CPAs create clarity and peace of mind in a sea of noise for our clients. After nearly three decades of delivering professional advice, experience has revealed opportunities to help shield clients from risk and bumps in the road. Clarity in turbulent times, like the market volatility we are experiencing today, are driven by fidelity to the financial planning standards that are prescribed by the Statement on Standards in Personal Financial Planning Services (SSPFPS) at the AICPA.

The AICPA financial planning standards are under revision for the first time in 10 years to continue modernizing and consider changes that add clarity, concise language and evolution to reflect changes and updates that include artificial intelligence. Among other professionals on that team working on the revisions is Brooke Salvini, a member of the CalCPA Personal Financial Planning Committee. The SSPFPS impacts all CPAs who provide personal financial planning services, from answers from an individual client planning question to the delivery of financial planning services. Risk management, of which life insurance is a component, is an essential element of planning.

Many clients have the impression that their investment account embodies their financial plan. While some may have engaged in financial planning and put it on the shelf as a testament to having engaged in a planning experience at a point in time, very few make the financial plan a part of a guidepost to their future.

Integrating a financial plan in each portfolio review meeting is a fundamental transformation of a client relationship that adds peace of mind, clarity and purpose to a client's life. Engaging in the same process for risk management planning adds a key dimension that provides security during the inevitable bumps in the road we all face during our lifetimes.

Accountancy is unique as a profession and a natural complement to the application potential of financial planning. Our strength and expertise in tax compliance touches every aspect of financial planning. Insurance planning is similar. It impacts estate planning, retirement income planning, education planning, investment planning and spending plans, each with a key element of tax planning representing the integration of different aspects of a financial plan to enhance the client experience.

Closing a client meeting by matching the relationships between different aspects of the client plan indicates that you listened, understood what your client or prospective client shared, and, in a meaningful way, demonstrated the value proposition in planning that you will deliver in their best interest.

Getting the Most out of Life Insurance Planning

The benefits of life insurance are essential. Since most CPAs and CPA financial planners work with other professionals to manage their clients' risk, two housekeeping items are important to be aware of: compensation disclosure and due diligence.

Compensation Disclosure: The standards of compensation disclosure are more rigid for CPA financial planners than other financial services professionals. Standard 23 of the SSPFPS states, "If compensation alternatives are offered, the member should disclose the differences in these alternatives in writing.”

A reflection of the importance of disclosure of compensation methods for investment professionals was an SEC action in 2024, which indicated that a broker-dealer violated its Regulation Best Interest obligation by not disclosing different pricing platforms in securities in writing. CPAs delivering insurance planning services should disclose the compensation layers to their best abilities.

Due to the complexities of compensation in the insurance industry, it may not be possible to disclose all compensation fully. However, disclosures should be materially correct. Compensation should be disclosed not only, but in the case of life insurance, if alternatives through blending are available, alternative compensation should also be disclosed. If a CPA is working with an outside professional, it is a good idea to request similar disclosures from the insurance professional. Such disclosures may benefit the client.

Due Diligence: If you are working with other advisers regarding the placement of insurance, there are some due diligence steps you can take to help evaluate insurance professionals. Broker Check on FINRA.org is a securities industry sight that requires registered persons to report various issues. Licensing with FINRA is necessary for those who place variable life insurance and variable annuity solutions. Some insurance professionals are not licensed with FINRA. Equity-indexed or fixed-income solutions for life insurance and annuities do not currently require FINRA or SEC registration. The National Association of Insurance Commissioners site is another reference. In California, you can check licensing online. To determine who your insurance agent is appointed by, refer to The California State Department of Insurance (CDI). You will usually want to see a broad selection of insurance companies appointed in a person's record. 

Getting More out of Life Insurance

There are many myths and hyperbole around life insurance. It is also correct that not enough attention is paid to the nuances of protection for life insurance as a value proposition for your client's financial plan.

A common myth is that you can compare life insurance outcomes through illustrations provided by carriers. An illustration is merely an estimate of assumptions at a point in time that does not accurately reflect long-term outcomes. Mortality experience, company expenses, investment returns and many other factors determine outcomes. Resources that compare long-term performance of life insurance cash values and face values over 20- and 30-year time periods no longer exist. Other resources that should be considered for any insurance referral relationship are Bobby Samuelson, Joe Belth and Lee Slavutin’s PPC Guide to Life Insurance Planning.

An example of life insurance hyperbole on returns comes with some equity-indexed policies. Equity indexed policies generally have three clauses that may impose limitations on index returns.

One clause limitation is “participation rates, which can generally be adjusted annually by the insurance company. Initial participation rates may be as high as 120 percent of the index return. I have recently seen some participation rates revised to 8 percent, meaning a 20 percent S&P return will yield 1.6 percent. Other factors can reduce the return.

Living Benefits of Life Insurance

Waiver of premium: A waiver of premium rider on a policy generally waives the premium when a total disability occurs. There are important nuances in contractual language to be aware of, such as how long the waiver applies if the person is no longer totally disabled, what the definition of total disability is, the definition of presumptive disability and other contractual language.

For instance, the loss of a hand is different than the loss of the use of a hand. Generally, a waiver of premium is a benefit for those who have misfortune and live. In total permanent disability, the waiver of premium can pay the policy premiums. Care must be exercised as many waivers of premium riders will pay the premium for term insurance, or the term insurance cost of a universal life policy. There are term insurance policies that convert to whole life upon a permanent total disability, and whole life policies state that the waiver of the premium pays the entire premium upon total disability.

Examples of young and totally disabled are a 32-year-old business owner t-boned by someone running a red light. A 19-year-old with an aneurysm, a 48-year-old with scoliosis and requires a walker. In these cases, life insurance with the proper riders and the company with the most favorable contract results in significant cash value accumulated over time.

Additional purchase benefit—young adult/kiddie policies: Despite longer lifespans we’re seeing today, medical issues still pop up, and insurability issues can be highly limiting when applying for life insurance.

For instance, an autism diagnosis and the aneurism mentioned in the Waiver of Premium section above can render one uninsurable. The Merk manual is thick with very thin pages of most that ails us. It isn't just the inability to obtain approval for life insurance; it’s also the insurance rating due to some event.

Becoming uninsurable or having a health issue results in an expensive, highly rated policy that can be protected through an additional purchase benefit rider added to a whole-life policy. Think of the additional purchase benefit rider as an option to exercise the right to obtain a whole-life policy at the best rates. Combined with a waiver of premium, the additional purchase benefit rider is a powerful combination of protection when bad things happen.

For a small premium, a modest $150,000 whole-life policy, can provide well over $1 million of additional whole life protections for the insured that would not otherwise be available at favorable rates regardless of insurability, subject to the terms of the contract.

1035 exchange for long-term care premiums and complementary asset: Those old life insurance policies may contain a gold mine of opportunity. Recently, due to stubbornly persistent low interest rates, the regulations were changed to allow insurance policies to pay a minimum 1 percent crediting rate. Old policies may come with greater guaranteed rates. While a transfer of assets to life insurance cash values results in an income reduction for advisers who bill for assets under management and can be a reason to find a way to frame the discussion away from life insurance, the policies that have high interest or dividend rates may be a good complement to fixed income assets when interest rates are lower. Certainly, 5 percent interest or dividend or so rates were a beneficial asset accumulation complement when bond interest rates were 0-2 percent. Because many who retire under current tax laws may not file a Schedule A, the value of a 1035 exchange to pay for a long-term care premium combined with the tax-deferred returns on cash values may be worth consideration. Client advice and decisions should be framed in the context of a financial plan. Care should be taken not to allocate too much to any singular type of asset. Diversification of assets can reduce risk and result in different tax outcomes.

Asset builder: By focusing on the client's best interest, unexpected planning opportunities can be created. For instance, over the years, I have developed significant expertise regarding the placement of cash balance plans to complement the retirement plan cake. It is my passion to serve America's underprivileged and business owners simultaneously (see Retirement Ready in the June 2022 issue of California CPA and Small-business Owners Misunderstand Retirement Planning.

When speaking with a potential client about the cash balance plan opportunities and a $600,000 tax deduction for the potential client's high-income business, it came to my attention that the potential client's net worth was over $30 million. While the tax deduction may be a beneficial solution, the distribution of the assets in a cash balance plan most likely would be subject to income tax rates at or close to the highest level of the tax law at the time of distribution, in addition to estate taxes at 40 percent under current law.

Using Glenn Daily’s blending strategy, most of the commissions can be eliminated in a life insurance policy, and depending on underwriting, it is possible that over time, the total costs of insurance and separate account management is about 1 percent, or comparable to the all in costs for a managed portfolio. For individual accounts, considerations on tax savings should include asset types, stocks held long term, which are subject to a step-up in basis.

If assets are in an irrevocable trust, there is no escape of income taxation through a step-up in basis. While tax factors can be mitigated based on planning, there is no escape of either estate or income taxation, and typically a client is impacted by both when accounts are held in the estate. It may be in the client’s best interest to set up an ILIT and fund the ILIT with a life insurance policy consistent with the client's risk tolerance. If a client has a balanced risk tolerance, the client could fund both a whole life policy for the bond portion of the allocation and a variable life policy for the stock portion of the portfolio. In addition, depending on the premiums, the client may prefer to have more than one company to further diversify insurance company risk. 

Life insurance policies are unique because the agent can vary compensation. There are usually three forms of compensation in a life insurance policy: additional premiums that are paid commissions between 3 percent and 5 percent per payment; term insurance that is paid commission at 35 percent to 50 percent and whole life base that can be paid commission between 35 percent to 125 percent depending on age and company.

One trick to create value is to structure the policy to eliminate insurance compensation to the maximum amount possible and pay up the policy as quickly as possible, perhaps over seven years. When a policy is properly blended, the all-in cost over time may be as low as about 1 percent per year (costs are much more in the first few years but greatly reduced by blending).

While advisers are paid considerably less with a blended life insurance solution over time than assets under management in an advisory account, the compensation for services is still reasonable on larger policies and the client benefits.

One last point is that a joint life insurance policy with your spouse or significant other will lower the insurance cost, potentially increasing the policy's value.

There are quite a few elements to implement life insurance properly. Life insurance is not an investment, but it can be valuable in helping pay for estate taxes and providing long-term multi-generational value for families. Life insurance can be an asset that can partially or fully convert to an annuity with increasing income streams to help pay for a graduated care living facility. Minimizing the face value relative to premiums and reducing commissions through blending has the potential to create significant additional value over time. Life insurance is almost always subject to underwriting considerations that can impact the costs within the policy and long-term insurance values.  

Temporary resources when natural disasters or capital market disruptions occur: Natural disasters that hit highly populated areas have devastating impacts on local communities. It may take some time before the flow of insurance money begins. Besides your retirement plan at work, another place to secure resources is cash value in whole life insurance. A whole life insurance policy can be a resource during capital market disruptions.

A key concern in the first few years of retirement is sequencing risk. Portfolios can recover from market disruptions during the accumulation years. During retirement years, distributions will not recover. A significant investment drop in the first few years of retirement can adversely impact retirement income. During such market disruptions, the distributions typically made from a stock market account can be loaned or distributed from a whole life insurance policy and, if loaned, replenished when the market drops in value.

How to get life insurance when you are not insurable or have health considerations: For most, every time your client switches jobs, they should consider notifying their human resources department in writing that they wish to take their life insurance and disability insurance policies with them. One reason group insurance tends to be more expensive than applying for insurance personally is that company group insurance is “come one, come all,” regardless of insurability.

While it is not guaranteed that your clients can take insurance with them as they leave, with many group plans, your clients can request to continue to pay premiums and take their policy with them when they leave their current jobs. Some of the life insurance policies offer accelerated death benefits for terminally ill insureds.

Proper planning could result in a tax-free distribution of $100,000 for those with a life expectancy of less than two years, with a policy that carries an accelerated death benefit rider, subject to contractual provisions.

For clients who are executives, policies can be guaranteed issue in companies. Be aware that insureds must sign a form acknowledging the purchase of life insurance, and companies must both retain that form and file the IRS form 8925 each year. Failure to do so will subject life insurance proceeds to taxation. Insurance companies have differing standards on issuance amount and the required number of executives to be insured for guaranteed issue programs.

Insurance when there are health issues: Insurance has many nuances, with the underwriting process being one of them. I have had a health condition result, with one company issuing a policy as premier, best in class, and another declining the same condition. What happens when an underwriting issue results in a decline or rating? The insurance company may report the findings to a national database called the Medical Information Bureau (MIB) for other insurance companies to see.

If there is an insurability risk, it may be best to take the extra step of an “informal inquiry” to see which company views the case most favorably. Often, an agent may take shortcuts to get in submission and get paid while discounting the potential impact of health conditions on the insured's application and the related premiums. Certain companies have resources dedicated to special risks that can benefit clients through informal inquiry. While not guaranteed, the extra step of an informal inquiry may result in a more favorable outcome for the insured.

Conclusion

There is much more to consider about insurance opportunities as it applies to life insurance. While not discussed, disability insurance, long-term care insurance and annuities have their own nuances while providing protection. With the best interest of clients in mind and matched to the client's financial plan, decisions around risk management strategies can be optimized.

CPAs represent the most capable profession in delivering a wide range of financial planning services that are a natural extension of tax compliance work. Clients look for professionals who look forward and help them make sense of a wild world.

If you perform tax compliance work, you have the potential to deliver value-added services that clients increasingly need in a complex world. You represent clarity in a world full of noise.