Life Insurance from the Estate Planning Attorney’s Viewpoint

By Steven J. Oshins, J.D., AEP (Distinguished)

Estate planning attorneys are often known for “killing” life insurance sales.  Since the attorney owes the client a duty to do what is in the client’s best interest, if the attorney truly believes that the client does not need the insurance policy, then the attorney is arguably satisfying his or her ethical responsibilities to the client.  However, the attorney often automatically says “no” to the client’s detriment.  Perhaps the problem is that many attorneys just don’t understand the different life insurance products.  And human nature is often such that if you don’t understand something then you are negative towards it.

Term Life Insurance – Term insurance is temporary insurance that expires after the designated term.  It has no investment component and therefore is pure insurance with no cash value build-up.  Term insurance is less costly than permanent insurance when comparing the premium dollars to the death benefit.  However, in nearly all cases, the insured survives the term of years in the insurance contract and, thus, there is no payout.  Therefore, in most cases, when looking at a term policy after-the-fact using hindsight, it was a “bad” deal.  However, when cash flow doesn’t enable the acquisition of permanent insurance, term insurance is the ideal product to inexpensively hedge against an early death that would cause a financial problem, such as the inability to pay off a mortgage, or take care of a surviving spouse or young children. It also works well for a person who can’t afford permanent insurance, but has an insurance need.

Permanent Life Insurance – There is often a belief that life insurance is a bad financial investment and that the client is better off buying term insurance and investing the difference.  However, that is generally wrong since term insurance rarely pays, whereas permanent insurance does.  Unless the client dies within the term of a term insurance policy, which is unlikely, the permanent insurance policy is the better long-term product.  There are different types of permanent insurance products, with different combinations and different riders that can influence the results.  A qualified life insurance advisor can run illustrations showing the advantages and disadvantages of different products, as well as different companies, some of which are strong in some products and weak in other products.  The permanent life insurance products include whole life, variable life and universal life.

Internal Rate of Return – In this author’s opinion, there is no better metric than the internal rate of return (“IRR”).  If the life insurance advisors would show the attorneys the year-by-year IRR, it is likely that there would be a much better understanding of the benefits of a permanent life insurance product.

IRR for High Cash Value Products – Given the high federal and state income taxes that currently exist, high early cash value life insurance policies are often used as an investment vehicle, but with the death benefit component as an added benefit.  Looking at the IRR on the cash value build-up, especially after the policy has been in existence for a number of years, is a great way to illustrate the benefits in buying this type of product.

IRR for High Death Benefit Products – With respect to the more traditional high death benefit life insurance policies, try having the life insurance agent run an illustration showing the IRR at ages such as 90 or 95.  The client should be pleasantly surprised at the income tax-free IRR for the benefit of the client’s surviving spouse, children or other beneficiaries.  This will likely demonstrate to the attorney and to the client that life insurance is actually a solid investment for the family and that “buying term and investing the difference” is generally bad advice.

Don’t just simply dismiss life insurance as an important client planning strategy!

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ABOUT THE AUTHOR

Steven J. Oshins, Esq. is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States.  He is listed in The Best Lawyers in America®.  He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by The Trust Advisor.  Mr. Oshins can be reached at 702-341-6000, ext.2 or at [email protected].

 

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