Having achieved significant financial success, clients may be reflecting on how to prepare for the retirement years, as well as on how to manage overall finances--- even their ultimate legacy that will transfer to family members, and/or a charity.
To simplify the thinking around this, it may be instructive to consider 3 planning accounts into which to place assets:
Assets required for retirement and emergencies-- and which can be liquidated-- should go in accounts #1 and #2. The balance of the assets can be thought of as legacy assets and can reside in account #3.
Let’s focus on Account #3
By repositioning a very small fraction of the income generated from Account #3 into life insurance, it is possible to both ensure a legacy for the next generation and to leave considerably more for family members, regardless of an ill-timed market correction, or insufficient time for assets to grow.
That is, the life insurance serves as a “floor” that immediately “locks-in” a legacy amount and protects the assets against early death and negative market conditions.
De-risking the legacy
How? Certain cash value life insurance policies can de-risk a portfolio. That is, the performance of certain cash value life insurance policies is not correlated to the equity, bond or real estate markets. The policy can potentially preserve the net value of the legacy, regardless of market conditions.
Converting a taxable legacy into a non-taxable one
And because the life insurance proceeds are received free of income taxes, the life insurance policy transforms a taxable legacy into a non-taxable -- potentially increasing the amount ultimately transferring to heirs significantly.
A more aggressive investment strategy for other assets may be possible
What’s more—the life insurance, when viewed as a risk management tool for an estate portfolio, may offer the opportunity for clients and their advisors to consider a slightly more aggressive strategy for the balance of the portfolio, depending on tolerance for risk and the client’s particular situation.
Take a look at how a Legacy Floor approach works by comparing a hypothetical scenario in which the value of Legacy Account #3 today is $2,000,000 growing at 3% annually. What amount do heirs receive with no Legacy Floor approach and with a Legacy Floor approach?
Note that the Legacy Floor strategy assumes assets in excess of what is required for retirement income and to cover long term care and emergencies are available.
The bottom line is a legacy Floor approach to planning yields the following powerful benefits:
