Blog #77: Integrated Planning for College and Retirement

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In last week’s Blog #76: Smart Use of Term Coverage for Funding College Costs, we featured a video by Steve Savant and Don Prehn in which they discuss Blog #46: Let’s Make Sure the Girls Go to College.  It involved how much life insurance Tom and Kristin Scott, age 40 and 35, should acquire to take care of their two daughters, Daisy and Jody, age 10 and 8, through their college years should something happen to Tom and Kristin.

The recommendation was $500,000 of 15-year term insurance coverage on each parent.  Tom’s annual premium is $600; Kristin’s annual premium is $400.

Steve and Don also produced a video regarding my Blog #47: Tom and Kristin’s Retirement Planning that integrates funding for the cash flow needed for their daughters’ college costs along with their own retirement planning.  The solution includes a significant amount of permanent life insurance instead of term insurance.  Steve and Don’s video has a very effective summary of the concepts in Blog #47, and you can view it below.

Blog 77 Steve Savant and Don Prehn video integrated planning for college and retirement image

After viewing Don and Steve’s video, click here to visit Blog #47 for a detailed exploration of this comprehensive college and retirement funding concept plus a look at the actual illustrations and graphics.

 

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.

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Digital Workbook Files For This Blog

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Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

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.

 

Licensing

To license 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.

Referral Resources

If you would like assistance with an 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.

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com, and we will provide you with recommendations.

Testimonials

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

“I am writing to give you a ringing endorsement for the Wealthy and Wise System.  As you know, I am a LEAP practitioner.  The Wealthy and Wise software has really helped me supplement my LEAP skills.  I have been paid for many cases using Wealthy and Wise as support, the smallest of which was $27,000, the largest was $363,000.  With those type of commissions, you would have to be nuts not to buy it.”
Vincent M. D’Addona, CLU, ChFC, MSFS, AEP, InsMark Platinum Power Producer®, New York, NY

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More Recent Blogs:

Blog #76: Smart Use of Term Coverage for Funding College Costs

Blog #75: Golden Handcuffs for Sam Hunt

Blog #74: Long-Term Care – Insure or Self-Insure

Blog #73: The Discounted Dollars Strategy (Part 2 of 2)

Blog #72: The Discounted Dollars Strategy (Part 1 of 2)

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 #76: Smart Use of Term Coverage for Funding College Costs

(Click here for Blog Archive)
(Click here for Blog Index)

Getting Started with InsMark Training Video

spacer image

picture of family running together

Steve Savant recently produced a video with Don Prehn regarding my Blog #46: Let’s Make Sure the Girls Go to College.  They have a very effective explanation of the concepts in that Blog, and you can view it below.

The video features an analysis for Tom and Kristin Scott about planning for the college costs for their two daughters, Daisy and Jody, ages 10 and 8, in the event one or both parents die.  Blog #46 deliberately uses a term insurance solution in order to easily attract Tom and Kristin as clients.  It also prepares the groundwork for a more comprehensive analysis presented in a second interview with the Scotts planned for next week’s Blog.

Blog 76 Steve Savant and Don Prehn video 76 smart use of term coverage for funding college costs image

After viewing Don and Steve’s video, click here to visit Blog #46 for a detailed exploration of this college funding concept plus a look at the actual illustrations and graphics.

Next week in Blog #77, Tom and Kristin’s retirement planning is coupled with living cash flow for Daisy and Jody’s college costs, and the planning logic is expanded to include a sizable amount of permanent life insurance instead of term insurance.

 

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.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog46.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

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.

 

Licensing

To license the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275), or you can click here to order it at the InsMark website.  Institutional inquiries should be directed to David Grant, Senior Vice President — Sales, at dag@insmark.com or 925-543-0513.

Referral Resources

If you would like assistance with an 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.

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com, and we will provide you with recommendations.

Testimonials

“InsMark has important marketing information for every one of the producers in my firm — from the newly licensed to the veteran producer.”
Gary Curry, ORBA Financial Management, InsMark Platinum Power Producer®, Gold River, CA

“I really thought I knew all the sales techniques that affect my business, but I do now, thanks to InsMark.”
Sam Keck, MBA, CLU, CFP, LUTCF, InsMark Platinum Power Producer®, Financial Planner, Denver, CO

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More Recent Blogs:

Blog #75: Golden Handcuffs for Sam Hunt

Blog #74: Long-Term Care – Insure or Self-Insure

Blog #73: The Discounted Dollars Strategy (Part 2 of 2)

Blog #72: The Discounted Dollars Strategy (Part 1 of 2)

Blog #71: When Life Insurance Doesn’t Work — or Does It?

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 #75: Golden Handcuffs for Sam Hunt

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Getting Started with InsMark Training Video

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Editor’s Note:  Once in a while, Bob goes deeply into an advanced subject in his Blog, and this is one of those times.  If you have access to those who own a closely-held business with one or more important, non-owner executives they would like to tie more closely to the business, be sure to study this Blog.  Otherwise, skip it.

What is most valuable about the information in this Blog is learning the integration of a split dollar plan with the executive’s personal retirement planning.  The results may well astound you, and they will likely astound your clients and prospects as well.  If you study the strategy, it will be well worth your time.

Any type of closely-held business with important non-owner executives can use the concepts discussed in this Blog:  C Corporations, S Corporations, LLCs, Partnerships, Sole Proprietorships, and Tax Exempt Organizations.  (It also works for owner-executives of C Corporations.)

Thanks to Sarbanes-Oxley legislation, publicly-owned companies cannot use the form of split dollar described in this Blog.  A Controlled Executive Bonus Plan would certainly be applicable for such firms with somewhat similar results (a subject for a forthcoming Blog).

Over the last 30+ years of InsMark, I have been told countless times by producers, “I don’t do much in the way of executive benefits."

One sure way to ramp up activity regarding executive benefits is to ask business owners this question:

“Do you have any executives who are so valuable to your business that you want to do whatever is economically feasible to induce them to stay with you?”

If the answer is “Yes,” respond with this:

“Retirement planning concerns are on the minds of most — maybe all — of your executives.  I’d like to show you a selective, cost-efficient way your company can provide a serious retirement enhancement to important executives.  Would you like to see how that works?”

Case Study

Sam Hunt, age 40, is Senior Vice President for BFI, Inc., and heads up a major profit center for a large, privately-owned, shipping firm. BFI, an S Corporation, is reviewing a plan designed to produce “golden handcuffs” for Sam that will likely cause him to stay with the firm for at least the next 15 years.

The plan involves BFI loaning Sam $100,000 a year for seven years to be used to purchase $4,250,000 of a personally-owned, investment-grade, life insurance policy illustrated using InsMark’s Loan-Based Split Dollar System.  No IRS approval is required to install or maintain such a plan on selected executives.

Sam will pay loan interest to BFI based on the long-term Applicable Federal Rate.  BFI plans to adjust Sam’s compensation to cover the loan interest due each year leaving Sam to pay the income tax on the increased compensation.  In Year 15, Sam is scheduled to repay BFI’s $700,000 loan, the cost of which will be offset by an additional increase in his compensation.

Note:  Although Sam’s costs may be offset by increased compensation, the plan documentation must provide that BFI will not, directly or indirectly, pay the interest on the loans or the loan repayment on behalf of Sam.  Sam must make such payments himself.  The purpose of this is to comply with the prohibition against the employer making such payments as provided in the split dollar final regulations issued in 2003 (TD 9092, 9/11/03, and Rev. Rul. 2003-105).  Information about specimen split dollar plan documents is available near the end of this Blog.

Below are Sam’s annual income tax costs on the increased compensation noted above for the first 15 years of the plan.  Further down in the Blog, I’ll show you how Sam can pay the income tax using no out-of-pocket funds.

Bob Ritter's Blog-75-image-2-Sams-annual-income-tax-costs-graph

The split dollar arrangement will cease in year 15 after the loans are repaid.

The policy is illustrated to produce substantial, participating policy loans beginning at Sam’s age 65 (starting at $204,000 and increasing to $403,000). Cumulative, after tax, cash flow totals from the policy loans are:

Click here to read Blog #52: Participating Loans vs. Fixed Loans if you are unfamiliar with the difference between fixed and participating loans.

  • $  5.7 million by Sam’s life expectancy at age 85;
  • $  7.7 million by age 90;
  • $  9.8 million by age 95;
  • $11.8 million by age 100.

Below is a graphic of the plan’s results.

Bob Ritter's Blog-75-image-3-plan-payments-and-executives-cash-flow

This is a most interesting split dollar arrangement.  Costs over 15 years of funding are almost evenly divided between BFI ($385,000) and Sam ($369,012).  Sam gets all the plan benefits and BFI likely gets to retain Sam with a very efficient 15-year set of golden handcuffs — with the potential of repeating the transaction again for Sam in year 16 should further inducement be desired.

Here is another view of Sam’s benefits.

Bob Ritter's Blog-75-image-4-interesting-split-dollar-arrangement

Click here to review the full split dollar illustration.  (I outlined a few key items in red.)

Click here for remarks on:

  • Which Applicable Federal Rate to use with split dollar plans;
  • Details of the additional compensation provided to Sam to help with his repayment of loans in year 15.

Preliminary Conclusion

At this point, there has been sufficient analysis that Sam Hunt will likely value this benefit plan as a very generous retirement supplement and welcome the golden handcuffs that go with it.  If he doesn’t, it may be a valuable warning to BFI that Sam might be thinking of other employment opportunities now — an unfortunate discovery, perhaps, but a valuable one.

Important Note:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Loan-Based Split Dollar Integrates Data with Wealthy and Wise®

Next, we will integrate the results of Sam’s split dollar arrangement into our wealth planning system, Wealthy and Wise, to determine its impact on the retirement goals of Sam and his wife, Allison.

Sam is earning $360,000 after tax, and his and Allison’s goal is to have at least that much after tax cash flow in their retirement years.  Although Sam is a highly paid executive, he and Allison have not yet accumulated a level of liquid assets which can support that level of retirement cash flow.  They have $250,000 in an equity account and $150,000 in Sam’s 401(k) into which Sam is making maximum contributions.

Strategy 1:  Sam and Allison’s Current Plan

With Strategy 1, Wealthy and Wise tells us that their growing liquid assets plus social security can produce $130,000 of annual, after tax cash flow starting at age 65 leaving a residual net worth (just under $730,000) at age 100 should they live that long.

Strategy 2:  Include Split Dollar Benefits

With Strategy 2, Wealthy and Wise tells us that their growing liquid assets plus social security plus Sam’s split dollar benefits can produce $360,000 of annual, after tax cash flow starting at age 65 leaving a substantial amount of remaining net worth (almost $5.9 million) at age 100 should they live that long.

Based on these assumptions, below is a comparison of the net worth results of the two Strategies.

Bob Ritter's Blog-75-image-5-net-worth-after-providing-required-cash-flow

Strategy 2 provides 285% more after tax retirement cash flow and 805% more long-range net worth than Strategy 1.

As you can see in the graphic below, wealth to heirs is also significantly impacted by Strategy 2.

Bob Ritter's Blog-75-image-6-wealth-to-heirs-graph

Strategy 2 provides 1,225% more wealth to heirs than Strategy 1.

Click here to see the Wealthy and Wise reports.

Wealthy and Wise has allocated the cash flow for Sam’s cost of the split dollar plan shown in Table 1 above mostly by after tax withdrawals from Sam and Allison’s equity account and a lesser amount from Sam’s 401(k).  Using their assets in this manner means that they will incur no personal out-of-pocket costs for the split dollar arrangement.

Throughout the Wealthy and Wise presentation, every time the impact of split dollar is referenced in Strategy 2 (starting on Page 35), I have outlined those references in red.  For those who want to search for them, they occur on Pages 35, 38, 39, 40, 42, 43, 46, 48, 54, 55, 59, and 60.

If the rationale behind effective executive compensation is to provide an important benefit that cannot be duplicated personally by the covered executive, we clearly have met that test — and then some.  But the results in this case can only be accomplished by integrating data from Loan-Based Split Dollar with Wealthy and Wise.

Conclusion

Sam and Allison’s retirement plan is now complete (at least until new economic circumstance indicate the need for a review).  With college costs on the horizon for their three children, this is welcome information.  Due to the significant death benefit provided by the split dollar plan, they can also realize improvements in their pre-retirement cash flow by terminating substantial amounts of term insurance currently carried on Sam’s life.

The results of integrating split dollar with Wealthy and Wise are so dramatic that any business offering such plans should also have the benefits integrated in a retirement analysis as part of the package.  As you have seen in this case, the executive’s perception of the split dollar plan has undoubtedly been increased substantially.  This likely results in a grateful and motivated key executive who welcomes the golden handcuffs which is the reason the benefit has been provided in the first place.

Let me end this Blog as I started it — with these two questions and suggested responses:

One sure way to ramp up activity regarding executive benefits is to ask business owners this question:

“Do you have any executives who are so valuable to your business that you want to do whatever is economically feasible to induce them to stay with you?”

If the answer is “Yes,” say:

“Retirement planning concerns are on the minds of most — maybe all — of your executives.  I’d like to show you a selective, cost-efficient way your company can provide a serious retirement enhancement to important executives.  Would you like to see how that works?”

If you do this, you should get many favorable responses.

Referral Resources

The first few times you work on a split dollar and retirement planning presentation as outlined in this Blog, you may want assistance with the illustrations.  Please feel free to 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.

 

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.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog75.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

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.

 

Licensing

Click on the highlighted name to license the InsMark Loan-Based Split Dollar System and Wealthy and Wise at the InsMark website, or 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.

Documents On A Disk imageInsMark’s Cloud-Based Documents On A Disk™ System (DOD) has specimen legal documents for installation of nineteen different variations of split dollar plans.  Click here and scroll down for Highlights of the Plan for the one likely to be used for Sam Hunt.  Click here to review all the features of DOD.

Testimonials

“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, InsMark Silver Power Producer, Overland Park, KS

“Bob Ritter is the most knowledgeable practitioner of advanced markets.”
Hector May, CLU, ChFC, CFP® , InsMark Platinum Power Producer®, New City, NY

“I have been a user of InsMark since 1999. In fact, it was the InsMark software that assisted me in closing my first big case.  It was a 90K premium Split-Dollar VUL.  With InsMark and their illustration of the advantages of Split Dollar, my sale was completed on my first presentation to my client.  I became an InsMark Platinum Power Producer in the fall of 2007, and my presentations have never been the same.  I am able to show my clients a complete and comprehensive view of the advantages of any split dollar plan.”
William Moates, Jr., InsMark Platinum Power Producer®, Fort Smith, AR

 

Important Note:  This information in this document (including any attachments, enclosures, or referred material) is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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More Recent Blogs:

Blog #74: Long-Term Care – Insure or Self-Insure

Blog #73: The Discounted Dollars Strategy (Part 2 of 2)

Blog #72: The Discounted Dollars Strategy (Part 1 of 2)

Blog #71: When Life Insurance Doesn’t Work — or Does It?

Blog #70: What Exactly is CheckMate® Logic?

 

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