Financial planning essential: life insurance

Kathleen Kenealy, Director of Financial Planning, invites Tim Gibson, Managing Partner at McWalter Volunteer Insurance Agency, to answer some of the most frequently asked questions about life insurance. Listen now as they explain why you should consider purchasing life insurance, how much coverage you may need, and how you can work with advisors to obtain a policy.


Kathleen: Hello and welcome to Boston Private Perspective. I'm Kathleen Kenealy, director of financial planning here at Boston Private. Today, we're going to dig into a key component of your financial plan, life insurance. While September is life insurance awareness month, it always a good idea to review your insurance coverage annually, to walk through some insurance coverage basics such as why do I need insurance, and how much do I need, and how do I get it?

I've invited an expert to join me today. Tim Gibson is a managing partner at McWalter Volunteer Insurance Agency. He has 28 years of experience working with clients to secure appropriate life insurance coverage based on aligning their needs while working to minimize their risk exposure. Hi, Tim. Welcome and thanks for joining me today.

Tim: Hi, Kathleen. Thanks for having me.

Kathleen: Yeah, my pleasure. So I'd like to start by asking you what seems like a simple question, but can actually be a bit tricky to figure out. And that's how much life insurance do individuals and families need? There are a lot of different ways that you can go about calculating it, so could you tell us a little bit about how you usually determine how much life insurance coverage is appropriate? How do you help your clients figure that out?

Tim: Sure. Figuring out the amount of coverage your family needs is the first step in the process and maybe the most important. There are formulas that some financial advisors use, based on a multiple of income, but I don't really think any of them makes sense because every family's situation is different. The family with 7 kids in a $3 million mortgage does not have the same needs as a family with 1 kid and no mortgage. So, life insurance should be thought of as a tax-free asset that will replace lost income so that there's no financial loss to dependents when an income earner passes away. We really need to figure out the present value of that after tax income to determine the right amount of coverage. Other factors that need to be considered are future education costs, as well as amount of debt and assets. A level term insurance policy is almost always the best solution for a family that needs to replace the income of a breadwinner. And I also think it's important to work with a insurance broker that has the ability to represent most of the companies out there as opposed to just one or two companies.

Kathleen: Yeah, that definitely makes sense and that's really important and incredibly helpful information to think about. You know, I think people are definitely thinking about their own mortality a bit more than we usually do given the global health crisis we're all going through right now. And the work that you do, are you seeing any changes in the life insurance industry as a resultant of COVID-19, like changes in prices, or underwriting process, or approval rate, or anything else?

Tim: You're right. There are more people thinking about their mortality and life insurance than ever before. Insurance companies haven't necessarily increased their rates, but many companies are decreasing the age that these products are available. A lot of companies are not offering products to anyone over age 70. The good news is that insurance companies have new accelerated underwriting programs as a result of COVID. Many companies will allow insureds under age 50 to apply for coverage without an insurance exam, in some cases, as much as $3 million of coverage without an exam.

Kathleen: Wow. It's interesting to hear how COVID is definitely impacting a lot of different industries, including the insurance industry these days. You mentioned a few minutes ago about how when you're looking at life insurance needs and making sure to have enough coverage to replace the, you know, the after tax salary of the primary breadwinner, and funding for college, and paying off mortgages, etc. You know, we work with a lot of high-net-worth and ultra high-net-worth clients that, you know, really don't necessarily need life insurance for these purposes because, perhaps they, you know, have acquired enough in assets where they can self-insure. You know, are there other reasons why life insurance is appropriate for people?

Tim: Yeah, absolutely. And you're right, families can get to a point where their assets are enough to cover their after expense needs. And term insurance and other traditional types of insurance don't make sense. But when families reach a point where they have enough assets to provide the income they need to cover expenses during their lifetime, they can really think of their assets or segregate their assets into two portfolios. The core capital is the portfolio they'll need to provide the income during their lifetime, and the rest of their assets can be viewed as their legacy capital that they plan to pass on to kids and grandkids. In a lot of cases adding second-to-die-insurance as an asset class in a legacy portfolio can significantly increase the amount passed on to heirs. Second-to-die-insurance is a type of policy that provides a benefit only after the surviving spouse dies. The tax-free death benefit is non-correlated asset that can deliver very competitive returns with much less risk than most of the other assets in the portfolio. I should also point out for families that have established a revocable trust, investments in these trusts will not get a step up in basis. So, if the investments in the trust have performed well over time, the capital gains can create a large tax liability for future generations, making it more difficult for them to take income. Life insurance will deliver tax-free cash in the trust, needling investment flexibility and tax-free income.

Kathleen: That's an interesting point. I think life insurance can definitely be used in creative ways when talking about estate planning and legacy planning, especially given the fact that the, you know, high federal estate tax exemption rates that we have right now, a little over $11 million per person, is going to go away at the end of 2025, if not sooner, if we see a change in the White House and Congress with the upcoming election. But, clearly there are a lot of different reasons why individuals and families shouldn consider life insurance. And from all the things that we've already talked about, you know, it can get fairly complicated relatively quickly. We have a lot of clients who acquired life insurance policies over the years. Would you say it's important that people review the policy periodically, and if so, why?

Tim: Yeah. Life insurance policy should be reviewed on a regular basis just like any other investment. I see a lot of policies that have incorrect ownership beneficiary arrangements and also the amount or the type of policy doesn't make sense anymore in a lot of situations because the family's financial situation and needs have changed. So policy reviews are even more important for anyone who wants a permanent policy. And that could be a whole life variable or universal life policy whether it's single life or second-to-die. These policies are designed to be enforced for future generations. And if the policy doesn't have a guaranteed death benefit, there's a good chance the policy is not performing as well as originally illustrated. And that's usually as a result of the non-guaranteed assumptions changing. And that could be the fees and expenses, the cost of insurance, and anything, any policies that are tied to interest rates or market risk assumptions typically have changed. So we help our clients get an in-force illustration that will clearly show the current and future values of the policies, and the level of premium funding necessary for the policy to remain in-force. We've had many clients learn that their policies are projected to lapse before their life expectancy. Unfortunately, that can mean that all the premiums will be lost and the beneficiaries will not receive anything. Our job is to help them make changes to the policy or search for alternatives to make sure they avoid a bad outcome.

Kathleen: That's great. You know, you went through a lot of different things that need to be looked at, and reviewed, and considered when people are reviewing their life insurance coverage each year. And there's a lot going on, and it can get very complicated really quickly. And, even from my perspective, you know, I've been doing this for a long time, but I am not an expert in life insurance so that I am glad that I have professionals like you, Tim, to reach out to when I have question. But I think that's one of the nice things about Boston Private. You know, as a fiduciary, you know, we don't sell insurance and so we're able to make objective opinions and recommendations to our client when we think their insurance needs to be increased, or decreased, or changed, or reviewed. But it's great to have professionals to reach out to and collaborate with on behalf of our client.

I want to thank you, Tim, for sharing your perspective that our client can use when considering their life insurance needs. And I want to encourage all of our clients to reach out to your Boston Private Wealth Advisor to discuss your life insurance needs for any element of today's conversation. Providing guidance and support as your trusted advisor is our mission. You can also read our latest perspective on wealth planning by visiting bostonprivate.com. And while you're there, you can subscribe to our newsletters if you want all this information delivered right to your inbox. Be sure to also subscribe to the Boston Private Perspective on Apple Podcasts or wherever you prefer to listen. Thank you for tuning in, and we'll see you in our next perspective podcast.

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