By Mary Lou Dobbs, president, Executive Benefit Strategies Inc.
Today's trying financial environment has many business owners and their insurance agents in flux. With the financial world spinning out of control, smart business owners are looking for financial vehicles that provide recession protection for their retirement funds. And it's a common goal for the business owner to have adequate money at retirement without depleting the assets of the company to make that happen.
An increasingly popular strategy for creating a retirement income fund is using the age-old, tried and true universal life insurance policy. This product becomes more popular during a recession because it offers guarantees, a self-completion component, protection of principal, earned interest and protection from creditors. Its most appealing feature is the policyholder's ability to access money before age 59 1/2 while providing a stream of needed income.
Universal life insurance is perhaps the most underutilized and least understood financial product in America today. Banks purchase the largest amount of life insurance, with bank-owned life insurance (BOLI) a favored asset. In fact, the Federal Reserve, FDIC, and many thrift associations categorize BOLI into the safest category of assets called Tier 1. It is relatively liquid, grows on a tax-deferred basis and offers minimum guaranteed rates of return.
The IRS has guidelines regarding the amount of money that can go into an insurance contract to avoid making it a "modified endowment contract" which results in loss of tax-free withdrawals of the cash value. It is important to ensure that the tax-free element is not lost and that monies coming out at retirement provide the desired income stream.
Those who are willing to live with lower earnings have peace of mind knowing their principal and interest are protected in uncertain times. A "tortoise" approach of a slow and safe return may have looked boring in the past, but has plenty of sexy curb appeal in today's uncertain economic climate.
So how does this no-risk policy work? The traditional goal of a life insurance policy is to get the most coverage with the least amount of premium. This no- risk policy works just the opposite. It has the most premium going in, yielding the least amount of insurance. It is a more conservative approach in relation to earnings and risk, thus building a large amount of excess cash value. This concept is often utilized when looking for a "second flexible bucket" of tax-free income to offset the taxes paid from qualified plans such as 401(k)s, IRA accounts, or other taxable assets.
As with any other life insurance purchase, a physical examination is required to be approved for coverage.
Selling the coverage
Independent insurance agents advising their clients on the value of universal life may want
to try a "power phrase" to move the client toward purchasing this product. By asking the client, "Would you have any objection if we cleared you medically to see if you qualify for this coverage?" and getting a "no" answer, you can begin the process. Getting a "yes" response with a "no" answer helps you make a sale and guides your client through the buying process.
Before doing anything, however, financial due diligence of the insurance provider is strongly recommended. It's also smart to request that the plan have low upfront surrender charges so that the policy owner is free to access the money if needed.
This policy strategy is like a sleeping giant. It suits the many business owners who are now looking for creative ways to secure a prudent retirement plan and are carefully considering all risks, such as liability, investment, interest, divorce, errors as a practicing professional, lack of planning and the potential impact of the coming inflation risk.
Fiscal responsibility mandates constant review and adjustment to this plan. Major threats to a secure retirement are inviting this old, slow but safe product to be dusted off and re-examined, as the tortoise may be the big winner after all.
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Mary Lou Dobbs is president of Executive Benefit Strategies Inc. and is a recognized speaker, coach and seminar leader. She is the author of "Repotting Yourself: Financial, Emotional, Spiritual Flow."
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