Blog #101: Linking Indexed UL
with Disability Income Insurance
(Part 1 of 2)

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(Presentations in this blog were created using the InsMark Illustration System.)

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Since May is Disability Insurance Awareness Month, this Blog is dedicated to some thoughts on disability income insurance linked with life insurance.

When I was active as a producer, I pretty much shied away from disability income insurance due to the terrible underwriting issues that always seemed to plague my applications.  My friends in the business tell me that this has eased considerably in recent years, and many of them consider disability income coverage to be a significant part of their practice.

The coverage issues that affect all your clients are fourfold:

  • Disability;
  • Early death;
  • Retirement;
  • Long-term care.

All four can be addressed with a cash-rich life insurance policy with accelerated death benefits combined with a disability income policy.  This combination can be used effectively for individuals and executive benefits.

Case Study of an Executive Benefit

Tom Hamilton is Chief Marketing Officer, a key rainmaker, and a non-owner executive of Acme Ford, LLC.  The owners plan to sell the company in five years.  The goal is to provide a benefit package for Tom that causes him to remain with the firm for at least the next seven years (including two years after the expected sale of the company in order to remain a resource for the new owners).

They plan to provide Tom with a Controlled Executive Bonus plan in which the max-funded life insurance policy coupled with a disability income policy helps solve all four issues: disability, early death, retirement, and long-term care, as follows:

  • An employer-paid gross-up bonus is used to fund the premiums on the policy owned by Tom.
  • To help with needed family income should disability occur during pre-retirement years, Tom makes loans on the policy which he uses to pay for a personal, long-range, disability income policy with a benefit of $12,750 a month and annual premiums of $7,200.  (In this example, the policy loans don’t start until year 2, so an additional gross-up bonus is paid by the firm during the first year so Tom can net the needed $7,200.)
  • The policy death benefit serves the family well in the event of Tom’s early death.
  • The extensive after tax cash flow from policy loans adds an important source of retirement income.
  • In the event that institutional or home care is needed during retirement, an advance of a portion of the policy death benefit provides needed dollars.

Here is a flow chart of the case:

Controlled Executive Bonus Plan

blog-101-controlled-executive-bonus-plan-flow-chart-image

Click here for a copy of this Flow Chart for your personal use.

The question that Acme Ford has to answer is this: Will this plan glue Tom to the firm for 7 years?  For the answer, check out the snapshot below of the first 8 years outlining Tom’s repayment obligations.  There is a swing in Tom’s favor of $725,000 between his loss in year 7 and his gain in year 8.  This, coupled with the potential losses in prior years and the immense gains in subsequent years, should produce some serious superglue.

blog-101-snapshot-of-the-first-8-years-outlining-toms-repayment-obligations-image

Note:  In the plan documentation, Tom’s obligation to repay the bonuses during the first seven years would typically be waived should he die or be terminated without cause.

Another interesting aspect of the Controlled Executive Bonus plan is that, in view of the repayment liability, Tom may refuse to participate.  With the array of benefits provided by the plan, what would his refusal tell Acme Ford?  My guess is that Tom would likely be considering another employment offer.  What an unexpected management tool this could turn out to be!

Click here to review Tom’s Controlled Executive Bonus illustration using the Executive Security Plan module from the InsMark Illustration System.

The benefits to Tom are considerable:

  • No personal out-of-pocket cost;
  • A disability income policy with annualized tax free income of $150,000+;
  • A seven-figure pre-retirement life insurance death benefit;
  • A substantial post-retirement death benefit;
  • Annual, tax free, retirement cash flow of $125,000;
  • Residual cash value in the final year illustrated at $1.1 million.

Benefits to Acme Ford are the retention of a valuable key executive plus all plan funding is tax deductible.

Note:  In the absence of a business to fund the plan, the logic of this presentation will work for an individual as well.  In Part 2 next week, you’ll see how Tom can acquire this plan even if Acme Ford is unwilling to provide it.

Click here for a link to the disability income proposal used for the case study example above.  Most of you know how strongly I feel about comparison selling.  Pay particular attention to Page 3 to see the effective comparative strategy in the quote.

Note:  The disability income proposal and the carrier’s basic illustration should accompany the Controlled Executive Bonus illustration.

Conclusion

Good as the overall benefits are, without the disability income policy, Tom’s plan is a chair with only three legs: death benefit, retirement cash flow, and long-term care.

Resources

I know many of you currently have a disability resource, but for those who want a vital new relationship, we strongly recommend Disability Insurance Services in San Diego, CA, an InsMark’s Referral Resource, for disability income and long-term care.

Quotes are available for:

  • Individual Disability Income Insurance;
  • Business Overhead Expense Insurance;
  • Disability Buy/Sell Insurance;
  • Critical Illness Insurance;
  • Long Term Care Insurance;
  • Bank Loan (ensuring repayment of loans);
  • Lump Sum Key Person Insurance.

Click here for a link to the InsMark DI Quoting Service to request a proposal for any of the plans listed above.

 

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

Blog101.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 InsMark Systems

To license the InsMark Illustration System and/or Documents On A Disk, 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 Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

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 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

“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

 

Important Note #1:  The hypothetical life insurance illustration associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  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.

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More Recent Blogs:

Blog #100: Mysterious Fees for Mutual Funds

Blog #99: One More Time – The Value of “You” to Your Clients

Blog #98: The Value of “You” to Your Clients (Part 2 of 2)

Blog #97: The Value of “You” to Your Clients (Part 1 of 2)

Blog #96: Retirement Cash Flow Funded by Premium Financing

 

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 #100: Mysterious Fees for Mutual Funds

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(Presentations in this blog were created using the InsMark Illustration System.)

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Recently, I read an article in Forbes that examines the fees associated with mutual funds, and the results were surprising.  Below are the fees discussed in the article (click on the title of the table for a link to the article):

The Real Cost of Owning a Mutual Fund*

blog-100-non-taxable-account-taxable-account-comparison-image

*Article published in Forbes (4/04/2011).

blog-100-non-taxable-account-taxable-account-comparison-imageI typically include 1.00% or less for adviser fees in my illustrations when comparing Indexed Universal Life (IUL) to an equity account, but 4.17% in addition to that — really?  According to Forbes, 4.17% is an accurate representation ignoring any advisor fees charged by a qualified broker.  Let’s test the difference between a fee of 1.00% for the adviser and 5.00% (4.00% for the Forbes-type charges plus 1.00% for the adviser).

InsMark Case Study

Harvey Pierce, MD, is an internist practicing in San Francisco, CA.  He is considering acquiring $500,000 of additional IUL coverage.

Below is a graphic of the IUL illustration:

blog-100-img-3-insmark-case-study-graphic-of-the-IUL-illustration-image

Click here for the full illustration.

These are nice values, but not necessarily good or bad until compared with alternatives.  Most people make their best decisions in a comparative environment, so let’s do that for Dr. Pierce.

Following up with the fee discussion above, let’s compare the IUL with two equity accounts, one with a 1.00% fee for the adviser, and the other with a 5.00% fee (4.00% plus 1.00% for the adviser).  Other than that, the two equity accounts are identical:

  • Same deposit as the IUL;
  • Same cash flow as the IUL (for as long as possible);

I used the Various Financial Alternatives module in the InsMark Illustration System for the comparison.  Typically, this module does not allow you to compare two of the same accounts to the life policy; however, you can do this if you utilize the Customize investment selection and direct each to be taxed as an equity account.  If you do this, be sure to name each one differently so you can tell which is which.  In Dr. Pierce’s case, I used:

  • Equity Acc’t (1% Fee)
  • Equity Acc’t (5% Fee)

For both equity accounts, I assumed a capital gains and dividend tax rate of 30% (including a provision for state tax).  I assumed a 30% turnover ratio and 60% of the growth would be subject to long-term gains; 40% short-term gains.  Dr. Pierce’s 45% income tax bracket was also included.

Below is a graphic of the comparative results:

IUL vs. Equity Account

blog-100-IUL-vs-equity-account-image

Both equity accounts are depleted well before the final illustration year.  Equity Acc’t (1% Fee) collapses in Year 37 (age 83) and Equity Acc’t (5% Fee) disappears in Year 29 (age 75).

Click here for the full illustration.

The difference in long-range values is pretty amazing:

Results at Age 90

blog-100-results-at-age-90-cumulative-payments-after-tax-cash-flow-death-benefit-image

blog-100-after-tax-cash-flow

To match the cash flow and long-range cash value of the IUL, the Equity Acc’t (1% Fee) would need pre-tax equivalent growth of 10.12% plus the assumed dividend of 2.50% for a combined 12.62%.  To match the cash flow and death benefit of the IUL, the Equity Acc’t (5% Fee) would need pre-tax equivalent growth of 14.82% plus the assumed dividend of 2.50% for a combined 17.32%.  (You can see these numbers on Page 4 of the comparative illustration.)

Note to licensees of the InsMark Illustration System:  If you want to test these growth percentages, enter them in their respective fields in the System Workbook file available below.

The equity accounts are not competitive compared to the IUL — and notice that the full $500,000 death benefit is on top of the cash value throughout the entire IUL illustration.  Live or die — it’s a win/win for the IUL.

Here again is the quote from that superb article in the December 2014 issue of Trusts & Estates by Bill Boersma in which he discusses life insurance as an asset class: “I can only wonder if another asset with the same qualities would be implemented more frequently if it wasn’t called life insurance.”

Conclusion

It makes no difference if your recommended policy is a lot smaller or a lot bigger than Dr. Pierce’s, comparisons make an extraordinary difference to your clients’ understanding of the value of 21st century cash value life insurance.  If you have prospects and/or clients enamored of mutual funds, the research in the Forbes’ article noted at the top of this Blog, coupled with our ability to reflect aggressive management fees in our comparisons, should provide you with some pretty serious competitive tools.

There are several comparison modules in the InsMark Illustration System that can be used in this manner:

  • Other Investments vs. Your Policy (comparison to one alternative)
  • Various Financial Alternatives (comparisons of up to four alternatives)
  • Permanent vs. Term and a Side Fund

Comparing the policyowner’s cost of a premium financed plan with an equity account is another way this logic can be used.  Similarly, the policyowner’s share of any of our benefit plans — executive bonus, leveraged executive bonus, loan-based split dollar, loan-based private split dollar, leveraged deferred compensation, and 401(k) look-alike — can be impressively compared to an equity alternative.  To do this, click the following selection on the lower right of the benefit plan module while in edit mode:

sample

This will export the policyowner’s costs and benefits of that plan to the InsMark Source Data Storage files where it can be imported into one of the three comparative modules noted above (or into Wealthy and Wise®).

 

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

Blog100.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 InsMark Systems

To license the Premium Financing System and/or the InsMark Illustration System, 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 Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

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:

“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 Linsday, CLU, AEP, ChFC, InsMark Power Producer®, Top of the Table, International Forum, Pasadena, CA

“Thanks to InsMark, we recently set business goals in our firm that I basically thought were ridiculously unachievable – until now.”
Brian Langford, InsMark Platinum Power Producer®, Plano, TX

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  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.

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More Recent Blogs:

Blog #99: One More Time – The Value of “You” to Your Clients

Blog #98: The Value of “You” to Your Clients (Part 2 of 2)

Blog #97: The Value of “You” to Your Clients (Part 1 of 2)

Blog #96: Retirement Cash Flow Funded by Premium Financing

Blog #95: How Much Do I Really Need?

 

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 #99: One More Time – The Value of “You” to Your Clients

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

(Presentations in this blog were created using the InsMark Illustration System and the Premium Financing System)

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My last three Blogs (#96, #97, and #98) dealt with Premium Financing integrated with Wealthy and Wise, our wealth planning system.  With that, I thought I was done with premium financing for a while.  But over the weekend, one of our licensees told me his client’s CPA had reviewed one of his premium financing illustrations and pooh-poohed it by saying, “This is way too complicated.  Why not just take the cost of the premium financing and invest in some equities.”

That’s an unsophisticated, although not uncommon, objection to cash value life insurance in general.  So let’s see what happens if we compare a hypothetical equity account alternative to the premium financing case examined in Blog #98.

Here again are the results of the premium financing case using Indexed Universal Life (IUL):

Graphic from the Premium Financing Illustration
Robert Sullivan, Age 46

blog-99-premium-financing-illustration-image

Click here to review the full illustration.

Next, we’ll compare the cost of the premium financing illustration with an equity account using a growth rate of 7.50% (similar to the IUL interest rate used in the premium financing) plus a 2.50% dividend assumption for a total presumed yield of 10.00%.

Below is a graphic of the results from the Other Investments vs. Your Policy module in the InsMark Illustration System using the cost of the premium financing as the alternative deposit to the equity account.

blog-99-other-investments-vs-your-policy-module-in-the-insmark-illustration-system-image

Click here to review the full comparative illustration.

The results in favor of the premium financing are remarkable.  As you can see in the upper right quadrant of the graphic above, the gain in after tax retirement cash flow is almost $9 million.  And on the lower right, there is also almost $10 million of cash value in the premium financing instead of $0 in the equity account.

All this for the same payments into either plan of $926,169!

Over the years illustrated, the equity account would have to have a growth rate 15.55% plus the assumed dividend of 2.50% (total 18.05%) to match the overall results of the premium financing.  That’s 241% greater that the interest rate of 7.50% assumed for the IUL.  This clearly dismisses any convincing argument that IUL participation rates in the S&P don’t account for dividends.  They don’t need to!  It’s no wonder several big mutual companies recently tried to deliver a knockout blow to IUL.  Was it in the name of consumer protection as they claimed?  Hardly — it was due to critical competitive pressure on whole life.

This favorable result is not applicable merely to a comparison to an equity account.  It applies to virtually any comparison of a reasonable alternative to the IUL/premium financing combination.  For example, it would take a yield of 24.20% on a taxable account and 14.79% on an indexed tax deferred annuity to match the results of the premium financing (with zero life insurance protection).  If you ask for the System Workbook files associated with this Blog (see below), I included an illustration from the Various Financial Alternatives module in the InsMark Illustration System with precisely these results.

Note:  It doesn’t take a premium financing analysis to bury an equity account (or a taxable or tax deferred account).  A max-funded IUL will do the job — every time.

Conclusion

Most clients make the best decisions using comparisons, and you can’t counter the objection “Life insurance is a lousy investment” using just the basic illustration.  There is no economic theory that explains why a bad idea is acceptable just because you hear it frequently.  If you have the cash flow to buy what you want, cash value life insurance is the only logical choice.  InsMark can help you prove it.

Below is a quote from a terrific article in the December 2014 issue of Trusts & Estates by Bill Boersma in which he discusses life insurance as an asset class:

“I can only wonder if another asset with the same qualities would be implemented more frequently if it wasn’t called life insurance.”

Does all this convince you to include premium financing in your offerings to upscale clients?  It is not intended to unless it fits your comfort zone and your client base.  If nothing else, I hope my remarks emphasize the extraordinary power of IUL no matter in what context it is presented.

Details of the Equity Account Calculations

I assumed a capital gains and dividend tax rate of 30% (including a provision for state tax).  I assumed a 30% turnover ratio and 60% of the growth would be subject to long-term gains; 40% short-term gains.  The Sullivans’ 45% income tax bracket was also included.

I also used a 1.50% management fee.  Too high?  Too low?  Ask a dozen experts and you’ll get varied opinions.  In next week’s Blog #100, I’ll have some details on management fees — the results will likely surprise you.

 

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

Blog99.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 InsMark Systems

To license the Premium Financing System and/or the InsMark Illustration System, 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 Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

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:

“Standard premium financing illustrations produce much in the way of great data, but it takes the InsMark Premium Financing System to really present compelling numbers; however, the integration of that data into InsMark’s comparative modules like Various Financial Alternatives and Wealthy and Wise is really what makes premium financing sizzle.”
Chris Jacob, CFP, SFI-Cadeau, St. Louis, MO, InsMark Platinum Power Producer®

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag.  I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, Grafton, WI, InsMark Gold Power Producer®

 

Important Note #1:  This information in this Blog and any 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.

Important Note #2:  The hypothetical life insurance illustrations associated with this Blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

seperator bar

More Recent Blogs:

Blog #98: The Value of “You” to Your Clients (Part 2 of 2)

Blog #97: The Value of “You” to Your Clients (Part 1 of 2)

Blog #96: Retirement Cash Flow Funded by Premium Financing

Blog #95: How Much Do I Really Need?

Blog #94: How to Double Your Affluent Clients

 

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