement noted earlier in this article to read: “Life insurance is not only for those who live; it’s also for those who die!” Arkady Milgram, CLU, ChFC, ChSNC, CLF, is an eight-time MDRT Qualifying Member. He is a financial strategist and special care planner with MassMutual Greater Los Angeles, where he was named Associate of the Year for 2009 and 2011. Arkady may be contacted at arkady.milgram@innfeedback.com.