How well-diversified are your big-ticket clients’ life insurance issuers? Standard & Poor’s threw Uncle Sam, the insurance industry and financial advisors for a real loop in April when it downgraded long-term U.S. government debt to AAA negative from AAA stable and revised its outlooks for five U.S. insurance groups to negative from stable.

Those insurers, based on published reports, are Knights of Columbus, New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance & Annuity Assoc. of America (TIAA), and United Services Automobile Association (USAA).

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Many of your Boomer clients have elderly parents who are facing a seemingly unsolvable problem: how to produce enough income to cover increasing living costs without jeopardizing investment principal. But for families in the right situation, it’s possible to dramatically improve the cash flowing to the older parent, without risking the value of (or access to) her “rainy day” fund.

Here’s how reverse mortgages can serve as an unorthodox solution to a common dilemma.

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When you design a portfolio by market capitalization and investment style, do you consider the cash value and death benefits of your client’s life insurance policy in the mix? Some experts say you should. Why? The death benefits and steady growth of cash value over the years can improve an overall portfolio’s risk-adjusted rate of return when combined with bond values.

“Investment managers should realize there may be a place for life insurance as part of the fixed income part of a portfolio,” says Richard Weber, principal with The Ethical Edge Inc., a Pleasant Hill, Cal., consulting firm. “Fixed income investments have low correlations to stocks. Life insurance cash values don’t move in the same direction (as stocks or bonds) during a crisis.”

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Reps are turning to index universal life insurance to bridge the risk gap between low-rate permanent life insurance and riskier variable universal life. With variable universal life policies, the cash value is invested, typically in mutual funds.

With index universal life insurance, on the other hand, the interest rate credited to the cash value is based on the performance of a market index, such as the S&P 500. The cash value interest rate, for example, may be 70 percent of the price gain on the S&P 500. Or, it may be the full gain of the index, with an interest-rate cap of, say 12 percent. On the downside, no matter how the stock market performs, the insurers pay a minimum guaranteed rate, often ranging from 1 or 2 percent. As with all universal life insurance, index universal life insurance policyholders can make flexible premium payments.

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RIAs have long avoided variable annuities like they were bad breath. But LPL Financial (NASDAQ: LPLA), among others, is trying to change that with its new fee-based variable annuity platform. The insurance carriers on the new LPL platform (and others) have stripped away commissions, lowered the mortality and expense fees and eliminated the surrender charges.

In the past, RIA aversion to variable annuities has mostly been related to high expense ratios and commissions, said Douglas Dannemiller, senior analyst at Aite Group. But over the past several years, a number of fee-based annuities have made their way into the market. And yet, resistance to the product among RIAs remains. According to a Cogent Research survey of 1,569 advisors, only 26 percent of RIAs said they had used variable annuities in 2010, versus 90 percent of independent broker/dealer reps.

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