A Multi-Purpose Planning Tool That Solves More Than One Problem at a Time

Today, client’s available dollars for financial planning need to go further, and life insurance products that offer a broader value proposition are a great solution. That said, solutions that try to cover multiple needs do come with some gaps.

With the myriad competing planning goals clients face, it can be easy to gravitate to a “Swiss Army Knife” product that offers death benefit protection, supplemental cash for retirement and protection against needing care later in life. However, as was pointed out in this article, clients can’t spend the same dollar twice, leaving one or more of their three planning objectives at risk when using this strategy. Fortunately, there is a low-cost way to bolster this approach by layering in a second risk management solution focused exclusively on care planning and death benefit protection.

The Dual Policy Approach to Risk Management

It all starts with a properly designed accumulation-focused permanent life insurance product, including an adequate amount of life insurance coverage, cash accumulation potential and a chronic illness benefit. The chronic illness benefit is typically a “no charge” rider that is paid for by a reduction of the net accelerated amount the client ultimately receives. This approach is a great start, but many of these products don’t include a critical illness component. Even if they did, all four of these benefits (death benefit protection, retirement income, chronic illness and critical illness coverage) come from the same pool of assets. As soon as that happens, that dollar is no longer available for any other purpose.

The solution? Create another asset. In this case, using a term insurance policy. But not just any term insurance policy. Term with living benefits.

This layered approach puts the term insurance policy in “first position” should the client experience a qualifying critical illness, meaning this policy will be used first in the event of a claim.¹ This policy is also in first position should the client develop a chronic condition later in life and need some sort of care. In either event, amounts accelerated can be used for anything the client would like, not simply for care. Critical illness benefits can offset the out-of-pocket expenses that typically come with treatments for a critical illness. Chronic illness benefits can of course be used for care, but also for modifications to a home, acquiring a new vehicle that can safely transport the client, or even travel expenses that would allow loved ones to visit the client. These benefits are never paid back. Assuming a Preferred Non-smoking male who is age 55 at policy issue and falls ill at age 70, the claim could play out as seen in Table 1, below. The life expectancy assumption in this example is 10 years. Keep in mind the client and their family could receive far more if the client’s life expectancy were shorter.