Death benefits may be the most commonly associated feature of life insurance, for both financial advisors and clients. However, there are many benefits of life insurance that clients can take advantage of now. Advisors should have the life insurance conversation with their clients so that they have the opportunity to take advantage of the benefits while they’re alive.
These benefits are typically associated with permanent life insurance, including whole life, universal life and variable life. Most of these types of policies generate cash value on a tax-deferred basis, which is a huge plus for forward-thinking clients who are concerned about their way of life years down the road.
Cash value is a huge living benefit of life insurance, allowing clients to build their assets while alive, then using them to pay for large items, such as a home, education for children, a retirement fund for when they’re older or an emergency fund for life’s unexpected events.
There’s a major perk financial advisors should touch on when trying to sell life insurance to younger consumers: The earlier they buy insurance, the cheaper that coverage will most likely be. Of course, younger people can be unhealthy, but they generally are healthier than their older counterparts and carry less risk of serious illness or death.
Brush up on fees and implications
While most financial advisors realize the protection offered by the living benefits of life insurance, they should keep in mind that they should educate clients about the fees and implications associated with coverage. Making sure they are aware of the pros and possible cons can ensure they’ll remain happy and loyal consumers in the future.
For one, premiums for permanent insurance are higher, mostly because they likely will provide clients death benefits until the end of their life, but also due to accessible cash values that builds up over time. On the other hand, increasing term insurance costs as a client gets older typically means that permanent life insurance coverage may be less expensive than term over the long run.
In addition, while cash value is a huge living benefit of life insurance, agents should remind potential consumers that taking out that cash to pay for a wedding, education or retirement likely may reduce the death benefit paid to beneficiaries down the road. Also, in certain situations, policyholders may be subject to early withdrawal penalties for taking out cash value in addition being subject to income tax.
Another common living benefit of life insurance that advisors should let potential consumers know about is the ability to borrow money from the issuer using policy values as collateral. These loans are typically subject to varying interest, and the amount a consumer can borrow is based on the value of the policy’s cash-accumulation account and the contract’s terms.
Life insurance policyholders also have the option of selling their coverage to a third party – either another client or a life settlement company for more than the cash-surrender value, which is typically only 3 to 5 percent of the policy’s face value. This move is typically only opted for by older clients who decide that the policy they once deemed necessary doesn’t meet their needs as they age.
Editor’s Note: This post was originally published in March 2014 and has been reviewed and updated.