Blog #38: Avoiding a $20 Million Mistake

(Presentations were created using Wealthy and Wise®.)

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Brace yourself; this is a good one!

Last week in Blog #37, we reviewed the case of Elizabeth Rand, MD, age 40, who was analyzing the purchase of $3.6 million of indexed universal life (IUL).  We compared the IUL to $3.6 million of 30-year level term insurance coupled with a side fund.  We also illustrated $120,000 in policy loans on the IUL beginning at Dr. Rand’s age 60.  As you may recall, the IUL turned out to be the smart way to go -- by a wide margin.  Click here if you would like to review her comparison of IUL to term insurance using the InsMark Illustration System.

Wealthy and Wise®, InsMark’s wealth planning system, can also perform effective term comparisons, and it goes a step beyond by evaluating and comparing the overall impact on Dr. Rand’s cash flow, net worth, and wealth to heirs.

To gauge the impact of Wealthy and Wise, let’s first review Dr. Rand’s current financial picture:

$   350,000 Taxable Assets @ 5.00%
350,000 Tax Exempt Assets @ 4.00%
1,500,000 Equity Assets @ 7.50% growth; 1.00% dividend
300,000 Defined Contribution Plan Assets @ 7.50%
500,000 Residence @ 5.00% growth
(400,000) Mortgage @ 4.40%
100,000 Art Collection @ 7.50%
400,000 Personal Property @ -5.00%
$ 3,100,000 Total Net Worth

Click here for comments about yields and Monte Carlo simulations.

The IUL policy has five scheduled premiums of $100,000 each, and Dr. Rand does not plan to pay those premiums from her income.  Rather, she will pay them by way of withdrawal from her assets as part of the Maximize Net Worth solve available in Wealthy and Wise.  This will deplete her current assets by $500,000 over the next five years and replace them with the values of the IUL policy.

At her retirement age 60, Dr. Rand wants $200,000 a year in today’s dollars for after tax retirement cash flow indexed at 3.00% as an inflation offset.  In this case, $200,000 in today’s dollars will need to be $361,222 in tomorrow’s dollars by her age 60, and this amount will also need to rise by 3.00% in retirement years to meet her expectations.  These amounts will also be withdrawn from assets and are included in the Maximize Net Worth solve noted above.

Will her current asset base support this?  It will, and below is the comparison where Strategy 1 is her current plan without the new life insurance, and Strategy 2 includes the IUL as described above.  Due to the addition of the IUL (and its participating loans), the long-range gain in net worth of Strategy 2 vs. Strategy 1 is over $20 million, an astonishing increase.  21st century investment-grade life insurance is truly amazing, and it is the key component in helping Dr. Rand avoid a $20 million dollar mistake by acquiring the term insurance.

net worth graph 1 image

$3.6 million of 30-year, level term insurance costs $3,600.  Let’s substitute that for the IUL policy and see what happens.  As you can see below, Strategy 3 with term insurance is not suitable from the standpoint of long-range net worth and wealth to heirs.

net worth graph 2 image

The difference in wealth to heirs is over $16 million in favor of the IUL vs. term insurance.

wealth to heirs graph image

Critical point:  The gain in net worth and wealth to heirs is accomplished with no additional out-of-pocket costs to Dr. Rand as premiums are funded by withdrawal from her assets; however, it is only the IUL that produces serious increases in wealth due to its participating loans, cash value, and death benefit.

The Suze Ormans of the world tell Dr. Rand to buy the term insurance.  They are wrong!

For licensing information regarding Wealthy and Wise, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President - Sales, at dag@insmark.com or 925-543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

Digital Workbook Files For This Blog

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Download all workbook files for all blogs

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Note:  Wealthy and Wise produces a significant number of reports since we never want you to have a client, attorney, or CPA ask, “Where did this number come from?” There is backup for every number, and in this Blog for example, there are four full evaluations: 1) Comparison of Alternatives; 2) Current Retirement Analysis; 3) Add Indexed Universal Life; and 4) Add Term Insurance Instead.  Each one in the series produces different mathematics thus the large number of reports.  You will likely want to pick and choose various combinations of reports to share with your clients, but you will always want to have access to all of those pertinent to your overall analysis.

Click here if you would like to review the 100+ page report for Dr. Rand generated by the System.

InsMark’s Referral Resources

If you would like assistance with any InsMark illustration, contact any of the Referral Resources listed below.  All are InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

Testimonials:

"As I’ve said to anyone who will listen, Wealthy and Wise is the best piece of software in the industry."
Simon Singer, International Forum Member, InsMark Power Producer, Encino, CA

“Major cases we are developing have all moved along successfully because of the sublime simplicity and communication capability of Wealthy and Wise. I guarantee that the proper use of this tool will dramatically raise the professional and personal self-image of any associate who dares to take the time to understand it.”
Phillip Barnhill, CLU, InsMark Power Producer Minneapolis, MN

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More Recent Articles:

Blog #37: Four Ways to Smite a Termite

Blog #36: The Magic of Indexed Universal Life

Blog #35: Revisiting the Pothole in Wealth Planning (Good Logic vs. Bad Logic™)

Blog #33: Referred Leads – How to Use Them Effectively

Blog #32: Documents On A Disk™ is Now in the Cloud

3 Reasons Why It’s Profitable For You To Share These
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Professional Study Groups (i.e. “LinkedIn”)

Robert B. Ritter, Jr. Blog Archive

 

Blog #37: Four Ways to Smite a Termite

(Presentations were created using the InsMark Illustration System.)

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Next time you are confronted by a “termite” who tells you cash value life insurance is a lousy investment, try asking one of these questions:

1. “If something you believe to be true turns out to be wrong, when would you want to know about it?”

Or this:

2. “If I agreed with you, then we’d both be wrong. Do you want to know why?”

Or this:

3. “Do you dislike cash value life insurance so much that you’ll give up yield just to avoid it?”

If a CPA or attorney is the termite, either #1 or #2 can be effective, but #3 needs to be reworded a little.

4. “Do you dislike cash value life insurance so much that you recommend clients give up yield just to avoid it?”

If you’re bold enough to use these questions, you must be able to prove the point, so follow-up with this question:

“Would you like to see how you would have to earn over 12% in order to match the yield of cash value life insurance?”

Most reasonable observers will generally answer that they would like to see the proof of your claim.

Proof? As an example, click here to review the indexed universal life (IUL) illustration we prepared for Elizabeth Rand, MD, from Case Study #2 in last week’s Blog #36. Her policy is intended to be a source of after tax retirement cash flow coupled with substantial death protection.

After reviewing Dr. Rand’s comparison to term insurance and a side fund on Pages 1 – 3 (note on Page 2 of the illustration that the term and side fund evaporate in year 28), pay particular attention to Page 4. It shows that Dr. Rand would have to earn a pre-tax, equivalent, compounded rate of return of 16.12% on the side fund each and every year to match the results of the IUL cash value.

Might you be asked to prove it? You might, but it’s simple. Run the illustration with the side fund at 16.12%, and you’ll have the documented proof as the side fund and cash value come together in the last year of her illustration.

Note: Dr. Rand’s IUL illustrates participating loans which makes her comparative yield pretty substantial.

Does Dr. Rand’s illustration apply to all prospects? Of course not, and we suggest you develop several masters at different ages and different amounts and carry them with you. This way, an appropriate one will always be available when you need it — and you will need it.

Click here for a similar comparison using a less substantial policy. Page 4 in this case illustrates a pre-tax equivalent rate of return of 13.29% for the side fund to match the results of the IUL. (The difference is mainly caused by the fact that this particular IUL carrier does not illustrate participating loans.)

The Suze Ormans of the world are relentless in discrediting cash value life insurance. I don’t care how big or small your case is — they are simply wrong! If you have the cash flow to buy permanent life insurance, you’re nuts to buy term.

We prepared Dr. Rand’s comparison to “Term and Invest the Difference” in the InsMark Illustration System. For licensing information, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275). Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or 925-543-0513.

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

Digital Workbook Files For This Blog

Blog37.zip

Download all workbook files for all blogs

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Note:  Last week, we promised to compare how Dr. Rand intends to use her IUL as the funding instrument for a deferred compensation arrangement. We will do that in one of the next few Blogs.

InsMark’s Referral Resources

If you would like assistance with any InsMark illustration, contact any of the Referral Resources listed below.  All are InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

Testimonial:

“InsMark is the Picasso of the financial services world – their marketing savvy never fails to amaze me.”

Doug Peete (Past President, Top of the Table) Pasadena, CA

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More Recent Articles:

Blog #36: The Magic of Indexed Universal Life

Blog #35: Revisiting the Pothole in Wealth Planning (Good Logic vs. Bad Logic™)

Blog #33: Referred Leads – How to Use Them Effectively

Blog #32: Documents On A Disk™ is Now in the Cloud

Blog #31: IRA Rescue Made Easy

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

Robert B. Ritter, Jr. Blog Archive

 

Blog #36: The Magic of Indexed Universal Life

(Presentations were created using the InsMark Illustration System.)

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The more I study the intricacies of Indexed Universal Life (IUL), the more I find it the golden egg of the financial world. This is particularly true when you introduce “Compared to What?” which I’ll present further down in this Blog.

The opportunity to couple valuable policy death benefits with cash values credited with interest rates equivalent to a high percentage of S&P returns is, of course, one of its key lynch pins. The floor of a 0% guarantee to insulate against negative yields is another.

Provided the policy is not a modified endowment contract (MEC), the icing on the cake is the opportunity to access cash values by way of participating loans. Traditionally, the rule has been to use tax free withdrawals up to cost basis (basis being the sum of premiums paid) and then switching to tax free policy loans once cost basis has been exhausted.

The advent of participating policy loans is a real game changer and dictates their use from the get-go as the preferred way of accessing cash values for, say, tax free retirement cash flow. Such loans add a serious level of interest rate arbitrage, often associated with foreign currency transactions but previously unrelated to life insurance transactions.

It only works well if the loan interest rate charged by the issuing insurance companies is guaranteed for the life of the policy. If you can borrow against accruing cash values at a guaranteed rate of say, 5%, and the cash values securing the loan can still participate in a share of S&P returns (guaranteed never to be lower than 0%), you then have the following benefits of 21st century life insurance:

  • checkmarkPolicy cash values accrue free of income tax;
  • checkmarkPolicy loans are free of income tax;
  • checkmarkCash values securing loans participate in the selected index;
  • checkmarkPolicy death benefits are free of income tax.

There is nothing in the financial world quite like this package of benefits.

Caution: You and your clients must manage the amount of policy loans to be sure the policy contains sufficient residual (unborrowed) cash value to prevent a lapse of the policy as that event could trigger taxation of all policy loans in excess of cost basis. Some life insurance companies have sophisticated concierge units whose purpose is to assist policy owners in the management of policy loans.

Case Study #1

Let’s look at “Compared to What” mentioned previously. No financial product is good or bad in the abstract. Real value is determined by comparison to reasonable alternatives. Click the link below to view a recent 8-minute video where I was interviewed by Eric Palmer, Chief Marketing Officer of Brokers Alliance in San Diego, where we discussed comparing IUL to term insurance.

You can contact Eric at (800) 290-7226 (ext. 103) or eric.palmer@brokersalliance.com.

Case Study #2 (The Amazing Impact of Participating Loans)

Elizabeth Rand, age 40, is Board Certified orthopedic surgeon specializing in sports injuries. She is evaluating a $3.6 million IUL illustration at 7.50% compared to buying 30-year level term and investing the difference.

Click here to review the details of her term vs. permanent comparison from the InsMark Illustration System. As you can see on Page 2 of the illustration, even with an extraordinarily low assumption for the term premium and a side investment fund earning 7.50%, the “difference” of term “term and invest the difference” runs out in year 28 (her age 68).

Participating Loans: With Case Study #2, you can really see the impact of participating loans. Notice in Column (9) on Page 2 of the illustration that policy loan activity of $120,000 a year begins in year 21 of Column (4). As you might expect, cash values begin to decline in Column (9). The yearly decline gradually slows until year 34 (age 74) when it turns upward while still supporting ongoing policy loans of $120,000 a year. For example, by year 40 (age 80), the cash value increase exceeds $43,000 from year 39; by year 50 on Page 3 (age 90), the cash value increase exceeds $184,000 from year 49; and by year 60 (age 100), the cash value increase exceeds $642,000 from year 59. This is the power of participating loans.

Note:  In the InsMark Illustration System, you can compare IUL with taxable, tax exempt, tax deferred, and equity accounts. (They all lose — significantly so when participating loans are illustrated.)

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

Digital Workbook Files For This Blog

Blog36.zip

Download all workbook files for all blogs

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Click here to learn more about the InsMark Illustration System. You can also contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275). Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or 925-543-0513.

Note:  In Blog #37 next week (January 23, 2014), we’ll compare how and why Dr. Rand intends to use the IUL illustration in Case Study #2 in this Blog as the funding instrument for a deferred compensation arrangement.

InsMark’s Referral Resources

If you would like assistance with any InsMark illustration, contact any of the Referral Resources listed below.  All are InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

Testimonial:

“The reason I use InsMark products is because they are so good at explaining financial concepts to all three parties: 1) the producer trying to explain the idea; 2) the computer technician trying to illustrate it; 3) the customer trying to understand it.”
Rich Lindsay, CLU, AEP, ChFC Pasadena, CA

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More Recent Articles:

Blog #35: Revisiting the Pothole in Wealth Planning (Good Logic vs. Bad Logic™)

Blog #33: Referred Leads – How to Use Them Effectively

Blog #32: Documents On A Disk™ is Now in the Cloud

Blog #31: IRA Rescue Made Easy

Blog #30: Six Sales Ideas For Life Insurance Producers
(Steve Savant Interviews Bob Ritter)

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

Robert B. Ritter, Jr. Blog Archive