Clients who have achieved wealth at a young age may have vastly different life insurance needs than traditional clients. At Life Insurance Strategies Group, we regularly work with clients aged 25 to 45 who have either generated wealth through business or investment growth or who have had recent liquidity events from the disposition of assets or inheritance.
Many of these clients have not yet married or started families. Most are not sure what they will be doing the rest of their lives, how they will spend or invest their wealth or, just as likely, how they will earn more. Even with all these unknowns, they face the reality of needing to do some financial and estate planning immediately.
The key to any “Early Age Wealth” life insurance purchase is flexibility. The uncertainty about the future demands that both any planning and the requisite life insurance solution permit flexibility in order to meet a multitude of life events.
Here are five considerations for buying life insurance for these young and wealthy clients:
1. Cut Through the Noise With a Life Insurance Advisor. The client, their lawyer and their accountant likely know several professional life insurance producers. Some broker business for many insurance companies and some are captive agents for a single company. Some have licenses which permit the sale of variable insurance contracts and others are limited to permanent policies.
An independent life insurance advisor does not sell products and will act as a consultant on the client’s behalf to help choose the appropriate life insurance contract and company. This advisor will work with any preferred life insurance producer in modeling various designs and making sure the insurance solution properly fits in with the overall financial plan. The advisor is also a source of education about life insurance to help the client through the complexities of the process. They are the client's advocate and their only interest is finding the right solution for that client.
2. Own the Policy Correctly. A client’s lawyer will likely insist that a life insurance policy of any size be owned by a trust and, to the extent possible, kept out of the future estate of the client. Just because a policy is held in a trust does not mean there is not access to the policy’s cash value should the client need capital for any reason. Trustees may make loans of funds taken from the policy and this flexibility provides the comfort for the young client who may not wish to lock up funds forever.
3. Buy Permanent and Fixed Life Insurance. Fixed life insurance contracts, such as traditional whole life and universal life contracts, shift the investment risk almost completely to the life insurance carrier. This means that the illustration (model) a client is shown will list current and guaranteed interest rates of performance which will give the client a fairly good idea of how the contract should perform over the rest of their life—which could be seventy years or more.
This differs from a term life insurance contract which is for a set period of time – usually no more than for 30 years – and then becomes prohibitively expensive to renew, if possible, after that. In addition, term life insurance contracts do not include an investment component (hence there is no return). Term contracts are typically used for a temporary life insurance need.
Variable contracts shift the investment risk to the client since these contracts rely on the premium being invested in underlying funds and the performance of those funds determines how the life insurance contract will perform. Most wealthy clients face investment risk in other areas of their lives and need their life insurance policies to offer certainty and not volatility.
4. Buy on the Guaranteed Rate for the Policy’s Cash Value. As mentioned, many permanent and fixed life insurance contracts may show a current rate of return on how the premiums will grow inside the policy. This current rate is typically guaranteed for a year and subject to change at the evaluation of the insurance company. For example, the current rate may be 3.85% and the illustration will show what your premium will be so that, at 3.85% a year, the policy will stay in effect to age 100 or even age 120 - which is a possibility for young clients buying today.
The contract will also show a minimum guaranteed rate which is a rate the insurance company promises the rate of return will never fall below. That rate may be 2% which is quite a bit different than the current rate. This could be catastrophic as it would require the client to supply additional funds to maintain the policy later in life.
Historically, over a period of years, life insurance companies have tended to reduce the current rates down to the minimum, guaranteed rates. While this may not be the case in the future, a young purchaser should not take the chance that they will be forced to fund their life insurance contract at a later date because the rate of return was lower than what was first promised.
At Life Insurance Strategies Group, we always insist a life insurance producer create an illustration which shows the premium required for not only the current rate of return but also the guaranteed rate. In addition, we often insist the client pay the premium based on the guarantee or, at the very least, pay more than the premium required by the current rate in order to mitigate a potential reduced policy performance.
5. Consider Insurability (aka youth is wasted on the young). It goes without saying that younger insureds tend to be healthier than older ones. Therefore, the cost of insurance increases as you age - meaning it benefits a young purchaser to take every precaution to ensure they do not have to undergo medical and lab testing in the future in order to buy more life insurance coverage.
A young insured should consider two options to preserve their insurability. First, evaluate purchasing a policy with an increasing death benefit rather than a level one. The premium will be higher since more insurance is purchased over time but the difference in premium between a level and increasing death benefit for a young client is just a fraction of the cost if the client had to seek more coverage 20, 30 or even 50 years in the future.
Second, seek a rider which provides the option of purchasing more death benefit without proving insurability (or at least not having to conduct a medical exam) at set times in the future or after certain life events such as marriage or the birth of child. This guaranteed insurability option is invaluable to offset health risks which come with aging.
At Life Insurance Strategies Group, we help the Early Age Wealthy Client make the best decision when a life insurance solution is needed to fit with a holistic financial plan.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.