By Chuck Jones

You can use life insurance to: Fund a buy/sell agreement Secure a line of credit Protect a business from monetary loss Provide an employee benefit Pay mortgages and debts Pay funeral expenses Pay for college Give money to charity Create an estate Pay estate taxes Equalize an inheritance Provide income Guarantee future insurability For an illustration of a creative concept in life insurance, you might turn to L. Frank Baum’s children’s classic, The Wonderful Wizard of Oz. In Oz, we are introduced to a new use of that universal substance, water. Before Oz was published in 1900, water was used for drinking, of course; washing, naturally; swimming, without a doubt. But melting wicked witches? That was unheard of. Who would have thought? It was a creative use of an existing commodity. Think of its parallel in the world of whole life insurance. Life insurance was created to provide a death benefit to someone who would be financially hurt by the death of the insured. The beneficiary was usually a family member, typically a wife or husband.

But since the development of modern life insurance some 150 years ago, a combination of evolving tax laws, business cycles and innovative insurance professionals has turned the “give the widow a check” whole life policy into a financial instrument that does more. Much more.

Life insurance for income
Using life insurance for something other than a family death benefit has been around for years. People use life insurance in their businesses to fund buy/sell agreements. They use it as an employee benefit to attract top talent. They use it to pay their taxes, fund a college education, give money to charity. One of the more innovative uses of life insurance may be to use coverage to provide a living benefit rather than a death benefit.

That’s the main reason Ari Kolker, a 32-year-old computer consultant in Plainsboro, N.J., bought his variable universal life policy—to provide an income for him and his wife when he reaches his projected early retirement age of 52.

The software specialist and new father says his goal of retiring early is a lifestyle choice his wife, Susan, 32, and he decided on by the time they were married in 1997. “It was part of our view of life,” he says. “We wanted a happy and fulfilling life before we had children, with children and ultimately after the children have grown.” Susan gave birth to twins, Nicholas and Grace, in April 2003, which has kick-started the second planned phase of Ari’s life.

“I don’t want to have to work until I’m 65 or 70,” he says. “That’s going to get in the way of my plans. We’ve got this family goal—to enjoy our lives together. We’re willing to work hard, doing as well at our jobs as possible, have satisfying careers and work ourselves into a financially fruitful position. To do this, we’ve had to prepare ourselves early on.”

While the couple recognizes the need to prepare financially before they can retire at such an early age, they’ve encountered a few setbacks in their professional lives of late. Susan, who was an English teacher at the Gotz Middle School in Jackson, N.J., and then a guidance counselor at Jackson Memorial High School, quit her guidance counselor job a few weeks before the twins were born. And Ari, who started his own software business in May 2002, has just seen his business fail after one year—typical for many start-up firms. “We specialized in customer relationship management software,” he explains, “but it’s a tough market. It’s the same story you hear everywhere. The economy is bad, and we were swept down in the same downdraft that’s taken everybody in the software sector. We gave it a shot and missed.”

And although Ari recently took a consulting position with a major computer hardware corporation that he wishes not to name, he describes his family’s financial status as middle income. “I’m not a doctor or a lawyer,” he says. “I don’t make huge gobs of money. Now Susan doesn’t work outside the home. Things are tight.”

“I had the idea of overfunding a VUL policy to grow about half of the money he’d need for early retirement, and supplement that with money from mutual funds.” —Mark D. Olson, CLU, ChFC, CFP, AEP, LUTCF

An advisor’s help
Not long after the Kolkers were married in 1997, Ari received an inquiry from a local financial advisor who was making prospecting calls. Ari knew at the time that he and Susan wanted to retire early, and that he needed help in reaching that goal. He made an appointment with the advisor to discuss where he was at financially and where he wanted to be in 25 years.

“The guy just didn’t impress us,” Ari says. “I got the impression that he only had a sketchy idea of what he was talking about. Even though he was the first planner to contact us, I just knew he wasn’t the guy to help us. What he did do was show us [by negative example] the importance of getting professional help with our finances.”

Ari turned to another advisor named Guy Dean. Dean was part of a financial planning team that included Mark D. Olson, CLU, ChFC, CFP, AEP, LUTCF, who is a 36-year-old, fee-based senior planner with MetLife in the nearby town of Berkeley Heights, about 15 miles west of Newark. Olson came highly recommended by Dean, having served a year as president of Central Jersey AIFA. A few years later, he would be named MetLife Financial Planner of the Year three years in a row. The year Ari met him, though, was 1997.

“Ari was a young guy who wanted to retire early and enjoy life,” Olson says. “He knew enough to know that it would take some planning to get there and that the time to start was now. At age 52, he’d have no Social Security benefits to draw on yet, and it would be difficult, under current rules, to access his 401(k) money at that age. I was brought in to create a strategy for him to meet his retirement goal—which was to build up assets to draw income from between the ages of 52 and 62.”

“I remember telling Mark that to me, there was more to life than going to the office and driving in traffic,” Ari recalls. “I said that I didn’t want to be burdened by work until I died. I was so insistent about retiring early that it was almost comical. I was sitting in his office and we were discussing my goals, and I just out and asked him, ‘Can I retire at age 40?’ Mark said, no, it wasn’t feasible. And we sort of bantered back and forth. What was feasible? What wasn’t? I guess I had my head in the sky, and Mark kept me grounded.”

“Most people are surprised when they find out all the things insurance can do. It’s not what they expect. [And] if it weren’t for us, they wouldn’t know what it can do.” —Mark D. Olson

The solution
Between Ari’s retirement wishes and Olson’s practical viewpoint, the two hammered out a reachable goal of retirement at age 52. The next step was how to get there. Olson knew where to begin.

“I use some pretty sophisticated financial planning software,” Olson says. “It’s a standard procedure that includes a life insurance needs analysis.” That analysis revealed a $1 million need for life insurance. But while a life insurance death benefit became part of the Kolker family’s financial plan, it didn’t do much to help him prepare for early retirement. That’s when Olson used his know-how to devise the means to this end.

“My job was to come up with a strategy to meet the goal,” Olson says. “And there were several ways to do it.” These included investing in stocks and bonds, putting money into mutual funds and simply putting money into high-yielding certificates of deposit. There was also a more creative, more effective way: overfunding a variable universal life (VUL) policy and heavily buying mutual funds.

“There was already the need for life insurance,” Olson explains, “so Ari was going to buy some of that anyway. I had the idea of overfunding a VUL policy to grow about half of the money he’d need for early retirement, and supplement that with money from the mutual funds.”

But how much did he have to buy? Olson says to determine the amount of monthly income Ari and his wife would need to retire early, he did an analysis of the couple’s current expenses and projected them 20 years into the future at a 4 percent inflation rate. That projection showed that the couple would need about $6,000 in monthly income.

Olson sold Ari a $1 million VUL policy with his wife, Susan, as beneficiary. The plan was that Ari would be able to withdraw—tax-free—$3,000 a month from the policy starting at age 52, and the mutual funds would provide the additional $3,000 in monthly income. When he first bought the $1 million VUL policy, it cost Ari $585 per month in premium. About a year ago, Olson was able to reduce the premium by $100 per month.

“By overfunding the VUL, you’re inflating the cash value,” Olson explains. “He would have had to buy the life insurance anyway to protect his family. This way, he’s using double-duty dollars. It will provide a death benefit and a living income at the same time.”

“I was more than receptive to this idea,” Ari says. “I had no idea that you could get a benefit out of a life insurance policy before you died. I was definitely surprised. I wouldn’t have known how to do that, or even that I could do that, without Mark telling me about that option.” (Continued…)

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