Retirees and pre-retirees (ages 50-75) displayed a lack of knowledge around awareness of income in retirement, basic investment management and understanding of long-term care needs – yet those with a written retirement plan in place reported feeling more prepared to navigate the COVID-19 pandemic than their counterparts did. 

A majority of respondents are holding their financial plans steady amid the COVID-19 pandemic, yet just one in three report having a formal, written retirement plan in place. 

These findings are part of the third iteration of the Retirement Income Literacy Survey from The American College of Financial Services, testing consumers’ knowledge about retirement income concepts and focusing on the drawdown phase when Americans have limited or no ability to earn additional money through work. This year’s study expanded the scope of those surveyed to include Americans ages 50-75. 

“With a troubled economy and an acceleration of early or forced retirements, consumer understanding of retirement principles is particularly important. Yet the survey demonstrates that retirement literacy remains troublingly low,” said Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP®, Adjunct Professor of Advanced Planning and Co-Director of the Retirement Income Center at The American College of Financial Services. “Financial advisors should take heed of this situation and embrace the opportunity it provides to help Americans prepare for a successful retirement.” 

Knowledge Gap Needs to Close in Retirement Income Planning and Investment Management 

Retirement literacy in 2020 remains low overall, as was the case in The College’s 2014 and 2017 surveys, with eight in ten (81%) failing a 38-question retirement literacy quiz. In fact, the average score of the quiz was just 42%. This is further underscored by consumers’ own lack of confidence – only a third of consumers consider themselves highly knowledgeable about retirement income planning. 

Among the financial planning elements driving low scores on the quiz was consumers’ particularly low level of knowledge about preserving assets and sustaining income in retirement: 

• More than half underestimate the life expectancy of a 65-year-old man, suggesting that many do not realize how long their assets may have to last. 
• Only 32% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, suggesting most do not know how to determine a prudent withdrawal rate. 
• Only 35% know that a negative single year return in a retirement portfolio has the most significant impact on long-term retirement security if it happens at the year of retirement, suggesting a fundamental lack of knowledge about investment risk in the pre-retirement and retirement period. 

“Determining how much you can spend in retirement when you don’t know how long you will live or what market returns you will experience is complicated,” said Wade Pfau, PhD, CFA, RICP®, Professor of Retirement Income, RICP® Program Director, and Co-Director of the Retirement Income Center at The American College of Financial Services. “Unfortunately the task is even harder for Americans who do not recognize how to properly evaluate these risks in the first place, and who do not understand the lasting impact of a market downturn in the early years of retirement. The survey demonstrates that these retirees don’t fully understand the consequences a bad market can have on their long-term retirement prospects.” 

Consumers also displayed a significant lack of knowledge when it comes to understanding investments, despite the fact that a majority self-report that they are at least moderately knowledgeable about investment management. 

• Just 26% understand that the value of bonds and bond funds falls as interest rates rise. 
• Just 28% know that actively managed mutual funds have higher fees than ETFs. 
• Only 18% know that B-rated corporate bonds have higher yield than AAA corporate bonds or treasury bonds. 

Long-Term Care is an Afterthought Leaving Many Unprepared 

The survey found that only three in ten (31%) have a plan in place for how to fund long-term care needs and only one in four (23%) have some sort of long-term care insurance coverage. Very worrying is the fact that most older Americans are split on whether they will even need long-term care insurance in the future: 

• Half (50%) say it is at least somewhat likely they will need long-term care services in the future. Only 8% consider it very likely that they will ever experience a long-term care need, even though the reality is that 70% will. 
• 52% of respondents have not looked into long-term care insurance at all. 
• Just 25% know that family members provide the majority of long-term care services nationally, which is concerning as 70% of respondents do not expect their family members to provide the care, highlighting a disconnect in the planning process. 

“The story coming from the data suggests that people underestimate their life expectancy – and what’s more, assume they will be healthy for the entirety of their life,” said Timi Jorgensen, Assistant Professor and Director of Financial Literacy at The American College of Financial Services. “Advisors can help with long-term care conversations, and they can work with clients to make a plan on when and how to have these crucial discussions with family about the likelihood of healthcare needs.” 

COVID-19 Preparedness: Better with a Written Plan 

Nearly four in ten (39%) consumers reported feeling highly prepared for the market downturn associated with the pandemic. Interestingly, what made a difference in consumers’ perception of preparedness for the crisis was having a formal, written retirement plan: 

• Those with a written retirement plan (47% vs. 35% of those without) or a retirement income plan (43% vs. 22%) reported feeling more prepared to deal with the market downturn. 
• Yet only one in three (33%) respondents report having a written plan. 

While many felt prepared, the pandemic has shifted the mindset of many investors. Four in ten (39%) say they now feel less comfortable taking investment risk. Only 8% say they’ve adjusted their allocations to be more conservative, but a realignment of risk tolerance is noteworthy. More than half (54%) of consumers said they are holding their financial plans steady. 

“A bottom-line conclusion from this survey is that until the plan is written, it isn’t real. And the pandemic showed that those with a real plan are in better shape to grapple with forced financial changes,” said Parrish. “We are in an environment where people are coming into retirement, sometimes faster than expected, without an approach to converting their pot of money into a stream of income, and yet they are looking at increased life expectancy, increased risk of a long-term care event, and decreased prospects of having their needs covered by Social Security and employer plans. This is a clarion call for financial advisors to help their clients increase financial literacy and, together, craft a plan for a successful retirement.”

STUDY METHODOLOGY 

The American College of Financial Services commissioned Greenwald & Associates for the study. Respondents were asked a number of knowledge, behavior, and attitudinal questions to assess retirement literacy among individuals who are approaching or already in retirement. Information for this study was gathered through online interviews with over 1,500 Americans conducted between April 29 – May 18, 2020. To qualify for participation in the study, respondents had to be ages 50-75 and have at least $100,000 in household assets, not including their primary residence. 

ABOUT THE AMERICAN COLLEGE OF FINANCIAL SERVICES 

Founded in 1927, The American College of Financial Services is the nation’s largest nonprofit educational institution devoted to financial services professionals. Holding the highest level of academic accreditation, The College has educated over 200,000 professionals across the United States through certificate, designation, and graduate degree programs. Its portfolio of applied knowledge also includes just-in-time learning and consumer financial education programs. The College’s faculty represents some of the foremost thought leaders in the financial services industry. Visit TheAmericanCollege.edu and connect with us on LinkedIn, Twitter, Instagram, Facebook, and YouTube. Discover all the ways you can expand your opportunities with us.

If you’ve put saving for retirement on the back burner, here is some good news: It’s never too late to start. And it’s never too early, either. 

There are reasons why retirement planning is a touchy subject. In Northwestern Mutual’s most recent Planning & Progress Study, an annual survey of national attitudes and behaviors about money, they found that 22% of Americans have less than $5,000 in retirement savings, and 15% have no savings at all. That’s actually an improvement from the previous year. 

But this isn’t about guilt trips or alarm bells. This is about starting or improving your retirement strategy so you will be financially set for the long term. 

While strategies will change depending on your situation, retirement planning is all about looking to the future. For that, there’s no better time than the present. 

Why it’s never too late 

If you’re in your 50s and don’t like what you see in your retirement account, consider these course-correcting steps. 

1. Make your 401(k) your savings priority. If your employer offers a 401(k) or 403 (b) plan, participate, or up your participation if you’re already involved. If there’s an employer matching contribution, try to contribute up to that amount. Matching contributions are meant to incentivize savings, so take advantage: It’s free money in your pocket (actually, in your retirement savings account). And because your contributions are pre-tax, you'll see additional benefits when tax season arrives. 
2. Take advantage of the IRS catch-up contribution. Believe it or not, the IRS is on your side, at least when it comes to your retirement. The annual limit for tax-free contributions to 401(k) and similar plans was raised to $19,500, and those over 50 can contribute an additional $6,500, up from $6,000 in 2019. Those 50 and older can also make an extra $1,000 tax-free IRA contribution on top of the $6,000 annual cap. See the IRS website for specific catch-up contribution details. 
3. Consider extending work and delaying Social Security. If you always envisioned retiring at a certain age — say 65 — it may be worth rethinking that. Start positioning yourself now for work you would enjoy doing for a few years after your current job. Retired workers are increasingly valued as consultants and mentors. If that interests you, lay the groundwork now. At the same time, consider delaying taking your Social Security benefits. Every year you delay until age 70, your benefits increase by 8%. If you do take on a “post-career” job, you may find that 8% ROI enticing and doable. 
4. Rethink your financial commitments. This may be difficult, especially when it involves those close to you. For example, you may have always intended to pay for your child’s college education. But, the truth is, your children have a lifetime to pay off (a reasonable amount of) student loans; your timeframe for retirement security is a lot shorter. Some more good news: There’s currently a lot of discussion about college affordability and free tuition, which could help make this decision easier. 

Why it’s never too early 

It’s tempting to think that younger generations have it “easier” when it comes to retirement savings. Time is certainly on your side if you’re in your 20s. But that luxury can also be a disadvantage if it leads to procrastination. Instead, keep these guidelines in mind. 

1. Get in the habit. Most of us are creatures of habit. The challenge is to develop more good ones than bad ones. If you get in the habit of saving for retirement early on, you’ll increase the chances that you’ll stick with it throughout your working life. As with older investors, take advantage of 401(k) plans and employer matching contributions. With your longer investment window, you’ll benefit from the compound interest — interest on top of interest — that can turn modest lifetime savings into a secure retirement nest egg: Annual savings of $4,500 over a 45-year career can turn into $1 million in retirement. With an employer match, you could save as little as $2,250 a year to reach that goal. 
2. Make it automatic. Use automatic payroll deduction to support your good habit: If you don’t see the money, you won’t miss it. At the same time, add to your retirement contributions as your salary increases, a benefit to your retirement and your tax bill. 
3. Reassess your investments. Regular, automated investing isn’t the same thing as neglected investing. Being a life-long investor means that your life circumstances will change, and your financial priorities and risk tolerance will change along with it. Set up regular intervals to make sure that the investments you have match your goals and situation. Consider engaging a financial advisor as your wealth increases. 
4. Resist temptation. One downside of investing early is that there will be more instances where you’ll be tempted to use your retirement savings for some other purpose. There may be severe cases where that becomes necessary. In all other cases, just say no. 

Why you should start now 

Because something made you read this post, and you’re older now than when you started reading it. 

Because you deserve a great life in retirement. 

Because it won’t be any easier tomorrow. 

If you need additional motivation, consider contacting an advisor who specializes in retirement planning. Like working with a personal trainer, the support of a professional can be what we need to get us to where we want to go. 

This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.

To paraphrase the immortal Yogi Berra, “It’s tough to make predictions, especially about the future.” 

Investing in your retirement requires you to not only predict the future but to make financial decisions based on those predictions. How can you make the most informed decisions about your long-term financial needs, regardless of your age or when you plan to retire? 

One common way is to use free online retirement calculator tools. Unfortunately, some of these tools are hosted by financial investment firms looking to promote their services. If you prefer to avoid that, use calculators provided by organizations like AARP. But even the best calculators have their drawbacks because, despite being a good way to get you thinking about what you need — and what you might need to do differently now to get there — they’re based on general data and the law of averages, not on you. 

To get a better sense of your retirement, go beyond the numbers and get to the fundamentals. 

Focus on the constants 

You may not know everything about what you’ll need in retirement, but you’ll need to cover the basics, so start there. 

• Housing. Here’s where knowing your preferences can help you get more specific with your projections. If you’re a homeowner who plans to age in place, will your mortgage be paid off when you retire? If so, that’s great; just remember to account for ongoing maintenance, insurance costs, and property taxes. Consider modifying your home as necessary now while you have a regular income, or downsizing to a more manageable — and less expensive — house. 

Retirement communities are another option. Choices range from individual apartment living to 24/7 care in a skilled nursing setting, and costs vary just as widely. If this is your picture of retirement, price options in your desired location. In a best-case scenario, the money you get from selling your home can cover a significant portion of your future housing costs. 

• Healthcare. According to the Employee Benefit Research Institute, health spending constitutes 8% of expenses for those aged 50 to 64, a figure that rises to 11% for those over 75. It’s essential to account for that increased spending. If you’re currently enrolled in a plan through work, find out what happens when you retire. You may have options to continue with the group plan, or you may have worked at your job long enough to become vested in certain benefits. 

All Americans are eligible for Medicare when they turn 65. Unless you’re getting Social Security, you need to enroll at that age. Medicare will cover about half of your healthcare costs. You’ll need to supplement the plan with private coverage or with the public Part C or Part D. Research the program at medicare.gov and explore the available options and costs. 

Factor in geography 

Certain parts of the country will be more expensive retirement destinations than others. You’ll need more money to retire in San Francisco than you will in Duluth. 

There are factors to consider beyond the obvious cost-of-living items like housing. For example, some states tax Social Security benefits. Check out property taxes and see if any programs exist for homeowners over 65. If you have a sizable estate, be aware that six states currently collect an inheritance tax and 12 collect estate taxes. Because some exemptions apply, it’s worth researching your intended location to learn how these costs could impact you and your family. 

Play the percentages 

Let’s face it: One of the reasons retirement planning is difficult to talk about is because it forces us to think about the other inevitable thing in life besides taxes. But having a reasonable sense of your life expectancy can help you avoid the two major retirement nightmares — running out of money or cutting corners unnecessarily. 

The good news is that people who reach retirement age can expect to live longer. According to the Social Security Administration, men and women who reach age 65 live to ages 84 and 86.5, respectively. With one in three 65-year-olds living past 90 — and one in seven past 95 — a third of your life could be in retirement. 

Balance those odds with your personal health and family history. If you’re married, talk with your spouse about their expectations. If you or your spouse are dealing with an ongoing medical condition, you may want to include long-term care insurance in your retirement plan. 

The good news is, you don’t have to do all this planning alone. Consider talking with a financial advisor who has expertise in retirement planning. After all, these are meant to be your golden years, and you’ve worked hard to make them that way. 

This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.

However, while the benefits you’ve earned are guaranteed, not everyone gets the same amount — and you can make choices that either increase or decrease how much you receive and when you receive it. 

To make good choices with your Social Security, you first need to understand how Social Security works. Specifically, it’s important to know that the benefits are progressive. That means, if you’ve earned less than the national average throughout your career, you will have more of your earnings replaced by Social Security. If you’ve earned more than the national average, you’ll have less replaced. In general, lower-wage workers can expect to have about half of their earnings replaced, while higher-wage workers can expect to have a quarter or less of their earnings replaced. 

As of 2020, the average monthly benefit was around $1,503. A cost-of-living adjustment routinely raises benefit payments by small amounts, with payments rising by 2.8% (an average of $40 more a month) heading into 2019 and 1.6% (an average of $24 more a month) heading into 2020. You can expect the average monthly benefit to be higher when you retire than it is now, but the exact amount you receive will be determined by more than cost-of-living increases and your lifetime earnings. It will also be determined by when you start claiming benefits — and that’s where the decision-making comes into play. 

Claiming Benefits 

Early If you want, you can start claiming your Social Security benefits as early as age 62. For some, this may be a necessity due to life circumstances. But, for most, claiming early is not a good idea. If you claim at 62, you’ll only receive 75% of your monthly benefit, and this percentage will never go up, no matter how long you live. The only increases you’ll receive will be cost-of-living adjustments. To avoid this penalty and receive 100% of your monthly benefit, you’ll need to wait until you’re older. 

Receiving 100% of Your Monthly Benefit 

You may have heard that the retirement age is 65. While you’re certainly free to retire whenever you choose, 65 is no longer the age when you can claim 100% of your monthly benefit — and hasn’t been for a while. 

For those born between 1943–1954, the age at which they can claim 100% of their monthly benefits is 66. The last of this group will reach that age in 2020. After that, the age at which someone can claim 100% of their monthly benefit will slowly rise, eventually hitting age 67 for those born in 1960 or later. 

Will that age rise again? That’s impossible to predict, but it could definitely happen. So, if you were born after 1960, you’ll want to pay attention to any future changes. 

Deferring Benefits to Age 70 

For many, holding off on claiming Social Security until age 70 is a smart idea. That’s because, for each year you wait beyond the age you can receive 100% of your benefits, you’ll get an extra 8% per year for the rest of your life. 

This is a great benefit. What other way can you increase your guaranteed yearly retirement earnings by 24%–32%? To see how this deferment can add up for you, check out the Social Security Administration’s benefits calculator. 

The only risk in deferment is the possibility that you won’t live until age 70, or won’t live long enough past 70 to make the increase in yearly benefits a net gain. Currently, the average life expectancy for a U.S. woman is 81.4 and the average for a man is 76.3. However, those life expectancies are calculated at birth and include those who die young. According to the Social Security Administration, a man who turns 65 today is likely to live until 84, while a woman who turns 65 today is likely to live until 86. 

When determining if deferring your benefits makes sense, you’ll want to calculate your break-even date (i.e., the date when the total amount you’ll earn by deferring surpasses the total amount you would have earned if you started claiming your benefit earlier). Then, consider your health, family history, and any other factor that might affect your longevity. For most who reach retirement age, deferring pays off in the long run. 

Considerations for Married Couples 

If you’re married, your spouse’s benefits can become your benefits on the occasion of their death. While considering the death of a spouse is not pleasant, it is an important part of a strong social security claiming strategy. 

As long as both you and your spouse are alive and of retirement age, you’ll each collect your own individual Social Security benefit, beginning at the age of your choosing. If one of you passes away, the surviving spouse will receive the highest of the two monthly benefits. Meaning, if a wife is receiving more in Social Security than her husband, the husband will start receiving her benefit (and his will stop) if she dies. If one spouse never qualified for any benefit of their own, they will begin receiving half of their spouse’s benefit on the occasion of the spouse’s death. 

When deciding on when to start claiming your Social Security, you should take your spouse’s Social Security benefit into consideration. For many couples, it makes sense to defer the benefit of the spouse who will receive a higher amount. That way, whoever lives longest will be guaranteed the deferment bonus for the rest of their lives. 

Of course, making these choices aren’t necessarily easy. And while the Social Security Administration can answer a lot of questions, they are not allowed to help you put together a strategy to maximize your lifetime benefits. For that, you may want to consider a financial advisor with retirement earnings expertise. Social Security is too important to ignore. 

This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.

Did you finance your home, or did you purchase outright with cash? Leverage (loans) works best to purchase appreciating assets like houses or income producing business assets instead of paying cash. 

Do you realize that nearly all private equity and hedge funds use low cost leverage to increase investment returns? Would you like to get $3 to $1 match on your savings contributions? You can! We show you how to thoughtfully increase your retirement savings contributions! Thoughtful Advisors partners with a specialized provider for individuals or households earning $100,000 or more per year. We bring Wall Street finance ethically to Main Street USA. If you could create up to 60% - 100% more income (than you could save on your own) for retirement AND immediately improve the financial security of your family, would you want to learn how? 

What is TTFI? 

TTFI is available to individuals or as a non-qualified employee benefit. It allows clients to maximize their savings dollars with the opportunity for pension-like recurring tax-free cash flow in retirement. TTFI overcomes traditional retirement issues that limit successful savings:

1. Limits on annual contributions 
2. Large contributions are simply unmanageable for many successful earners until they reach their fifties or sixties 
3. Investment market corrections and crashes impair overall returns 

Our $3 to $1 match makes the most of your savings dollars. It creates a larger savings amount that compounds so you can make up for lost time. It provides market gains without market losses. Compounding rates of returns are more efficient with downside loss floor protection.

How It Works 

Client or employee funds five annual payments to their plan. Those payments are combined with low-cost non-recourse bank financing that adds approximately 75% more to the contributions. Low-cost overfunded life insurance policy is the sole security for the loan. Non-recourse loan means the client, employee or business does not sign loan documents and has no responsibility for the loan. Thoughtfully combining low-cost bank financing with top-rated low commission insurance companies and proprietary insurance contracts, provides a much higher probability of achieving savings goals ahead of schedule, while also protecting against the “what if’s” that happen in life. 

Bottom Line…TTFI Provides: 

• More Money - substantially more tax-advantaged income for retirement years 
• More Protection - if something happens unexpectedly to interrupt savings contributions 
• More Confidence - that your retirement cash flow survives economic downturns 

Next Steps 

Contact Gary LoDuca at Thoughtful Advisors by calling 813 251-2600 or email thinking@thoughtfuladvisors.com to learn how to improve the financial security of employees or individuals and how much tax-free income could be added to retirement cash flow using this unique non-qualified retirement plan solution.

This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.

In recent meetings, I’ve been discussing new dimensions in estate planning. Legal, tax, financial, and societal changes necessitate a fresh look at this planning, and a key new consideration is how we look at, and utilize, life insurance. I’ve posited the idea that we should stop talking about the irrevocable life insurance trust (ILIT) as an estate planning solution, and instead look at it as one of many ways of implementing a life insurance strategy. Instead of assuming the use of an ILIT, I suggest a new approach to life insurance planning I call the wealth conservation and protection plan (W-CAP). A W-CAP is a simple estate planning methodology designed to preserve the client’s estate both while alive and at death. Life insurance is the underlying product used in the W-CAP approach, but the policy can be used in a variety of ways. As will be discussed, an ILIT is certainly one strategy for owning the life insurance policy, but it’s not the only ownership approach. 

Estate Planning Challenges with ILITs 

In the estate planning community, there has been some hand-wringing over the wisdom of some life insurance policies that were placed in ILITs. The debate was brought to the fore by the estate tax changes encompassed in the Tax Cuts and Jobs Act of 2017 (TCJA). Now that the individual estate tax exemption is an inflation-adjusted $11.20 million (at least until 2026), clients are asking why they can’t access the life insurance policies trapped in their trusts, and why they even need the life insurance in the first place. This is leading to requests for judicial reform of trusts, trust decanting, and even lapsing of trust-owned policies. 

Even before the TCJA, there was grumbling about ILITs. What I refer to as the “TOLI terrors” have been afflicting estate planning attorneys and corporate trustees for years. These advisors are concerned that trust-owned life insurance policies (TOLIs) aren’t performing as advertised. The policies need either more premiums than illustrated, a reduction in death benefit, or a reallocation of the underlying investment portfolio. For some trustees and/or attorneys, these troubled policies represent a source of potential fiduciary liability. Compounding the challenge is that it is difficult to explain to the client why more premiums are needed, while at the same time, the values in the insurance policy aren’t available for retirement income or to help with long-term care (LTC) expenses. Under current circumstances, the client may be more concerned with lifetime liquidity than possible estate taxes. Simply put, some ILITs are under fire both as to their utility and their risk. 

While we can question some of the histrionics we’ve seen from ILIT detractors, the underlying causes are understandable. Politicians have made such a big issue out of the “death tax” that prosperous individuals and families have gone to extremes to avoid the federal estate tax. There is little doubt that when transfer taxes are involved, ILITs are one of the best tried-and-true techniques for lowering the financial sting of these taxes. But now that estate taxes threaten a significantly smaller slice of the population, people are asking “why bother with an ILIT?” The technique severely limits the use of the life insurance policy for anything other than post-mortem needs, and it takes away the flexibility that is an otherwise positive aspect of the life insurance contract. 

A Different Approach 

So let’s take the debate off the table by approaching the issue from a different perspective. Let’s instead agree that in the estate planning context, life insurance is primarily a wealth conservation and protection tool. First, it helps conserve an estate by providing liquidity to pay taxes, pay debts, and fulfill family and business needs of the insured. Second, it helps protect an estate by offering a predictable and liquid source of capital when needed. As a non-correlated asset, it is available to shelter the estate from losses due to morbidity, mortality, and down markets. Further, if the life insurance has cash values, it can conserve and protect wealth whether that need occurs during life or at death. 

The question is how to choose and position the life insurance so as to maximize the advantages of the product in the client’s particular planning context. A Ferrari is a great car, but not if the buyer wants to use it for off-roading. A car lease works well as a financing strategy for a business owner, but may not be a good fit for a family wanting to buy a car for the long term. Choosing and positioning the product makes a difference in the value-add of the purchase. 

Consider how a life insurance policy can be chosen. Just like a car purchase, the consumer expects standard features but may desire certain add-ons to fit his or her unique situation. What are the standard features that every life insurance policy should have? Presumably the policy should provide an income-tax-free, liquid death benefit that is issued by an insurer with a solid financial rating. The policy should comply with both state and federal laws, and include standard nonforfeiture provisions. There may also be an expectation that the policy has features commonly enjoyed in modern-day insurance contracts such as a terminal-illness provision. Beyond these standard features, the advisor can both help the customer choose additional options, and determine an appropriate ownership strategy. 

What add-on features apply? It depends on the customer. I recall a car salesperson who fixated on the maximum speed of a proposed car. She was oblivious to the fact that I did not have the need for speed. This same dealer also lauded the manufacturer’s financing discount, even though I had indicated I intended to pay in cash. Similarly, the life insurance purchaser may not need, or want to pay for, features in a policy that will likely never be utilized. And even though there is a special way to position ownership of the policy, it may be moot if that particular purchaser obtains no benefit from the technique. Life insurance policies offer a myriad of riders and features, but their value depends on the client’s planning requirements. Why pay for disability waiver-of-premium when the insured is retired? Why purchase a policy with a chronic illness rider when the policy is going to reside in an ILIT? Conversely, why put the policy in an ILIT if the likelihood of incurring an estate tax is nil? 

Sometimes features and techniques with life insurance are solutions looking for a problem to solve. It’s time to change the order of the process. Particularly in the fast-changing world of estate planning, it’s time to take a new approach to planning with life insurance. 

W-CAP 

The W-CAP concept is specifically focused on the use of life insurance in estate planning. It uses life insurance to conserve and protect family wealth, whether during life or at death. The key feature of the W-CAP concept is it recognizes multiple estate planning uses for life insurance. It’s not just about estate taxes. So, while an ILIT is the primary ownership approach for avoiding estate taxes, it is not a useful approach in, for example, providing lifetime access or liquidity. In these situations, there are other ownership approaches for life insurance, including having the policy owned by the insured, a revocable trust, the spouse, or the children. These approaches may be better ways to conserve and protect a particular estate. 

The W-CAP’s four-step process focuses on what are the most important uses for the life insurance in the estate plan, and then places the ownership of the policy accordingly. 

STEP 1 

What estate planning needs is the policy primarily intended to address? Recognizing that rarely can all needs be fulfilled with one policy, part of the W-CAP process is it prioritizes the top two or three needs. Below are some of the more common needs that a life insurance policy can address, although there are certainly others: 

• Liquidity at death to pay estate taxes 
• Liquidity at death for other needs, such as a buy-sell agreement, survivor income, etc. 
• Liquidity during life for events such as long-term care or chronic illness 
• Avoiding estate and gift taxes on the death benefit 
• Avoiding income taxes on distributions of wealth Inheritance equalization 
• Creditor protection 

STEP 2 

• Once the estate planning needs for a policy have been determined and prioritized, determine which life insurance policy features are most important for addressing these needs. Below are some sample policy features that may apply: 
• Survivor-life death benefit (versus a single life policy) 
• Policy cash values in a permanent life insurance policy LTC or chronic illness riders 
• Auto-loan, reduced paid-up riders, or other anti-lapse features 
• Fixed death benefit to provide an uncorrelated asset for the estate 
• A variable death benefit to reflect market changes 
• The ability to switch between an increasing death benefit and a level death benefit Insurance company one-year term rates to use in lieu of Table 2001 rates (to accommodate split-dollar funding) 

STEP 3 

Choose the life insurance policy that best matches up the policy features (Step 2) with the primary estate planning priorities (Step 1). In other words, select a policy with provisions that can most effectively fulfill the top estate planning goals for the life insurance. This is an area where the advice of a life insurance professional is particularly important. 

STEP 4

Determine the appropriate ownership structure for the policy that will most effectively conserve and protect the estate. In estate planning, the primary ownership structures for life insurance are the following: 

• Ownership by the insured or the insured’s living trust 
• Ownership by an ILIT 
• Ownership by family members, such as the spouse or children 

Two Examples

The point of the W-CAP approach is that life insurance in estate planning is focused on conserving and protecting an estate. An LTC rider may or may not be needed; a trust may or not be required—it all depends on the needs of the client. Using the four steps above will help both determine the appropriate insurance product, and select an ownership strategy to fulfill the primary planning needs. Consider the following two examples of the use of the W-CAP approach. One is in a high-net-worth family situation, and the other involves a more moderate estate. 

SCENARIO 1 

Ruby, a widow who has a $20 million estate, has three children and five grandchildren. She recently gifted her profitable business to her daughter, the one child who is active in the business. Ruby wants to make sure the other children are also provided for. Ruby’s advisor has warned her about the likelihood of estate taxes, and has suggested life insurance as a means of accomplishing her estate planning goals. Applying the W-CAP approach, she arrives at the following estate planning strategy: 

1. Ruby’s primary concern is being able to create inheritance equalization. Since she has given the business to her one daughter, she wants to provide a comparable inheritance to her other children. Because of her wealth, though, she has another pressing concern—having sufficient liquidity for her estate to pay an expected estate tax. 
2. In order to accomplish her two primary goals, Ruby needs a large life insurance policy. The death proceeds can provide both an inheritance to the two nonbusiness children and a fund to pay the estate tax. Since there’s no way to know when Ruby will die, a large, fixed-death-benefit life insurance policy will provide an uncorrelated asset that is available exactly when needed, irrespective of where the market is at that time. 
3. Ruby has significant wealth, and her need for life insurance is permanent. She chooses to utilize a single life universal life policy. The premium payments will be enough to guarantee a fixed death benefit. 
4. The policy will be applied for, and owned by, an ILIT. At Ruby’s death, the ILIT receives the proceeds, and uses them for two purposes. First, it will pay out inheritances to the two intended children; and second, it will provide liquidity to lend money to, or buy assets from, the estate. This will give the estate the liquidity it needs to pay the estate tax without having the policy proceeds included in the gross estate. 

SCENARIO 2 

Francie and Bob have a projected $3 million estate, and they want to make sure that if they’re not around, their special-needs adult child will be cared for. The couple has completed their financial planning in anticipation of an eventual retirement, and part of their plan has identified estate planning needs. An advisor has suggested life insurance to help with several of their planning needs. Applying the W-CAP approach, the life insurance strategy used for this couple is quite different than for Ruby.

1. Francie and Bob are primarily concerned with providing liquidity for their child, but they want to do it in a manner that qualifies their child for continued government programs and benefits. They are, however, also concerned with the possible adverse effect on their estate plan if one or both of them are confined to a long-term care facility for an extensive period. They do not want their estates exhausted by the expenses of a long-term care incident.
2. This couple’s liquidity need can occur at either death or upon a long-term care event. Further, because the policy will require cash values to accomplish their long-term care need, the insurance product should include features that provide both guarantees and upside potential. Cash value growth is a core consideration in choosing the policy. 
3. Francie and Bob decide to each purchase an individual indexed universal life policy with a long-term care rider. They will use some of their ongoing wages to “overfund” their policies, with the intent that policy premiums will no longer be required after they retire. These policies will provide liquidity in the event of either a death or long-term care event, thereby accomplishing both of their top priorities. 
4. In order to access the long-term care benefits that may be payable, they will own their life insurance policies individually. Since estate taxes are not likely an issue for them, the individual ownership strategy works better than an ILIT to conserve and protect their estates. The primary beneficiary of each policy will be the surviving spouse. If that spouse predeceases the insured, the proceeds will be payable to a special needs trust for the benefit of their child. 

The W-CAP,  Justified 

In both of the above scenarios, the W-CAP helped identify needs, create a solution, and apply a strategy for implementation. There is nothing magical about the W-CAP approach. It is simply a disciplined way to do life insurance planning in an estate planning environment. It puts the need before the solution, and the solution before the ownership strategy. 

An added advantage of a W-CAP is that where an ILIT is actually needed, the process helps justify the concept’s use. Those attorneys who have “TOLI terrors” will more likely buy in to an ILIT structure when they realize it addresses the client’s primary goals. Hence with Ruby from scenario 1, the W-CAP process helped position the legitimate need for an ILIT to own the policy. Conversely, a W-CAP helps avoid the overzealous use of the ILIT structure where estate taxes are not in play. With Francie and Bob in scenario 2, the process helped identify suitable products and then place them in an appropriate ownership position. 

This post was originally published in the Journal of Financial Service Professionals 73, No.2 (2019): 32-36, copyright 2019, Society of Financial Service Professionals. 

Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP®, is the co-director for the New York Life Center for Retirement Income Planning at The American College of Financial Services. He is also an adjunct professor at both The American College and Drake University Law School.