©2015, College for Financial Planning, all rights reserved.

Session 5Survivor Planning

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Plan Development Course

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This class is being recorded so you may review it at a future time.

5-2

Life Insurance AnalysisPlanner’s Job• Explore “what if” • Show client how to protect from

devastating risks• Disability and/or death are devastating

and common. Look at these statistics*:

*from Social Security Administration mortality tables

5-3

How much life insurance?

5 common methods of determining gross life insurance needs: • Needs-based analysis* • Human life value• Capital retention• Income replacement• Simple income

multiplier approach

*CFP Board position is that thumbnail approaches are inappropriate – planners use needs-based analysis.

5-4

Your Clients

• Your clients’ assumptions and goals• Is this enough to complete your analysis?

5-5

What coverage do they have now?• When should they

replace whole life?• What is Belth

formula?• What are your

options for current coverage?

5-6

What do clients need?

You must consider:• Immediate cash needs

(debts, mortgage, immediate cash) $261,997

• Funding goals of cabin and college $100,000+ ($139,773 identified in future class)

• Total cash immediately $501,770

Even if there were no income support needs, Anne now has just $107,000. • income needs• tax bracket

5-7

Sample Budget in Case of Death • How good were you

at predicting your budget today 10 years ago?

• Seems reasonable at first

• Clients and planners are good at figuring out what expenses may disappear, such as paying off mortgage.

5-8

Think it Through• Consider what may

increase over 50 years besides inflation!

• What budget will make you happy to see the widower/widow walk through your door?

• What budget would make you want to hide under the desk?

• You are projecting over 50 years! What new expenses/changes will occur in 50 years that you need to anticipate?

5-9

Your Clients’ Life Analysis

5-10

Life Insurance Analysis

• Analysis shows Jim and Matt would be short approximately $400,000 if Anne dies.

• If Jim dies, Anne and Matt have an additional coverage need of $929,489 that you can predict.

• There are price breaks at $1,000,000. • What other issues exist?• How long will coverage be needed?

Why use Jim and Matt, and not just Jim?5-11

Sample Options

Not for your clients! Remember that you have to do your own.

Option 1: Purchase new 20-year term policy for $1,500,000. This will cost approximately $1,650 per year level premium, which is higher than your current coverage (i.e., $852) by $798.

5-12

More OptionsOption 2: Purchase a new 20-year term policy for $1,000,000 and a $500,000 10-year term policy, which is higher than your current coverage (i.e., $852) by $588 per year.

5-13

More Options

Option 3: Purchase a $1,000,000 term policy for 20 years, $400,000 10-year term, and a $100,000 permanent policy for total premium of $1,772, which is $920 more than current.

5-14

Policy Cost Considerations

• Term policies compared on basis of premium dollar per $1,000 for similar face amounts

• Pay attention to details and riders (i.e., waiver of premium, ability to extend coverage, future rate guarantees)

• There are breakpoints impacting cost, so compare similar face amount and terms

• Can be level or yearly renewable

• Rating of company also a consideration

• Do due diligence on policies you sell and policies clients own(you can be liable for both)

5-15

Cash Value Policies

• Company strength and reliability more important since it could span 40 years!

• Yearly price per thousand (YPPT Formula – also known as Belth formula) is effective in determining cost per thousand paid for a policy

• Information available by underwriting company upon diligent requests

• Understand assumptions driving illustrations

• Review and document yearly

5-16

Important Considerations

• Never cancel an existing policy until a new one is completely in place with premium drafting

• Churning policies, lack of due diligence on companies, failure to illustrate policies with reduced returns, or unrealistic returns create lawsuits

• Always consider nonforfeiture provisions for managing premiums and death benefits before dropping or eliminating coverage

• Consider 1035 exchanges into annuity or long-term care if insurance not needed or if you don’t want permanent

5-17

Nonforfeiture Provisions & Other Alternatives

When premium becomes an issue or insurance needs change, owners of cash value life insurance policies can employ these techniques:

• Purchase paid-up coverage (reduce face amount)

• Purchase fully paid term insurance (keep face amount or lower amount for specific number of years)

• Use loans to pay premiums

• Use dividends to pay part or all of premium and/or repay loans

• Have dividends buy additional insurance—term or paid up

• Withdraw dividends from “dividends on deposit” for other purposes

• Utilize loan to pay off high interest debt and establish repayment plan

5-18

1035 ExchangesTax code allows certain exchanges for insurance on a tax-free basis (important consideration on cash value

policies)• A currently owned policy for a newly issued policy

– cash value life to cash value life

• Endowment contract for another endowment or annuity contract

• Currently owned policy for annuity contract

• Annuity contract for another annuity contract

• Annuity or life insurance for a long-term care contract

5-19

Cash Value vs. Term

• Goal of policy: Temporary or permanent needo Under 10 years—temporaryo Between 10–20 years? o Over 20—permanent

• Health status or lifestyle, family history issueso May want to consider permanent if family history

or habits indicates rating or uninsurability in future

• Forced savings component o Permanent with plan to convert to annuity or long-term

care can work for people who always pay bills but don’t always save

• High tax bracket individuals making max contributions to qualified planso Tax-advantaged accumulation can be appealing

(watch out for termination of policy taxation)• Cash flow constraints can dictate type of policy

• Do your own comparisons so you understand!

5-20

Pick Your Recommendation & Analyze Impact on Other Areas

Life insurance can impact:• Cash flow• Disability if waiver of premium added• Can be tied with Social Security starting date• College funding• Estate planning• Future income needs

in case of disability or death so survivor can continue payments

5-21

Plan Development #11

You were given the amount of insurance needed based on the goals provided, the choices for his permanent coverage and the costs of various options.

Do you have questions about what you are to do?You decide whether to stay with analysis or shift it slightly with reasons. You pick the type of insurance and build your recommendation with the reasons that led you to your choice.

5-22

Help Clients Own the Problem

You have done the analysis and figured out the solution. You went through the process to identify the issue and the consequences of addressing the issue.

Did you lead the client through the process in the initial stages?

If not, how are you going to lead them through the process? When are you going to lead them through this process?

In this class, you partially led them through the process in your executive summary issue statement. In real life, if it is the first time they see it, they will not act!

If clients can’t tell you consequencesof not addressing issue, they don’t own or understand the issue.

5-23

Include Enough Details

Clearly paint the picture of what happens now and in the future if a death occurs with the current financial situation.

Use present value numbers or talk in terms of percentages of current budget cut.

Get confirmation from the client about their desired lifestyle and what it would be like without the desired lifestyle. Have the client describe the financial impacts and what would happen (move, change schools, no college, etc.) without the life insurance.

Discuss what percentage the premium represents of today’s lifestyle compared to the percentage reduction in lifestyle if one dies. Which cut is easier to make?

Ask client confirmation questions about benefits and drawbacks to strategy.

Lead discussion on alternative recommendations and get client to focus on characteristics of disadvantages and advantages that are key to making a decision.

5-24

Next Class

5-25

©2015, College for Financial Planning, all rights reserved.

Session 5

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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Plan Development Course