What do you say when clients or prospects believe that life insurance is a bad investment? I first ask why they feel that way to get a better perspective about where they are coming from. My answer usually sounds like this, then:
“Well, I agree with you if life insurance is used improperly. It all depends on how you are positioning it within your financial plan. For example, if clients are young and looking for ways to enhance their retirement plan beyond their qualified accounts, life insurance can provide a 4% to 5% tax-free return for them. In addition, it has a feature that I call a ‘plan completion.’ If you die prior to retirement, it ensures your spouse or heirs will receive the asset in your absence. It is kind of like setting up your own private pension plan.”
These two case studies provide additional ideas about how to answer that client objection or question of, “Is life insurance a bad investment?”
The professional athlete
I was meeting with a 31-year-old professional athlete. He had just signed a very big, guaranteed contract. He made the comment that he had always heard that life insurance was a bad investment and that he should steer clear of it. I approached this as a tax diversification strategy.
I used a whole life product from a well-known company. This investment vehicle has the following:
- Guaranteed cash accumulation
- Tax-deferred growth and tax-favored distributions
- Not directly affected by market conditions
- Strong dividend history
- Attractive internal rate of return
- Income distributions not treated as net investment income and excluded from Medicare surtax
- Access to the cash prior to age 59 with no 10% penalty
- Guaranteed income tax-free plan completion death benefit
I focused on what he needed. He was concerned about income after his playing days were over. I showed him that when he turned 50, he could take $556,400 per year tax-free from this for the next 20 years.
In addition, this strategy, because it’s less aggressive than other investments, provides some protection when the economy is slow.
This next client taught me a valuable way to talk to the ultra-wealthy about life insurance, and that’s to think in terms of percentages and not dollars.
How the ultra-wealthy think
I was completing the largest insurance policy that I had ever written at the time. It was a $90 million second-to-die policy with an annual premium of $2.2 million. We were using a privately financed strategy to get around paying gift tax. The client had a net worth of $150 million. I was referred to this client from his broker.
We were all done with the underwriting, and I was presenting the final paperwork to the client and his attorney. Up until now, the attorney was on board with this strategy. Out of the blue, the attorney said, “You know, Sam, you don’t have to do this. You have enough investable assets to pay the potential estate tax.”
Of course, I could have kicked the attorney under the table, but I sat still, probably because I was shocked. What the client said changed my attitude about how I would handle future high-net-worth clients.
He turned to his broker and asked, “What did you return on my portfolio last year?” The broker replied, “Roughly $10 million.” The client said, “So what you are asking me to do is to invest 22% of my growth on my portfolio to increase my net worth by 60% guaranteed. That sounds like a no-brainer to me!”
The best part about this was that the attorney just sat there. He basically was embarrassed that he even said what he said. I could have cheered out loud, but all I did was take note of what was just said. You see, wealthy people think in terms of percentages. From then on, I never quoted premiums and death benefits in terms of dollars. I always use percentages.
This was excerpted from Dale Martin’s 2017 MDRT Annual Meeting presentation “It’s not what you say; it’s how you say it.” Martin, of Port St. Lucie, Florida, has been an MDRT member since 2001 and is the Past Chair of Top of the Table.
For more ideas about insurance solutions for clients
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