This month's white paper discusses two planning opportunities with term life insurance that are, dare we say, innovative? While term life insurance is generally not known for being the most creative product in life insurance, there are two specific strategies that can create tremendous value for clients who estate planning goals/future are a bit uncertain.
Term life insurance operates on a relatively straight forward premise: policyholders pay premiums over a specified term, typically ranging from 10 to 30 years. in exchange for a death benefit should the insured pass away during the policy duration. Unlike permanent life insurance, term life insurance offers coverage for a fixed period, making it a suitable choice for individuals seeking temporary protection.
The conversion feature of term life insurance provides policyholders with the option to convert their team policy into a permanent life insurance policy, such as whole life or universal life, without the need for a new medical examination. This feature offers valuable flexibility, allowing individuals to adapt their insurance coverages their needs and circumstances change over time. By converting to a permanent policy, policyholders can lock in coverage for the long term, potentially benefitting from cash value accumulation and guaranteed death benefits.
But two unique conversion options are out there, with some added benefits for our clients, which will explore with a case study.
Let's assume Mr. and Mrs. Clients are 35 years old and each purchase a $10MM term life insurance policy for the benefit of their purpose. The purpose of the life insurance is to provide liquidity if either were to pass away in the next 20 years, while their children are young and need financial support, and while the mortgage and other family expenses need to be covered. Over time, the Client's needs for life insurance shift away from personal financial security towards tax and legacy planning. They each transfer their life insurance policy to an irrevocable life insurance trust (ILIT), and the trustee converts the term life insurance into a permanent life insurance policy on their respective lives.
Depicted in this chart are the original $10MM term life insurance policies broken out by insured:
Depicted in this chart are the converted $10MM permanent life insurance policies, assuming the clients each purchased a lifetime no lapse guarantee index Universal Life contract with premiums paid over 10 years.
If we assume a life expectancy of age 91, and planned premiums on the IUL paid in full and on time each year, the expected cumulative total outlay for the two policies at their deaths is $5,418,820.
Now let's assume Mr. and Mrs. Client each purchased a $10MM term life insurance policy for the benefit of each other. This time, they work with a life insurance professional who recommends a specific term life insurance policy on each of them, with additional flexibility for converting each policy into one $20MM survivorship (second to die) permanent policy.
For many reasons, second to die life insurance makes more sense for estate planning purposes, including that estate taxes are generally due until after the second death in a married couple. Plus, the added benefit of being less expensive than two individual permanent life insurance policies is certainly helpful. In this example, cumulative total premium outlay in the first scenario is nearly 40% higher than the survivorship option.
Mr. and Mrs. Clients each purchase $1MM term life insurance policy for the benefit of their spouse, to provide liquidity if with were to pass away in the next 30 years, while their children are young and need financial, and while the mortgage and other family expenses need to be covered.
Over time, the Client's fixed expenses decrease, and the mortgage gets paid off. Additionally, Mr. and Mrs. Client do not need life insurance for any long-term planning. Therefore, when they reach the and of the fixed term premium period, they decide to let their respective policies lapse.
When they meet with their insurance professional to confirm the term policies have been properly cancelled, they discover a new insurance need has surfaced: long term care insurance to protect against the risk of a long-term care claim. Unfortunately for both Mr. and Mrs. Client, their newest obsession with pickleball has created a few aches and pains in their joints, requiring physical therapy and cortisone injections, making them ineligible to purchase long term care insurance. They have no choice but to self-insure the risk at this time.
This outcome could have been avoided with the use of a specialized term life insurance product, that allows for a purchase option order (POR) to be added to the contract. The POR provides the policyowner the right to purchase a long-term care accelerated death benefit rider on a new permanent life insurance policy, at the time of conversion, without evidence of insurability. Put simply, instead of letting the term policies lapse because the death benefit is no longer needed, the clients could convert their term policy to permanent coverage, would then be used for their potential future long term care needs.
Depicted the chart is the term life insurance with the POR, along with the premium required to keep the $1MM would be spent down 2% per month, subject the IRS per diem limits after satisfying a 90 day elimination period.
This chart reflects the benefits when a LTC claim occurs at age 86:
