World War II ends and the U.S. embarks on the largest baby boom in the history of the world. "The Greatest Generation," as they have come to be known, begins its greatest journey of life and parenthood. The "baby boomer" is born and America is changed forever.
Leaving discussions of the boomers as a group to others, our focus is on three siblings born to this generation and how the life insurance industry has served them -- and should continue to do so -- to make sure they leave this life with the dignity they deserve.
In a town outside Boston, a local doctor had three children -- George, then Paul, and finally, Denise. The doctor was typical of his generation -- a person of simple tastes and fiscally very conservative. Having grown up in very difficult times, his mandate in life was to make sure his children received the finest possible education.
George's story
The eldest child, George, followed his father into the practice of medicine and, in time, became a world-renowned surgeon. In his practice, he developed his own medical devices and started a medical device company, which became quite successful.
Like his father, George provided his five children with the finest education possible. Two followed him into medicine. Another went to business school and took over the family's medical device business. One went into teaching, and her benefactor father made sure her lifestyle remained unchanged and very comfortable.
His fifth child, going in a different direction, went into business for himself. Unlike George's childhood, which was fraught with thrift and hard work, his children's was one of luxury, quite different from the sacrifices experienced by many other children of boomers.
Without question, George is every advisor's dream client: A rich, devoted family man concerned about making sure his children and spouse are well cared for. He purchased a typical, large insurance policy for wealth replacement early in his career, along with good disability coverage for the "just in case" scenario. He also covered his wife with a term life policy, just in case something should happen while the kids were young, to assist with replacing her value to the household.
Now, flash forward. George is in his 60s. His kids are grown and still receiving income from the family coffers in the form of stock from the family business. Everybody is happy. His advisor suggests that he establish an Irrevocable Life Insurance Trust (ILIT) for estate planning purposes. "Let's leverage your money and pay Uncle Sam with discounted dollars as you have more than you will ever need," says the planner.
Flash forward again, this time to the largest stock market correction and one of the largest real estate bubbles in modern history. Round this out with the biggest banking failure since the Great Depression, and we now have a very different client with very special needs.
George's daughter, the teacher, is now divorced and has moved home to mom and dad, along with her three kids. The value of George's business has eroded significantly. With all the gifting, their share balance and income have dropped to the point where they are concerned if they can maintain their lifestyle and still continue to support their daughter's young family.
Today, George is not only faced with providing family wealth for the next generation, but, more importantly, he is concerned with how he and his wife will maintain their lifestyle. They have leveraged their assets to make sure they don't find themselves relying on their children to take care of them in their final years, the most expensive time of one's life, according to government studies.
The first concern is how they can take care of themselves today, while using their wealth to provide leverage for their final years. There are many life insurance options available that offer a death benefit and long-term care packaged together. Some annuity products also have long-term care riders available and should be considered as a planning option; however, they do not have the same tax advantages at death as life products.
In looking at how to both pass on and create wealth for their children, the ILIT continues to serve as a useful tool. The issue with using an ILIT is concern with cash flow to the trust and the potential need to have access to the cash.
One way to fund an ILIT is to look at the insurance product used and what happens to the cash value in it. Over the years, the industry has moved to guaranteed universal life products which have very little or no cash value in them. Whole life insurance is an old, traditional planning tool with a strong cash value component -- boring, but very stable.
With gifting provisions in the ILIT, they can receive cash back from the trustee. The advice they had received from their planners, that they would have more money than they'd know what to do with, was simply not true. Their planners' advice was a complicated offensive strategy, lacking a defensive plan. Sometimes, the simple solution offers greater flexibility.
There's more to George's story. Although he is taking care of his daughter and her family, he doesn't have the responsibility of caring for his own parents at the same time, as are so many others of the so-called "sandwich" or "club sandwich" generation.
In an interesting twist, however, his situation becomes more complicated, as his brother Paul, who has always been his sidekick in life, finds himself in complicated emotional and financial circumstances.
Paul's story
Paul started out heading toward the professional world. However, he took a detour that led him into the printing business. Paul owned his own shop and survived financially, although not to the same extent as his brother, George. He married, had one child but then, like so many others, divorced. Along with the mental turmoil, his financial situation took a downward turn. Paul remarried and had another child with his second wife. This put added pressure on his financial ability to recover from the loss of his net worth from his first marriage.
Paul makes a living but has lost time to benefit from the eighth wonder of the world: compound interest. To make up for this, he needed to put away more assets, but lacked the ability to make up the necessary income. Paul's gloomy picture was exacerbated by the introduction of technology that drove him out of business.
With one divorce under his belt, Paul's second wife passed away, leaving him to raise his son on his own, and making it even more difficult to put more time and energy into working. Although he did his best, he was without a nest egg to grow or fall back on later in life.
Continuing his efforts to find happiness in his personal life, he tried marriage for a third time but it also ended in divorce, adding even more financial pressure. Like many people with demanding lives, Paul experienced health issues and the ensuing medical bills exacerbated his stress.
The silver lining in Paul's life is his older brother, George, who is financially able to help him, but this puts pressure on both of them, financially and emotionally. When they were children playing baseball together, neither of them would have thought they would later find themselves in such a tough life situation.
In working with clients, it's important to have a very clear understanding of their obligations, not just fiscally, but emotionally as well. In this situation, George would be wise to purchase long-term care insurance to leverage his gifts to his brother, as opposed to just footing the bills.
Paul also needs to seek the counsel of an Elder Law Attorney to make sure his planning is in order and that he is prepared to receive any support that may be available from the state. In addition, it's important to make sure that the gifts he receives from George are not hindering him from obtaining state assistance. Paul needs to be reminded that he is eligible for such support because he has been paying for it through his taxes over the years and, in his case at least, it's not charity.
As advisors, we sometimes forget we're dealing with emotions and not just financial statements. As most adults, Paul always felt it was important to be responsible for himself and his family. With some coaching and good advice from an Elder Law Attorney, Paul has been able to take advantage of the appropriate government programs, which has lessened the burden on his brother, George.
Denise's story
George and Paul also have their "baby sister," who has always looked up to them. To this day, they are her best friends and thoroughly enjoy being together. Denise's situation is different from that of her brothers. She attended college in Boston and worked in a research lab following school. Denise began saving some money for later in life, although it was not a top priority for her because she soon married and hoped to be well taken care of.
She married a doctor and they had a daughter and then a son. Being the daughter of a physician, she understood the long hours they put in. However, she didn't realize that all doctors do not have booming practices. Her husband did well and they were comfortable but they never really had the extra income to put away large sums of money as her father did.
When it came time to educate her children, she went back into the workplace and was able to send both to fine schools. Her daughter attended Phillips Andover and Boston University, while her son went to St. John's Prep and Brown University. Although she provided amazing educations for her children, they came at a high cost. Instead of putting money away for themselves, they invested in their children, thinking time was on their side.
Like many boomers, they thought they would live forever. Unfortunately, Denise's husband died at age 57, leaving his widow with some life insurance, but not enough to bridge the gap to Social Security because she was still young and the kids were no longer dependents. Denise commented that they could never justify the expense of more life insurance and they thought their assets would build up to the point where they could take care of themselves. Neither of them expected, nor planned for a premature death.
Although it's not necessary for Denise to depend on her brother George financially, her lifestyle has changed significantly. Her energy for working full-time has waned and she now works part-time to cover her real estate taxes. She has leveraged her small nest egg using an annuity with income riders.
She still hasn't addressed her long-term care risk, feeling the expense is too great at this point. There's still significant equity in her home, but there is no good way of tapping into it, other than to sell it. And, emotionally, that would be difficult. She will consider using a reverse mortgage on her home if that's what's needed some time in the future.
In advising Denise, her major concern is staying in her home. One of her current alternatives is looking into an annuity with a long-term care rider or a single pay life insurance product with a similar provision. She really needs the advice of an Estate Planning Attorney so she avoids estate tax issues due to the value of her home, particularly as the future of estate taxation is played out.
In looking at these three boomers and how their life stories are interrelated but so different, it's important to make sure we understand each client's life story, including their obligations to others.
Beyond all else, it's critical to help our clients plan with as much flexibility as possible. Their lives change and take unexpected turns, as do the rules that impact their finances.
Patrick Herndon is National Sales Manager at First American Insurance Underwriters, Inc., a life insurance brokerage firm based in Needham, Mass., specializing in coaching growth-oriented producers. Herndon has 27 years experience in financial services. He focuses on estate, wealth, charitable and business insurance planning. He can be contacted at (800)444-8715 or pherndon@faiu.com.
