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How an Income Stream Can Fill a Legacy Bucket Strategy

The welfare and happiness of their children and grandchildren is what is most important to many of our clients. What client doesn’t want to show you pictures of their grandkids?

In fact, during the planning process, it isn’t unusual for clients to focus more on their loved ones than on themselves. When it comes to clients who have taken retirement planning seriously, you can be sure that they have a good idea what they want to leave to their heirs.  


Pouring a Portfolio Into “Buckets”

An integral part of the retirement planning process is segregating client’s assets into three distinct “buckets.” Sometimes, this segregation is done literally by creating trusts or separate accounts with the assets.

These three distinct asset “buckets” include:


» The Retirement Fund (“Bucket A”).


» The Contingency Fund (“Bucket B”).


» The Legacy Fund (“Bucket C”). 


Bucket A assets are those that are earmarked for use in retirement. During the planning process, it is important to leave enough assets for your client’s own retirement, despite their desire to leave as much as possible to their family.     

Bucket B assets are those that are not expected to be used during your client’s lifetime. These assets are set aside in the event that the client lives longer than expected, the Bucket A assets underperform or the client experiences an unexpected financial setback in retirement. For many clients, cash value life insurance with a long-term care rider is a significant component of this contingency fund.

Here are some reasons cash value life insurance with a long-term care rider can be an appropriate asset for Bucket B.


» The cash value can be used as a tax-efficient supplement to retirement income.


» The long-term care rider can be used to pay for the cost of unexpected long-term care events.


» If the cash value and long-term care rider are not used during the client’s lifetime, the life insurance policy’s death benefit will pass to heirs free of income taxes.


But what about Bucket C? What investment strategy is appropriate for assets that your client has set aside for their heirs? On one hand, clients want to maximize their legacy, and that suggests an aggressive investment strategy. But for many clients, leaving a legacy for their family is at least as important as funding their own retirement. This desire to preserve the Bucket C assets can cause the investment strategy to be overly conservative as the client focuses on conserving the Bucket C principal for the family.


The Legacy Protect Strategy

Legacy protect is a relatively simple strategy to help assure that your clients’ families will receive a legacy, regardless of how long they live or the performance of their other Bucket C assets.     

A portion of the Bucket C cash flow is reallocated into permanent life insurance. In many instances, depending on the size of the portfolio, it is possible to take as little as 1 percent, or 100 basis points, from the return on the Bucket C assets and reposition it into a permanent life insurance policy that will, in effect, serve to protect the legacy fund against unexpected fluctuations in value.

The primary purpose of the life insurance policy is its death benefit. In addition, the life insurance policy protects the legacy funds against some of the financial effects of your client’s early death. It also serves as some level of overall portfolio diversification, helping protect the legacy assets in that sense.

Some insureds and their investment professionals believe that the portfolio diversification created by including a permanent life insurance policy in Bucket C allows them to take a broader investment strategy.   


A Grandmother Plans for a Legacy

Marjorie is 55 and recently has become a grandmother. As she looks forward to her retirement and the chance to spend more time with her grandchildren, Marjorie has taken the opportunity to sit with her investment professional and discuss her financial position. With $4 million in investment assets, Marjorie and her investment professional believe that she is in good shape for retirement.  

Marjorie hopes to work another 10 to 15 years before retiring. Her employer has a 401(k) plan, which she has been funding for the past 20 years, as well as a “cash balance” pension plan. She believes that $1 million of her investment assets — which include her retirement plans plus Social Security — will provide her with a comfortable retirement. These assets are what Marjorie considers her “Bucket A” retirement fund. 

She previously purchased $500,000 of permanent life insurance with a long-term care rider. This policy is funded at the maximum non-modified endowment contract level to optimize possible supplemental retirement income from policy cash value. This policy and $1 million of investment assets make up “Bucket B,” or her contingency fund.   

This leaves Marjorie with $2 million of portfolio assets that are not expected to be needed for retirement.  Although they are not segregated formally, these are Marjorie’s “Bucket C” legacy assets. If Marjorie lives until age 87 (her life expectancy) and earns a hypothetical average return of 3 percent (net of taxes), her Bucket C assets will have grown to more than $5 million by the time of her death. Although feeling protected in retirement makes her feel comfortable, her belief that she can leave a significant legacy for her family excites her.

But how certain is this $5 million legacy that she has earmarked for her family? Although Marjorie is a healthy and active 55-year-old, good health can be fleeting. A number of her friends are already fighting serious health issues. And although she and her investment professional are assuming a modest net 3 percent growth on her investment portfolio — that is hardly a given. What’s to say that the economy won’t experience another correction? An ill-timed market correction could have a devastating impact on her anticipated legacy.

By simply repositioning less than half of the current cash flow (140 basis points), Marjorie can purchase a life insurance policy with a face amount of more than $3 million. By purchasing a life insurance policy today, Marjorie has immediately grown her Bucket C from $2 million to more than $5 million (the amount that she hopes to accumulate for heirs at life expectancy). If Marjorie lives until life expectancy, after repositioning 140 basis points to life insurance, her $2 million Bucket C will still grow to more than $3.5 million by life expectancy. 

Combining her portfolio with the face amount of the life insurance policy creates an anticipated legacy (Bucket C) at life expectancy of more than $6.5 million. In other words, Marjorie’s legacy is immediately increased by more than $3 million and, at life expectancy, the projected legacy is more than $1.5 million above what it would be without life insurance. Moreover, her investment professional suggests that life insurance is creating diversification and protection that allows the professional to help Marjorie change her investment strategy slightly — even potentially earning more on the Bucket C assets than the current assumed hypothetical 3 percent.  

Most financial professionals and their clients realize that cash value life insurance can help create a source of supplemental retirement benefits.  They also understand that a permanent life insurance policy with a long-term care rider (available at an additional cost) can help protect clients and their families from the high cost of long-term care. 

But what is often less understood is that life insurance can be a key component of a well-balanced legacy portfolio. Life insurance is the one product that is designed to protect against what is probably the top threat to clients’ achieving their legacy goals — that is, early death. Life insurance can help complete the legacy goal immediately by redirecting a portion of the investment returns to that life insurance policy.  Life insurance also can diversify the portfolio’s risk profile, and can help create confidence when investing the portfolio’s principal.



Randy L. Zipse, J.D., is vice president, AXA Advanced Markets. Randy may be contacted at [email protected]

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