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At Fleming Financial Services, Inc., our role is to assist our clients in defining and realizing their financial objectives and goals. We work with our clients to implement personalized plans designed for their unique situations. Our areas of concentration are: Retirement planning, Estate and Wealth Transfer strategies, and Business Continuation planning. We emphasize the importance of conducting our business with integrity and professionalism. As a member of PartnersFinancial, an independent national financial services company, we are able to provide access to sophisticated resources for the benefit of our clients. Some of the professionals with our firm are currently registered to conduct business through NFP Securities, Inc. With those additional resources in place, we help facilitate the complex corporate and personal financial decisions our clients must make.
Life Insurance as an Asset
Life InsuranceAre you concerned that market fluctuations may influence the amount of wealth transferred to your beneficiaries? You are well aware that the value of an investment portfolio is subject to market fluctuations. The amount of wealth transferred to your beneficiaries is based on the value of your investment portfolio at an indeterminate point in the future. Depending on the performance of the investment portfolio, your beneficiaries may receive more or less than expected.   Is there a way to utilize life insurance to mitigate market fluctuations? By allocating a small portion of your portfolio to purchase a life insurance death benefit, you may mitigate market losses. In doing so, you may increase the amount of wealth transferred to your beneficiaries. How can life insurance mitigate market fluctuations? Life insurance is a unique asset in that the death benefit risk is borne by the life insurance carrier, which will pay the death benefit in full at the event of death no matter what the timing. As a result, life insurance can provide you with a death benefit that is uncorrelated with other sectors of the investment marketplace, such as equities or bonds. In other words, the death benefit is based on the event of death — not a market event that can cause a downturn in value. Leverage Offered by Life Insurance A life insurance death benefit offers substantial leverage during the early years of the policy. The value of the death benefit is substantially more than the value of the premiums had they been placed in an investment account (non-life insurance assets). The advantage may decrease over time if the non-life insurance assets increase in value. At some point, the value of non-life insurance assets may exceed the death benefit. The point at which this occurs is often called the “crossover” point. Life insurance offers an advantage when the crossover point occurs after your life expectancy. Leverage Advantages
  • Life insurance death benefit may offer significant leverage, especially in the early years, and may increase the amount of wealth transferred to heirs.
  • By directing a portion of your portfolio to life insurance premiums, you may mitigate against market losses.
  • Life insurance death benefit is uncorrelated with other sectors of the investment marketplace, such as equities or bonds.
  • May increase tax-adjusted internal rate of return (IRR) of your portfolio.
  • If properly owned, death benefit can be received estate and income tax free.
Considerations
  • Directing funds to life insurance premiums may reduce the return on your portfolio.
  • Potential advantage offered by life insurance needs to be viewed in light of your overall financial situation.
  • Your ability to see this plan to fruition is based on continuing premium payments, as required, as well as the claims paying ability of the underlying insurer.
  • Your total insurance capacity may be limited by financial underwriting.
  • Life insurance qualification generally requires medical and financial underwriting.
Impact on Portfolio and Wealth Transfer Hypothetical Case Study: Lily Osaka Lily’s Concerns Lily is a 65-year-old widow with a portfolio1 worth $6,000,000 that is comprised of real estate and equities. While she expects to receive a 7 percent return over time, she is concerned that her portfolio may not perform as expected and her heirs might receive substantially less than expected. Lily’s Wealth Transfer Strategy By allocating a small portion of her portfolio to purchase a life insurance death benefit, Lily may mitigate market losses and add a stabilizing element to the wealth ultimately transferred to her family (provided the policy stays in force). If Lily’s portfolio does not perform as expected, the life insurance death benefit may potentially offset the risk of underperformance. Lily’s Potential Results To address her concerns, Lily annually allocates 1 percent of her portfolio ($60,000) to purchase a life insurance death benefit of $3,030,829.2 While her portfolio is reduced by the amount of the life insurance premiums, the life insurance death benefit adds a stabilizing element to her wealth transfer strategy. Moreover, Lily may have increased the amount of wealth transferred to her beneficiaries. For example, at life expectancy (Year 18), Lily’s beneficiaries are better off by $1,195,760.3 Lily's Results Copyright © 2012 NFP. All rights reserved.    
Thomas Joseph
Other articles by: Thomas Joseph
Categories: Fleming Financial Services, Fleming Financial, Life Insurance
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