The Power of Policy

Tab 1

Just as it’s important to manage portfolio risk through diversification, it’s equally as important to manage real-life risks through insurance.


Insurance can mitigate the cost of long-term care, cushion the financial blow of a sudden death or alleviate the financial pain of liquidating an estate. Yet too often individuals plan to use their own resources to cover the cost of catastrophic financial events, exposing themselves to unnecessary peril and risking the loss of their estate’s assets in a heartbeat.


Darren Markley, Market Leader for U.S. Bank Private Wealth Management in Denver, and John Campbell, Vice President of Wealth Planning for U.S. Bank Private Wealth Management in Chicago, shared their perspective on why insurance may be essential in managing financial risk.


Why is insurance an integral part of a wealth management strategy? 


CAMPBELL: Forty percent of Americans do not own a life insurance policy1 and only one in four Americans 65 and older with a net worth of

$1 million or more owns long-term care insurance.High net worth individuals who do not own any life insurance or long-term care insurance typically plan to self-insure, using their own resources to cover the costs of long-term care and estate taxes. For these investors, it’s not a matter of whether they have the assets, it’s whether this is the best use of those resources. Self-insured investors with inadequate liquidity may need to borrow money against their assets or liquidate them when it isn’t a good time to sell.



In the event of death, executors or beneficiaries may need to sell or borrow at an inopportune time, receiving less than planned. Insurance could shift the burden to the insurance carrier.


MARKLEY: Buying insurance today at a fixed rate means you can pay 20 cents on the dollar for an asset that may prevent your estate from being depleted.


What makes traditional insurance better than self-insurance?


CAMPBELL: Life insurance is a contract that provides immediate leverage, relative to the premium spent, fully and immediately upon death. When self-insuring, however, needed funds may or may not be adequate or available depending on when death occurs and whether there has been time to accumulate needed funds. Also, under our current tax code, death benefits from life insurance are generally received income tax-free. 




Tab 2

In contrast, when self-insuring, taxes will usually need to be paid on realized investment gains as funds are accumulating. As a wealth management tool, life insurance can also be used as a structured financial instrument that is considered a non-correlated asset that provides a contractual face amount (death benefit) with a known outcome and manageable cost that is not subject to market fluctuations (depending on the type of life insurance purchased). 


Why are investors hesitant to use insurance to mitigate these risks?


MARKLEY: A lot of people have a negative connotation associated with insurance because of the way it is positioned. Insurance agents tend to sell it as a product rather than a potential solution for risk mitigation. 


CAMPBELL: Buying insurance also forces investors to wrestle with their own mortality. You have to remove emotion from the decision and think of mortality in purely financial terms — but with a view toward how best to achieve your goals with the least cost possible. Permanent life insurance is a way to reallocate assets into an “investment” bucket that can mitigate risk and help accomplish aspirational and legacy goals.





What motivates investors to change their minds?


MARKLEY: We rarely find investors who, initially, truly understand all the financial risks they face and how to mitigate them. But once we start asking them questions — “How will your heirs cover your estate taxes?” — they start to think about the best way to cover those costs. Insurance then starts to make sense. . We’ve also had clients shift their thinking about insurance after watching their parents go through a health crisis and seeing how quickly medical costs can escalate. Several clients have told me they don’t want to work their whole life just to see all their money go to medical bills.


How can insurance mitigate other risks or achieve goals?


CAMPBELL: It can provide a relatively inexpensive source of funds for beneficiaries to pay taxes on IRAs so the asset remains intact, and it can prevent the need for liquidating assets to cover estate tax costs when, because of market fluctuation and potential taxes, it may not be the best time to do so. It can also help keep a family business whole, allowing some heirs to receive cash payments while others gain control of the company without having to liquidate resources. In this way, everyone is treated equitably and family harmony is maintained.



Tab 3

MARKLEY: I see a lot of clients using insurance to support philanthropic goals. Gifting an insurance policy to a charity can have a huge financial impact for the charity. Insurance can also enable investors to be more aggressive in their investment strategies, because they don’t need to worry about covering long-term healthcare costs or estate taxes. Still, those decisions have to be part of a broader investment plan.


What advice can you offer about making insurance part of an estate planning strategy?


MARKLEY: Investors have to decide whether they are willing to self-insure against things like long-term illness or estate taxes in the event of their death and what impact that will have on their estate. If they don’t want to cover those costs, they should consider whether insurance can provide better financial leverage.


CAMPBELL: More often than not, successful people have achieved prosperity through informed choices. Notwithstanding the negative connotations often associated with life insurance, I would encourage open-mindedness and informed decision-making as it relates to life insurance. 



These are not the old types of policies their grandparents bought — because of competitive pressures and improved mortality over the years, these are newly structured financial instruments that, if designed and funded properly, provide leverage, tax-free death benefit, tax-deferred accumulation and tax-advantaged access to accumulated cash value. Investors should at least consider whether these tax-advantaged instruments fit into their wealth planning and how they can be used to enhance and preserve their wealth by providing liquidity when and where needed. 


U.S. Bank does not offer insurance products.


“2016 Insurance Barometer Study,” Life Happens® and the Life Insurance and Market Research Association

2 “Who is Covered by Private Long-Term Care Insurance,” Urban Institute, Aug. 2, 2016

Wealth Transfer , Financial Planning