The Hidden Insurance Sales Concealed Within Your Clients Federal Income Tax Return

I’ve been a member of the Million Dollar Round Table (MDRT) for 35 years and earned 21 Court of the Table designations and 12 Top of the Table designations. Taking the time to learn the federal income tax return has helped me achieve my success.

As advisors, we have honed in on the federal income tax return, yet many of us are unaware of the additional sales hidden within this extraordinary tool. The only way to achieve results is to know exactly what to review and what to discuss with your clients and prospects. If you don’t request the last two or three years of income tax returns, you are missing opportunities to build a long-term client/advisor relationship and to provide a thorough financial plan. Take a close look specifically into the W-2 and 1040 Forms, with the accompanying schedules, to find an effective strategy to help you satisfy your client’s needs and increase your sales.

Form W-2

Start by examining the W-2 Form, which is the wage and tax statement. If there’s a difference between line 1 (wages, tips and other compensations) and line 3 (Social Security wages), it may indicate a client could be a participant in a 401 (k), 403 (b) or a Section 125 plan. Box 12 (c) shows you the taxable portion of group term life insurance, in excess of $50,000. This is important because, it raises several questions. Is there a possibility of a need of additional life insurance? Or is your client’s employer a prospect for group and or individual life insurance?

When the retirement plan box on line 13 is checked, ask how satisfied they are with their investment options and the amount they are currently contributing. When Box 12D is left empty, it means it is non-contributory. If lines 1 and 3 have no difference, then there is no Section 125 or pension plan. Therefore, your client’s company may qualify for one or both of these plans. You’ll want to investigate the number of employees to see if they qualify for a simple IRA or 401 (k) salary deferral plan and if they would be interested in establishing a Section 125 plan.

Form 1040

Line 6C will be filled if your client has dependent children of any age. Keep in mind, a life insurance sale is possible if the children are not living with the taxpayer due to divorce. Some states require life insurance to be provided to an ex-spouse, so you should ask your client the amount, type of coverage required and when the policy was last reviewed. Also, look for other dependents on line 6C. If your client is caring for an elderly parent, they might be a good prospect for long-term care and estate planning. Maybe they have a special needs child; if so, discuss a special-needs trust and life insurance plan. Line 8B pertains to tax-exempt interest, which is generated from municipal bonds. This is included with all other income to determine the taxable portion of a client’s Social Security benefits. If your client doesn’t require a tax-exempt interest for living expense purposes, consider repositioning some of these assets into a tax-deferred annuity to take the income off the tax return.

Line 11 on Form 1040 indicates your client is receiving alimony as a result of a divorce and line 31 (a) means they are paying alimony. As unfortunate as a divorce is, you can uncover a number of sales opportunities.

An IRA distribution is listed on line 15A Form 1040. If your client isn’t spending the required minimum distribution (RMD), assist them in finding a more effective way to reinvest. Line 16 Form 1040 deals with pension distributions. Any time a pension distribution is made, a planning opportunity exists.

Schedule A

When you review lines 1 through 4, ask your client questions to investigate their medical history, because the answers could have an impact on their insurability for life insurance or their need for long-term care and disability insurance. Lines 16 and 17 show substantial gifts to charity and the client may be a prospect interested in using life insurance to create a gift to a charity. There’s also the opportunity to gift an IRA or other highly appreciated asset to charity, replacing the asset with life insurance owned by an irrevocable life insurance trust (wealth replacement trust).

Schedule B

Line 8A on the individual income tax return pertains to taxable interest income and line 9A, refers to ordinary dividends, a summary which is shown on the Form 1040 under Schedule B. If your client is accumulating interest, they may be an excellent prospect for a tax-deferred annuity. If they’re spending the interest, a single premium immediate annuity might be an option. There are a few questions to consider. Is your client receiving interest income from banks? Are they accumulating income? Could this interest cause Social Security income to be taxed? Continue to look at Part II of Schedule B at ordinary dividends. When stocks and mutual funds are listed, there’s the possibility to add a variable annuity, tax-efficient mutual fund or professional money management. Part III holds information about foreign accounts and trusts. If this section is completed, your client likely works with a certified public accountant (CPA) and/or tax attorney to set-up offshore trusts, which means there is an opportunity to be introduced to a new center of influence.

Schedule C

Line 12 on Form 1040 refers to business income or loss, which means your client, has a profit or loss from a business operated as a sole proprietorship per Schedule C attached. Then, you have a prospect for estate and business planning, including key person or disability insurance, critical illness insurance, long-term care and health insurance.

Schedule D

Schedule D tells us what capital gains and losses a client has from security and property transactions, which is show on line 13 on Form 1040. Questions you will want to think about are; has your client been involved in the trading of many stocks, bonds or mutual funds in the past few years? Are the multiple trades the result of independently trading or is a broker involved? In any case, it’s important for you to help find the best product to accommodate their needs.

Schedule E

Line 17 on the Form 1040 refers to Schedule E. Part I includes income and loss from rental real estate and royalties. Part II shows income or loss from partnerships and corporations. There are multiple sales opportunities if your client is a partner or shareholder in one of these entities, such as key person and disability insurance, estate planning, disability buy-out insurance or critical illness and long-term care insurance.

Schedule F

Schedule F, line 18 on the Form 1040, indicates a sole proprietor farmer, and your client is a prospect for all applicable products and services. For example; key person life and disability insurance and individual disability insurance. They are also an ideal prospect for estate planning, because it’s usually important to them to keep their land in the family.

If you make the effort to review your client’s or prospect’s tax return, you can uncover a treasure trove of sales opportunities for yourself, create the trust necessary for a long-term relationship and establish yourself as a valuable asset for you client’s financial planning needs.

by H. Larry Fortenberry, CPA, CLU, ChFC for Producer eSource

Larry is the president of Executive Planning Group, P.A., an insurance and employee benefits firm located in Jackson, Miss. He is a certified public accountant, a chartered life underwriter and a chartered financial consultant.


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