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The Insurance Portfolio Review

In many cases, this is even more essential than an investment portfolio review.

By Howard Slater, CFP, CLU, ChFC

A portfolio review more often than not refers to a review of your client's choice of investment products. But what is more essential is a review of your client's insurance portfolio, because unlike traditional investments, mistakes with insurance selection can carry huge financial and emotional costs that are not easily rectified.

Disability income (DI), long-term care (LTCI), property/casualty, life, group benefits and business-overhead insurance are all part of your client's risk-management portfolio, and if you don't address them, you will leave the door open for your competition to step in. Many times it takes a tragedy, a near-death experience or another crisis to motivate a client (even an advisor) to reexamine the topic of insurance. Insurance is an asset and as such, you need to understand its characteristics fully and how best to employ it for your client's purposes. Here are a few products you and your client should look at carefully during an insurance review:

DI insurance
The most important coverage a working individual can own is arguably DI insurance, although it is the insurance product that is the least sold by advisors. Yes, the product is complex, underwriting is challenging and premiums can be expensive, but the chances of a disability occurring during the working life of your client are significantly higher than the chances associated with other risks. Remember that DI insurance protects the client's ability to buy other assets.

DI insurance applications include keyperson coverage, group carve-out, business-overhead coverage and buy/sell funding. Although many advisors want an employee to purchase an individual policy prior to securing group coverage, because of the coordination of coverage and maximization of monetary benefits, today many workers receive employer- or employee-paid disability benefits through a group policy. While these policies often have limitations including a restrictive definition of disability, limited earnings coverage and lack of portability, they are a good starting point for discussing your clients' DI coverage.

For many organizations, providing paid disability benefits for their key employees (via a bonus plan) can be an excellent part of a retention package. Many contracts even offer income back to the company for a period of time (business-protection benefit), in addition to the regular benefit payout to the employee during a claim. Finally, group disability benefits with carve-out features offer a company flexible design approaches that can meet a variety of needs. For example, a large law firm with four partners earning in excess of $400,000 annually currently provides a $10,000 monthly taxable benefit for the partners and $5,000 monthly for other employees. Restructuring the DI insurance benefits to $15,000 a month tax-free for all partners, $6,000 a month for all others, including a two-year rate guarantee, and lowering the total monthly premium by $150 certainly adds value to the client.

Long-term care insurance
When purchased by an individual, a partnership, an LLC, an S corporation, a C corporation and/or through an employer-paid contributory arrangement, LTCI policies are generally structured as either reimbursement or indemnification-type policies. Although the government provides for LTCI premiums to be counted as medical expenses subject to certain limitations, suffice it to say that at this time, there isn't much significance to the tax incentives associated with purchasing LTCI. Newer and evolving state partnership insurer programs do offer some significant asset-protection provisions for individuals who anticipate Medicaid application, but the real wow in LTCI planning is through C corporations and employer-paid contributory programs.

C corporations can purchase tax-qualified LTCI coverage on behalf of their employees, spouses and/or dependents, and the corporations would be entitled to a 100 percent, business-expense deduction for total premiums they pay. No age-based limitations and nondiscrimination rules exist, and the entire premium paid is excluded from the employee's adjusted gross income. The same applies for an employer-paid contributory arrangement but with an added benefit for difficult medical situations. Typically for companies with 15 or more employees, some LTCI providers offer guaranteed issued coverage with some additional individual buy-ups.

Over the last few years, I have been an advisor to a closely held business (C corporation) owned by a husband and wife team. One had a recent bout with cancer, and the other was severely overweight. Under an individual LTCI policy, one was rated and the other was declined. How could we secure coverage for them? The company purchased a 'base' LTCI policy for all of its employees, which provided the necessary 100 percent participation and thus guaranteed issue from the carrier. Employees of the company, including the owners, then had the ability to 'buy-up' two levels of benefits from the 'base.' The first had no medical underwriting, and the second buy-up was modified underwriting. Both owners were now able to purchase a significant long-term benefit, deduct the premiums and have the policies portable upon retirement.

Other areas for review
Life insurance has many uses—including basic indemnification needs, keyperson coverage, nonqualified deferred compensation, buy/sell funding and portfolio diversification. As an advisor, you have a great opportunity to bring value to your clients because many of their policies are at risk. Policies with loans or older issue dates, variable contracts, universal life contracts with secondary guarantees and older term contracts can all be improved upon and can offer you a chance to show your clients the leverage and diversification that life insurance as an asset provides.

For example, a husband and wife aged 59 and 54 plan to gift $48,000 a year to their four children. What should they invest the gift money in? A $48,000 annual premium buys $6.8 million guaranteed of second-to-die life insurance (rated preferred and held in trust to eliminate estate taxes). Alternatively the trustee could purchase a hypothetical guaranteed annualized 8 percent investment. At the 30-year mark, the traditional investment is worth only $5.8 million, compared with a guaranteed $6.8 million. It takes over 31 years for the traditional investment to outperform the insurance alternative. That's smart diversification and wealth transfer.

During a review, you should pay a great deal of attention to your client's insurance portfolio. This will provide invaluable security for your clients and significantly enhance your relationship with them.

Howard Slater, CFP, CLU, ChFC, is a principal of Cedar Brook Financial Partners, LLC, a full-service, financial-planning firm in Cleveland. Securities offered through Securities America Inc., Member NSAD/SIPC Howard Slater, Registered Representative. Advisory services offered through Securities America Advisors Inc., Howard Slater Investment Advisor Representative. Cedar Brook Financial Partners, LLC, and Securities America are unaffiliated. You may reach Slater at hslater@cedar brookfinancial.com.


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