Delivering more value to clients is always top of mind for the best financial advisors. With the increase in interest rates, advisors have the ability to deliver more value – while building their businesses – by focusing on what’s often one of their clients’ most important, but neglected, assets: their life insurance policy and the potentially unmanaged cash in it.
It's easy for financial advisors to focus on the investment side of their clients' portfolios and overlook unmanaged cash within their client’s life insurance policies. There are several types of permanent life insurance products that have the ability to build cash on a tax deferred basis such as universal life, whole life, indexed life, and variable universal life. These products can accumulate cash at different rates of return and should be managed based on individual client needs and investment risk tolerances.
According to the American Council of Life Insurers, as of year-end 2020, there were approximately 39.4 million individual cash-value life insurance policies in force in the United States. Based on Proformex data, the average cash value for such policies is $75,000, which means there could be more than $3 trillion in cash inside U.S. life insurance policies.
The number is staggering – and shows that unmanaged cash in life insurance policies is a valuable asset that advisors shouldn't ignore.
Let’s discuss the reasons why advisors should pay attention to unmanaged cash within life insurance policies and outline three steps to communicate with clients about the potential value of this asset.
Cash within life insurance policies can be a valuable asset for clients for several reasons:
- Missed Opportunities: Unmanaged cash within life insurance policies represents a missed opportunity for advisors to utilize this asset type when their clients have a capital need, such as college funding, mounting medical bills from a family health emergency or other unforeseen short-term expenses. By ignoring the cash within life insurance policies, advisors may only be left with the option of liquidating other managed accounts, reducing their assets under management as well as the potential overall portfolio returns.
- Tax Implications: Life insurance cash grows tax-deferred and can be accessed tax free as withdrawals or policy loans, but could generate unforeseen tax implications for clients if they take out more than the premiums they paid into the policy Advisors who ignore unmanaged cash within a policy may be leaving their clients vulnerable to unexpected tax consequences. By monitoring and managing the cash value within the policy, advisors can help their clients minimize their tax burden and avoid any unintended tax consequences.
- Inflation: Inflation can erode the value of money over time, which can have a negative impact on the cash value buildup within a life insurance policy. By ignoring the cash value buildup, clients may be at risk of losing purchasing power over time. Depending on the type of life insurance product a client has purchased, there may be alternative investment choices within the policy which could help outpace inflation. By assuming more investment risk within products like variable universal life or indexed life, clients could benefit from higher return then the carrier’s crediting rates. Advisors who actively manage the policy's cash value and the investment lineups within the policies can help their clients mitigate the effects of inflation and ensure the policy remains aligned with their long-term financial goals.
- Changing Needs: Over time, what was once a need and priority clients had for their life insurance may not be the case any longer. Policies can be surrendered for their current cash surrender value, replaced for another policy, 1035-exchanged into an annuity, or potentially sold. By reviewing and analyzing their clients’ policies, advisors can help them make informed decisions to ensure the policy and the cash within it is optimized to meet their clients’ current financial needs and objectives.
By actively managing the cash within a life insurance policy, advisors can help their clients maximize the policy's benefits, minimize their tax burden, mitigate the effects of inflation, and ensure the policy remains aligned with their changing financial needs over time.
Three steps advisors should take to address the unmanaged cash within their client's life insurance policies:
- Review and Analyze: The first step is for advisors to bring life insurance into active planning discussions with clients to ensure it fits with their broader needs. From there, advisors can work with clients to review and analyze their life insurance policies to determine the amount of cash value buildup and the type of policy and how might be best to use that cash as part of their overall financial plan. Advisors can also determine if the policy is performing as expected and if any adjustments need to be made to help maximize the policy's benefits.
- Educate and Inform: Advisors should educate and inform their clients about the potential uses of the cash value within their life insurance policies. This includes discussing the various options available for utilizing the cash value, such as loans, withdrawals, policy exchanges or surrenders, and other investment options. Advisors can also discuss the tax implications of each option and help clients determine which strategy best aligns with their financial goals.
- Monitor and Rebalance: After analyzing the policy and educating the client, advisors should monitor and rebalance the policy regularly. This includes keeping track of the policy's performance, checking the cash value buildup, and making adjustments as necessary to ensure the policy remains aligned with the client's goals. If the policy is not performing as expected or if the client's needs change, advisors may recommend that the client explore other options or consider purchasing a new policy.
By taking these steps, advisors can bring more value to their clients by helping them make informed decisions about life insurance as part of their financial plan while also ensuring they’re maximizing benefits from cash potentially inside their policies.
Life insurance is a critical piece of financial planning and needs considered inside each client’s individual financial plan. Many policies have unmanaged cash inside of them. This can be a valuable asset for clients, and advisors should not overlook its potential value.
By reviewing policy documents, identifying potential uses for the cash value, and discussing investment options with clients, advisors can help clients make informed decisions about how to utilize life insurance assets to meet their financial goals and objectives. By paying attention to unmanaged cash within life insurance policies, advisors can help clients achieve a more comprehensive and successful financial plan.
