When an insurance policy does double duty

There was a time that financial planning meant a talk on the back porch with a family elder. And today, financial planning means getting the assistance of a professional. And the trick seems to be finding the right type of professional as well as someone you can trust and understand. Some times you need the specialist and some times you need a more comprehensive approach.

Let me give you an example. I was brought in by another advisor to help review his clients’ significant life insurance and annuity contracts. He has already sought the help from a sales agency who shared good information about the policies and contracts. And the agency made some recommendations to replace the policies based on a contract feature recently and to keep the annuities as they were. Keep or replace, that was the question.

And I saw something very different. I saw that the life insurance policies were probably sold as retirement savings vehicle. I knew that most of the marketing and administration costs were paid in the early years of the policy. Surrendering the policies waste those dollars spent. Instead we will investigate how to minimize the death benefit, let the values accumulate tax deferred as a fixed income portion of their portfolio and take advantage of the minimum 4% return. Additional cash outlay may not even be necessary.

Of course, we’ll calculate the amount of life insurance necessary or desired, what type of return the money would earn in an alternate investment if the life insurance was deemed unnecessary, and how the asset allocation of his portfolio would be impacted as well as determine the benefit to his total projected taxes. We will do a comprehensive analysis vs. the “keep or replace” analysis that the specialist offered.

So while I don’t recommend that life insurance be sold as an investment, once you have bought the policies and maintained them, before surrendering them or replacing them, I do recommend that you consider their tax advantages and where they might fit in your asset allocation. And when you’re making decisions that affect your financial future I recommend a comprehensive approach.

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