A Holistic View of Permanent Protection 

by Amy Sonstein, CPA/PFS 

Since I began my career, I have met with many clients. When I first meet new clients, I spend a good portion of my time getting to know them as they share with me their existing plans for wealth accumulation and asset building, as well as their ideas around wealth enjoyment. This conversation helps me learn about clients’ specific values, businesses and industries, family life, dreams, passions and hobbies. I also get to know my clients as people. 

Although each situation is unique, many clients’ thoughts and plans about money and finance have more than one similarity.

Patterns and Trends
When we discuss saving and investing, many clients lump both of these into the same category. Clients don’t often distinguish between short-term savings (emergency money), mid-term savings (liquid savings which would not be needed to handle a typical emergency situation), and long-term savings and investment (money designated for retirement). There are typically three scenarios:
  1. Many save modestly into short-term, more liquid accounts such as checking, savings and money market accounts. While they retain roughly three months of living expenses as an emergency fund, they have not purposefully saved into a mid-term savings vehicle.
  2. Most have been advised to immediately start investing for retirement by substantially contributing to their company-sponsored retirement plan because it is often accompanied by a matching employer contribution and considered to have tax advantages.
  3. If additional resources are available to save, invest or both, clients often want to invest in what they consider to be a well-diversified portfolio based on their personal risk tolerance, which may include many types of asset classes.

While clients save, on average, 10% to 15% of their gross income annually, the manner in which they have saved and invested over the years often has left them illiquid. As a result, they are either unprepared or underprepared to handle an emergency life event or take advantage of a financial opportunity if one becomes available. 

Another common trend revolves around protection decisions, specifically insurances. Most clients want the maximum amount of protection they can possibly own to protect their cars, homes and other property, but they do not purchase this same level of coverage on their lives. Most say it is beyond their ability to include this expenditure in their budget. As a result of this difficult balance between cost and benefit, they often only acquire the maximum level of protection they think they can afford, instead of the maximum amount of protection available to them. For example, many have purchased only enough life insurance death benefit to pay off the mortgage or send the kids to college, rather than acquiring the proper amount of coverage to fully replace the economic value that person would have provided to their family over their working years. 

As the conversation turns to retirement lifestyle and distribution strategies, I often hear new clients say, “We won’t need as much money when we retire.” Though we could analyze the validity of whether the average American will, in fact, need less money at retirement, I find that this type of thinking tends to be the result of the client’s attempt to mask or hide from the true dilemma: saving more for retirement without living less today.

As clients decide to save or invest for retirement, they are choosing to delay the gratification of spending the money they made today in favor of saving it for tomorrow. This is extremely difficult for the average American who does not have unlimited resources to both spend now and save for later. One common solution to gaining more wealth from less contribution is to increase the amount of risk associated with the types of investments being made. The client often underestimates what the increased risk truly means to the investment itself and becomes convinced that rate of return is more important than the rate of savings. 

The most common trend among clients relates to their plans for the enjoyment and eventual transfer of their wealth. The common plan involves acquiring assets over the course of their working years. Upon retirement, clients plan to live off of the interest income generated from their investments or nest egg; yet, very often, clients have no plans of spending the nest egg if they can avoid it. In essence, they will lock away the assets and only allow themselves access to interest, dividends or rental income. This style of distribution planning forces the assets to sit under a tremendous amount of pressure because they are required to perform many different functions, including providing a retirement lifetime of income and a legacy.

As clients make all these different financial decisions about saving, protection and retirement, what is commonly misunderstood is that each and every financial decision has the potential to affect the overall financial picture. Most clients look only at the immediate impact or usefulness of a product. Imagine throwing a rock in a pond. The initial splash is the individual financial decision or purchase of a product. This often creates the most notable immediate impact. However, that financial decision, much like the rock in the pond, will also create a ripple that will affect the entire financial picture. When analyzing a client’s risk management portfolio, balance sheet and income statement holistically, CPA financial planners can calculate the reciprocal impact of a financial decision and assess the effects the decision will have on the remainder of the clients’ financial life. 

Participating Whole Life Insurance
Let’s examine how a holistic view of permanent life insurance can provide a client with solutions to impact and improve on all of the planning challenges noted above. While more than one type of permanent life insurance is available in the marketplace, we’ll focus on participating whole life insurance. A participating policy provides the policy holder with the right to share in the company’s dividend, if declared by the company’s board of directors. This type of insurance also has level premiums over the life of the policy. 

Participating whole life insurance provides a unique combination of protection, wealth accumulation, liquidity and wealth preservation. It is often not considered for clients when planning for only the risk of premature death. However, when viewed through a wider lens, this product can initially serve to protect beneficiaries from the financial impact of the loss of the insured, as well as provide the client a liquid, tax advantaged vehicle that has certain guarantees. These include level premiums and cash value to save for mid-term opportunities and later provide flexibility to clients to spend their assets without jeopardizing their legacy objectives.

To be clear, participating whole life insurance should not be viewed as a substitute for other, more traditional, short-term savings strategies. Clients are often advised to maintain a short-term savings of at least six to 12 months of living expenses. The cash value of a permanent life insurance policy should be considered mid-term funds. As the insured continues to own the policy, cash value will continue to accumulate and become accessible. Many participating whole life insurance contracts have liquidity and availability of cash value as early as the second or third contract year. Clients could use this money to handle life events, such as taking advantage of an opportunity, paying for college or assisting aging parents, among various other events over the course of life.

There are often few restrictions on access to the cash value of the policy. Accessing the cash value for opportunities or other life events during the clients’ wealth building years may reduce the amount of death benefit proceeds to the beneficiaries if basis is surrendered or if policy loans are not repaid prior to death. As the adviser, you may want to consider a policy that is participating in the company’s dividend and structuring such a contract to allow dividend additions to increase death benefit when received.

Further, depending upon the insured’s medical history, a disability waiver of premium may be added at a relatively low cost, so that in the event of disability, the insurer will continue to pay the premiums for the insured. This allows the client to maintain protection and savings in the event of a disability.

If the policy were purchased from a dividend-paying mutual company, the cash value would continue to grow, as dividend additions are added to it and guaranteed cash value is credited. In addition, assuming the policy is never surrendered, the increase in cash value maintains tax advantages pursuant to IRC Sections 101a and 7702. As such, this product can allow your client to achieve both protection and savings goals within one product, as opposed to accomplishing this same task in multiple products with multiple allocations of resources. 

The presence of a guaranteed death benefit, which can be acquired only with permanent insurance, can help to facilitate a retirement lifestyle that maximizes the client’s ability to spend the nest egg without sacrificing legacy objectives. Specifically, whole life insurance that is in force throughout retirement alleviates some of the pressure on the balance sheet assets that exists when the promise to deliver cash at death is removed from the responsibility of the balance sheet. The contractual obligation of a large life insurer to pay the beneficiary upon the death of the insured can be leveraged to provide a retiree with the necessary flexibility to spend down the balance sheet assets, such as retirement and investment account holdings, during life rather than have them locked away.

As discussed, in an attempt to create certainty for themselves, many often hoard their assets on their balance sheet and attempt to pass as much of their net worth as they can. In essence, the average retiree self-insures his or her net worth by holding it in reserve and trying to spend only the income these assets produce. 

The stability and certainty that participating whole life insurance provides over the course of life allows the policy to then serve as an asset replacement tool that can compensate for the insured’s balance sheet assets after death. This could then allow the insured to fully use existing assets to produce cash flow during retirement. If structured properly, this strategy will provide the flexibility for the retiree to enjoy, rather than hoard, the assets it took a lifetime to create.

Retirement cash flow also increases through the reduction of annual income, and estate taxes may be minimized as the principal is spent down. Using gifting and trust strategies to remove the life insurance from the insured’s estate may further minimize estate tax consequences. It would no longer be critical for the client to choose between lifestyle and legacy. The client, during retirement, has access to other options to use other guaranteed products, such as single life annuity income choices, reverse mortgages and the single life option of a pension, if appropriate. Without the ability to replace a client’s wealth to his or her family at death, these types of options are less common because they create a likelihood of a reduced legacy for the spouse, other heirs or both. 

The addition of permanent life insurance to your clients’ overall plans may help them achieve many of their goals for wealth accumulation and asset protection during their working years. This insurance also can be repurposed to enable clients to enjoy more of their wealth during retirement, allowing them to improve their retirement lifestyle without sacrificing their legacy objectives.

Disclaimer: Whole Life Insurance is intended to provide death benefit protection for an individual’s entire life. With payment of the guaranteed premium, you receive a guaranteed death benefit and guaranteed cash values inside the policy. Guarantees are based on the timely payment of the required premiums and the claims paying ability of the company. Cash values may not appear and dividends may not be paid until the third policy year. Whole life cash accumulation is reduced by insurance costs, and company expenses should be considered for its long-term value. 

About the Author
Amy Sonstein, CPA/PFS, is principal of the Sonstein Financial Group, a full services financial services firm in Marlton, NJ. She was featured in a Planner CPA/PFS profile in the November/December 2013 issue and presented a webcast in 2013 on life insurance (see resources below). Contact her at amy_sonstein@glic.com.

Registered Representative and Financial Advisor of Park Avenue securities LLC (PAS), 2431 Atlantic Ave. Manasquan, NJ 08736, (732) 528-4800. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect wholly owned subsidiary of Guardian. Sonstein Financial Group is not an affiliate or subsidiary of PAS or Guardian. 
PAS is a member of FINRA, SIPC Guardian and its subsidiaries and its agents do not provide tax or legal advice.

Insurance Resources Available to PFP Section Members
The webcast, “Economics of Life Insurance” was presented by Amy Sonstein in September 2013. Among other topics, she discussed the true cost of life insurance and how the type of life insurance owned affects your clients’ retirement lifestyle. PFP members may access the audio recordings and presentation handouts in the PFP webcast library.

The 2014 Advanced PFP Conference included several sessions on insurance and retirement topics, including “Life and Disability Insurance Strategies in Live Situations” and “Retirement Income Strategies.” audio recordings and presentation materials are available in the AICPA’s online library. Registered attendees for the 2014 conference have complimentary access when they log in through the website (see instructions to access). Those who did not attend can create an account to purchase audio recordings and presentation materials.

If you haven’t visited the Insurance and Risk Management resources page on the PFP Section Web site, you should! Here, you’ll find a number of resources on all types of insurance, including publications, archives from prior webcasts and member benefits.


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