Blog #112: Retirement Planning Strategies Using Indexed Universal Life

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Editor’s Note:  Blog #112 involves a comprehensive financial plan in which a Private Retirement Plan funded with Indexed Universal Life is included as an alternative planning strategy in a do-it vs. don’t-do-it comparative analysis.  Due to the new regulations for Indexed Universal Life, the policy reflects a reduced illustration rate of 6.85%.

The Private Retirement Plan in this analysis involves a cash-rich life insurance policy used to accumulate funds prior to retirement from which secured participating loans are taken during retirement years.  “Private” in this sense is used to make the distinction between this plan and a tax qualified plan such as an IRA, or 401(k), or profit sharing plan.  There are no restrictions on the amount of funds paid into a Private Retirement Plan, and no approval or permission from the IRS is required for any aspect of it.

The following three features of the life insurance used in such plans are what make the results so unique:

  • Cash values accrue without income tax;
  • Cash values can be accessed without income tax using withdrawals to basis and/or loans;
  • Death benefits are paid to beneficiaries without income tax.  (This applies to the full death benefit, including any cash value component whether loans exist or not.)

Case Study

The purpose of this Case Study is to compare retirement planning for Tony and Jennifer Callahan with and without the use of a Private Retirement Plan, then substitute and compare term insurance as an alternative, and then introduce an innovation that increases spendable retirement cash flow considerably.

Tony and Jennifer are ages 45 and 40.  He is a physician, and she is a CPA.  Between them, their after tax income is $300,000.

The Callahans’ present plan is to duplicate their current after tax income of $300,000 beginning at retirement ages 65/60 and index it by 3.00% a year for an inflation offset.  This will be reevaluated yearly and adjusted accordingly as their after tax income changes.

Their current net worth is a little over $2,000,000.  Below are the details:

Blog-112-img-2-retirement-planning-strategies-current-net-worth-image

Click here for comments regarding yields and Monte Carlo simulations.

Strategy 1
Current Retirement Plan

Based on the above assumptions, below is a Wealthy and Wise® graphic of Strategy 1, Tony and Jennifer’s illustrated net worth over the next 50 years.  It includes the withdrawal of spendable, retirement cash flow of $300,000 a year starting at their ages 65/60 and increasing by 3.00% a year thereafter.

Wealthy and Wise
Strategy 1 Net Worth
(After Providing Desired Cash Flow)

Strategy-1-Net-Worth

That looks good, but let’s see if we can improve it.

Strategy 2
Add Indexed Universal Life

We’ll integrate a Private Retirement Plan into their analysis by funding it with a max-funded Indexed Universal Life (IUL) policy with $2,276,000 of level death benefit bearing five scheduled $100,000 premiums.  Due to the new regulations affecting IUL, the policy is illustrated at 6.85%, and we’ll call this Strategy 2.

Below is a graphic of the policy’s illustrated performance:

InsMark Illustration System
Illustration of Values

Illustration-of-Values

Click here to review the IUL illustration associated with Strategy 2.

Normally, if you present the Callahans with an illustration like this, their reaction would likely be “Are you crazy?  A $100,000 premium is a third of our current after tax income.”  But here comes the magic of Wealthy and Wise because we can direct the program to integrate the policy into their overall asset base.

  • The premiums will be paid by withdrawals from their current net worth;
  • The policy values will add to their net worth;
  • The policy loans will provide a large portion of their annual $300,000+ spendable retirement cash flow.

Below is the revision to Tony and Jennifer’s illustrated net worth over the next 50 years including the impact of the IUL.

Wealthy and Wise
Net Worth Strategy 2
(After Providing Desired Cash Flow)

Net-Worth-Strategy-2

Below is a Wealthy and Wise graphic comparing the two strategies.

Wealthy and Wise
Strategy 1 vs. Strategy 2

Strategy-1-vs-Strategy-2

Strategy 2 shows a long-range increase in net worth in excess of $8,000,000.  The additional net worth is caused in large part by the substantial policy loans from the IUL which significantly reduces the amount of principal needed from other assets.  Be sure you understand that the only difference between Strategy 1 and Strategy 2 is the inclusion of IUL in Strategy 2.  In all other respects, they both use the same data.

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

In the lower half of the graphic, you can see that both strategies produce $14,000,000+ in spendable retirement cash flow.  $9,000,000 of that is $300,000 a year times 30 retirement years (ages 65/60 through ages 95/90).  The balance is the result of the 3.00% indexing.  Strategy 2 shows $500,000 more cumulative spendable cash flow than Strategy 1 as the system is accounting for the five $100,000 IUL premiums added to desired cash flow.  Remember — this technique involves an asset transfer for the IUL premiums so Wealthy and Wise is accounting for the funds needed for those five premiums.

I rarely use words like “astonishing” in my Blog, but I will this time — Strategy 2 has produced an astonishing result.  Note that this result has the IUL illustrated at a lower interest rate (6.85%) as required by the new IUL regulations.

Click here to review a report summarizing the year-by-year cash flow and net worth numbers for Strategies 1 and 2.

Click here for all the reports associated with Strategy 1 and Strategy 2.  I included all possible reports, 89 pages in total.  Pages 1 through 6 are the key comparison summaries; the balance of the reports show how the significant increase in net worth is accomplished.

That is a large number of reports; however, with a Wealthy and Wise evaluation, I recommend that you have all the reports for a given case with you when you are visiting with a client or client’s attorney or CPA.  Wealthy and Wise backs up every number shown, and you never know which report you’ll need to answer the inevitable question, “Where did this number come from?”  That’s why I provided all of them to you in this Blog so you can familiarize yourself with them; however, you can accomplish the same thing if your presentation involves a computer as you can access the relevant reports via the Report menu.

Experienced Wealthy and Wise licensees usually select a few key illustrations for the main report and put the balance in an Appendix.  Even more elaborate report organization can be accomplished (Table of Contents, Section pages, etc.) through use of this prompt at the bottom right of the Main Workbook Window.  (I used it to prepare the reports for Strategy 1 vs. Strategy 2 available above.)

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Strategy 3
Substitute Term Insurance

termite-imageSomewhere, someone like Suze Orman will surely say, “Yeah, but you could do even better if the Callahans bought term insurance and invested the difference.”  As the saying goes, “some people know the price of everything and the value of nothing.”  Let’s dispel that term insurance myth right now as it relates to 21st century cash value life insurance.

 

Below is a Wealthy and Wise graphic where we created Strategy 3 (Term Insurance Instead of Indexed UL) by replacing the $2,276,000 IUL on Tony with $2,276,000 of 20-year level term insurance. The 20-year term policy has a level annual premium of $2,450.

Wealthy and Wise
Strategy 1 vs. Strategy 2 vs. Strategy 3

Strategy-1-vs-Strategy-2-vs-Strategy-3

It’s not even close.  Strategy 3 results in a $8.6 million long-range decrease in net worth compared to Strategy 2 due solely to the use of term insurance instead of IUL.

Click here to review just four of the reports from Strategy 3 that show the year-by-year differences that result when term insurance is substituted for the IUL.  If you are licensed — or become licensed — for Version 12.0 (or higher) of Wealthy and Wise and want to review all the reports for Strategy 3, request the Wealthy and Wise Workbook file from us available below.

Click here to review a report summarizing the year-by-year cash flow and net worth numbers for Strategies 1, 2, and 3.

Strategy 4
More Cash Flow

The Callahans might well ask, “Since the IUL produces so much more net worth, can some of it be used to provide additional cash flow during retirement?”  Wealthy and Wise has a calculator that can compute this automatically subject to the available liquid assets and/or liquidation of illiquid assets.

Below is a Wealthy and Wise graphic where we created Strategy 4 (Indexed UL Plus More Cash Flow) where additional spendable cash flow of $100,000 a year is scheduled from age 65/60 to 85/80.  (This was an arbitrary selection on my part as the calculator can produce a variety of answers based on the selection of amount, indexing, duration, etc.)

Wealthy and Wise
Strategy 1 vs. Strategy 2 vs. Strategy 4

Strategy-1-vs-Strategy-2-vs-Strategy-4

With Strategy 4, total retirement cash flow is increased by $2 million by reducing long-range net worth to $6.8 million, slightly in excess of Strategy 1.  Use for the funds could be additional cash flow, gifts to children or a trust on their behalf, premiums for disability income or long-term care policies, charitable gifts, etc.

If you are licensed — or become licensed — for Version 12.0 (or higher) of Wealthy and Wise and want to review all the reports for Strategy 4, request the Wealthy and Wise Workbook file from us available below.

Click here to review a report summarizing the year-by-year cash flow and net worth numbers for Strategies 1, 2, and 4.

Click here for a few questions and answers about this case that may be useful including how you can calculate additional cash flow using Wealthy and Wise.

Final Thought #1

I know that many of my readers are comfortable selling the retirement cash flow features of IUL using a stand-alone illustration that is not integrated with a client’s other assets.  Clients typically consider the premiums to be an expense for such plans.  Changing to a Wealthy and Wise analysis creates a new learning curve because your presentation changes to an asset transfer.  Believe this: the wealthier a client, the easier it is to convince him or her of the power of integrating IUL into their portfolio of assets with this type of analysis.  With allocations from current assets as the source of the IUL premiums as shown in this Blog, it becomes a case of “comparing assets and cash flow if you do it — with what happens when you don’t.”  That is a completely different presentation, and it can have compelling results for you.

The payoff?  You will develop much higher average compensation per case and a client locked into your planning expertise, not just as an IUL policyholder.  Tended carefully, you will likely have this client for life.

If you are an experienced user with Wealthy and Wise, putting a case together like this will be relatively straightforward.  (See below to obtain the electronic Workbook I used to prepare the data for all the Strategies in this Blog.)

That’s the good news.  The bad news for some is that you have to gather all of your client’s financial data for this type of analysis.  Many of my readers are used to doing this.  For those of you who are not so comfortable with it, how do you feel about asking a prospective client to reveal details of financial data?  Clearly, you have to earn a prospective client’s trust to do that.  My suggestion for the best way to gain that confidence is to share examples of how this concept works for others — this Blog, for example, or the Wealthy and Wise reports associated with it.

Note:  A Fact Finder is available in Wealthy and Wise to guide you in your data gathering (see Tools on the main menu bar).  Many of our licensees tell me they think the Fact Finder is best filled out with the client(s) present and involved in the process.

At first glance the Fact Finder may look intimidating, but on most pages, you will be entering data in only a few of the listed categories.  To acquaint yourself with it, try filling one out for your own situation.

If you are new to Wealthy and Wise, I suggest using one of our Referral Resources (see below) to help you with your first few cases. Their help can be invaluable.

Final Thought #2

The following paragraph appeared earlier in this Blog, and I want to draw your attention to a different aspect of it — particularly the last sentence:

The Callahans’ present plan is to duplicate their current after tax income of $300,000 beginning at retirement ages 65/60 and index it by 3.00% a year for an inflation offset.  This will be reevaluated yearly and adjusted accordingly as their after tax income changes.

As their income increases, Tony and Jennifer will likely want to increase the projected amount of spendable, retirement cash flow at retirement, and here is the point:  They will need you to bring their plan up-to-date every year, and this means you not only have opportunities for additional planning strategies, you also have the opportunity to charge an annual monitoring fee for each review.  This is easier to negotiate if you charge a fee for the initial study.  Look what you can accomplish for clients like the Callahans who are likely to be stunned by the results of the analysis.  Isn’t this worth a good-sized fee?

Blog #98 includes a monitoring fee in a Wealthy and Wise analysis.  The fees are coupled with a premium financing case, but the logic involved fits any planning case.  Review Blog #98 for the ease in which monitoring fees can be included in an evaluation.  Blog #97 is also a good resource if you are contemplating charging monitoring fees.

Note:  Before charging monitoring fees, be sure to check state/federal broker dealer and insurance company compliance.

Licensing

To license Wealthy and Wise 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 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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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.

 

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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.

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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.

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"I am writing to give you a ringing endorsement for the Wealthy and Wise System.  As you know, I am a LEAP practitioner, and the Wealthy and Wise software has helped me supplement my LEAP skills and increase my commissions.  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."
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Simon Singer, International Forum Member, InsMark Power Producer, Encino, CA

"If you don’t get the client to distinguish cash flow from net worth, you won’t make the case sale.  In my experience, Wealthy and Wise is the only system that recognizes this important estate planning component.
Stephen Rothschild, CLU, ChFC, CRC, RFC, International Forum Member, Saint Louis, MO

 

Important Note #1:  The hypothetical life insurance illustrations 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.

Important Note #3:  The information in this Blog 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 #111: Part 2 of the Impact of New Regulations on Indexed Universal Life

Blog #110: Impact of New Regulations on Indexed Universal Life (Part 1 of 2)

Blog #109: The Key to Tax-Efficient Strategies in Retirement Planning

Blog #108: Profit Sharing Plan vs. Indexed Universal Life (Part 3 of 3)

Blog #107: Profit Sharing Plan vs. Indexed Universal Life (Part 2 of 3)

 

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 #111: Part 2 of the Impact of New Regulations on Indexed Universal Life

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

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Editor’s Note:  Blog #111 is a revision of Blog #84 by taking into account the impact of the new regulations impacting Indexed Universal Life (“IUL”).  It examines powerful comparisons between IUL and “term and invest the difference” using both an equity account and a Keogh plan as the alternative investment.  The results may surprise you.

Your self-employed prospects/clients are often eligible for Keogh contributions well in excess of IRA limitations.  As is generally the case, when you compare cash value life insurance to any tax deferred retirement plan like a Keogh or IRA or 401(k), the life policy is typically the winner by a large margin.

Last week in Blog #110, I presented a life insurance analysis for Laura Lake Johnson, age 35, a very successful landscape painter living in Carmel, CA.  Laura is single with a four-year-old daughter, Caroline.  As a self-employed artist, retirement planning is solely Laura’s responsibility.  In Blog #110, Laura was considering $1,000,000 of level death benefit coverage using IUL that provides her with substantial after tax retirement cash flow.  For a reason described below, the IUL illustration in Blog #111 has an increasing death benefit during pre-retirement years; level thereafter.

Due to new regulations, Blog #111 uses an illustrated rate for the IUL of 6.85%.

Laura’s Proposed IUL Policy
Increasing Death Benefit for 30 Years; Level Thereafter
Illustrated at 6.50%
Five Annual Premiums
($23,802 each)
$119,010
Initial Death Benefit $1,000,000
Cumulative After Tax Policy Loans for
Retirement Cash Flow from Age 65 - 95
$2,088,194
Cash Value at Age 95
Pre-Tax Equivalent Rate of Return at Age 95
$668,971
11.51%
Death Benefit at Age 95
Pre-Tax Equivalent Rate of Return at Age 95
$719,682
11.53%
This Table assumes the non-guaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.

Click here to review the IUL illustration.

Laura mailed the illustration to her CPA.  A few days later, he asked her an interesting question: “Why pay almost $24,000 for something you could get for under $700?”  (He is referring to a $680 annual premium for $1,000,000 of 30-year, level term insurance.)  He added, “Do you think you might be better off investing the difference in a good mutual fund?

The CPA has surfaced “buy term and invest the difference”, and in response for this analysis, I am using IUL with an increasing death benefit.  When comparing cash value life insurance to level term insurance (30-year term in this case) and a side fund, it is generally better to use a cash value policy with an increasing death benefit; otherwise, the term and its side fund combination will have an overall death benefit advantage until the term expires.

The following graphic summarizes the results of comparing the IUL to term insurance coupled with an equity account with a growth rate of 6.85%.  The indexes available for IUL generally don’t credit a dividend.  The current S&P 500 dividend yield is 1.99% so let’s round that to a 2.00% dividend and add that to the equity account growth rate for a gross yield of 8.85%, 200 basis points greater than the IUL.  The identical after tax retirement cash flow from the IUL is illustrated being withdrawn from the equity account until it collapses.

InsMark Illustration System
Indexed Universal Life
vs.
Term Insurance and an Equity Account

The identical after tax retirement cash flow from the IUL is illustrated being withdrawn from the equity account until it collapses

*This graphic assumes the non-guaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable; however, the ratio of the comparison should remain relatively stable given equal interest and growth assumptions.

The equity account is consumed by Laura’s age 77 shortchanging her by $1,414,407 in after tax retirement cash flow over the years illustrated compared to the IUL.

What caused the reduced growth of the equity account?  Four factors: 1) tax on capital gains caused by withdrawals; 2) tax on dividends; 3) portfolio turnover; and 4) management fees.

Click here to review the detailed comparison reports.  As you can see from the Matching Interest Rate report on Page 4, it requires growth of 11.51% for the equity account (including the assumed 2.00% dividend) to match the living results of the IUL over the years illustrated.  (This is 466 basis points higher than the assumed yield of 6.85% of the IUL.)

This is an impressive analysis,” says the CPA upon reviewing the new numbers, “but as we have discussed in the past, Laura, you are eligible to participate in a Keogh plan at a very high level.  Let’s have your adviser analyze the impact of contributing to a Keogh for five years coupled with the term insurance.”

Keogh/Term Plan Analysis

Since Laura will deduct the contribution to the Keogh but not the term premiums, the following calculation logic is assumed:

Keogh/Term Plan Analysis

The following graphic summarizes the results of comparing the IUL to term insurance coupled with the Keogh earning a tax deferred yield of 6.85%.

InsMark Illustration System
Indexed Universal Life
vs.
Term Insurance and a Keogh Plan

this graphic summarizes the results of comparing the IUL to term insurance coupled with the Keogh earning a tax deferred yield of 6.85%

*This graphic assumes the non-guaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable; however, the ratio of the comparison should remain relatively stable given equal interest and yield assumptions.

The Keogh collapses at Laura’s age 77 shortchanging her by $1,432,390 in after tax retirement cash flow compared to the IUL.

What caused the reduced growth of the Keogh?  All withdrawals from the Keogh are taxable which means they must be grossed-up to match the after tax participating loans from the IUL.  It’s simply no contest!

Click here to review the detailed comparison reports.  As you can see from the Matching Interest Rate report on Page 4, it requires growth of 8.92% (207 basis points higher than the assumed yield of 6.85% of the IUL) for the Keogh to match the living results of the IUL over the years illustrated.

Note:  Small withdrawals are illustrated from the Keogh in years 6 through 30 to provide Laura with the $680 for the after tax cost of the term premiums (including a factor for the 10% penalty tax through her age 59).  (See the Term and Keogh Plan Detail report on Page 10 of the illustration.)

Additional Advantages of IUL vs. Keogh/Term

The IUL has four additional advantages:

  • If the market turns negative, there is no market risk to the policy owner;
  • There is no 10% penalty tax associated for distributions prior to age 59½;
  • There are no required minimum distributions during retirement;
  • There is a substantial tax free life insurance death benefit available during retirement.
Summary of the Alternatives
  (1) (2) (3)
  Equity Account Keogh/Term Indexed UL
Cum. After Tax Payments $119,010 $119,010* $119,010
Cum. After Tax Cash Flow (Age 65 – 95) $673,787 $655,804 $2,088,194
Residual Cash Value at Age 95 $0 $0 $668,971
Overall Living Value to Laura $673,787 $655,804 $2,757,165**
*After a 35% income tax deduction on the five Keogh contributions.
**309% greater than the Equity Account; 320% greater than the Keogh/Term.

Conclusion

So — is there ever a reason for spending almost $24,000 for something you can get for under $700?  You bet there is!

Other Policy Forms

This comparison works equally well using other forms of cash value life insurance such as whole life, universal life, and variable universal life provided corresponding adjustments are made to the yield/growth of the equity and Keogh accounts that reflect levels of risk assumption corresponding to the type of policy selected.

Other Tax Deferred Retirement Plans

This type of comparison also works well with other Tax Deferred Retirement Plans such as an IRA or 401(k) — provided only dollars in excess of those contributed by the employer are used for the life 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

Blog111.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.

 

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

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Doug Peete, Past President, Top of the Table, InsMark Power Producer®, Overland Park, KS

“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, InsMark Power Producer®, Grafton, WI

 

Important Note #1:  The hypothetical life insurance illustrations 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.

Important Note #3:  The information in this Blog 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 #110: Impact of New Regulations on Indexed Universal Life (Part 1 of 2)

Blog #109: The Key to Tax-Efficient Strategies in Retirement Planning

Blog #108: Profit Sharing Plan vs. Indexed Universal Life (Part 3 of 3)

Blog #107: Profit Sharing Plan vs. Indexed Universal Life (Part 2 of 3)

Blog #106: Profit Sharing Plan vs. Indexed Universal Life (Part 1 of 3)

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 #110: Impact of New Regulations on Indexed Universal Life (Part 1 of 2)

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

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

Getting Started with InsMark Training Video

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Editor’s Note:  Blog #110 involves a revision of Blog #83:  Chrystal Clear Alternatives, in which the presentation for Laura Lake Johnson is changed to illustrate the effect of the new regulations pertaining to Indexed Universal Life scheduled for implementation in September 2015.

Analysis of the regulations indicates two main features:

  • The maximum illustrated rate will be slightly less than 7.0%.  Blog #110 uses an illustrated rate of 6.85%.
  • The spread between the interest rate credited to policy values and the loan interest rate on participating loans borrowed from the policy is reduced.

Please understand that these restrictions apply only to illustrations of IUL.  The performance of in-force IUL will not be restricted in a similar manner.

Apparently, participating whole life insurance issued by the mutual life insurance companies has taken a serious beating from IUL, and the new regulations were promoted by them as a competitive move.  The IUL carriers appear to have responded forcefully as the results shown below are remarkable.

Laura Lake Johnson, age 35, is a successful landscape painter specializing in seascapes in watercolor and oil.  She has a four-year-old daughter, Caroline.

As a self-employed artist, retirement planning is solely Laura’s responsibility, and she is reviewing a ledger for a max-funded Indexed Universal Life (“IUL”) policy illustrated at 6.85%.  It includes a substantial $1,000,000 death benefit to help care for Caroline should anything happen to Laura.  It also illustrates $2,179,446 of total, after tax, retirement cash flow for Laura from her age 65 to age 95.  Premiums are scheduled at $23,802 annually for five years.

Note:  In all the examples in this Blog, Laura’s after tax retirement cash flow from the IUL policy consists of participating policy loans in which policy cash values securing loans continue to participate in the credited interest rate.

As is typically the case, her Basic Illustration from the insurance company is 20+ pages long, and although it includes very valuable information, it is an appalling presentation piece.  What can you add to this tedious document that not only brightens the presentation but makes it more easily understood by Laura?

Illustration of Values is one of the most straightforward reports from the InsMark Illustration System.  By including it as a forerunner to the Basic Illustration, communication to Laura can be significantly improved.

Below is the key graphic from Laura’s Illustration of Values:

Illustration of Values

blog-110-img-1-Illustration-of-Values

Click here to review the entire illustration from Illustration of Values.

Do you want it even simpler?  The most uncomplicated of all reports is Life Plan from the InsMark Illustration System.

Below is the key graphic from Laura’s Life Plan illustration:

Life Plan

blog-110-img-2-Life-Plan-illustration

Click here to review the entire illustration from Life Plan.

A Little More Complex

For those who prefer comparing alternative investments to the values of the life insurance, using our popular Various Financial Alternatives from the InsMark Illustration System produces a compelling, although more complex, presentation.  You can choose from 21 different alternative investments or customize your own.

For Laura, we compared IUL illustrated at 6.85% with a Taxable Account and a Tax Deferred Account, both at 6.85%, and assumed a growth rate for the Equity Account of the same 6.85%.  The indexes available for IUL generally don’t credit a dividend.  The current S&P 500 dividend yield is 1.99% so let’s round that to a 2.00% dividend and add that to the Equity Account growth rate for a total yield of 8.85%, 200 basis points greater than the IUL.

We matched the after tax cash flow from the IUL with after cash flow from each of the alternatives.  (None but the IUL lasted for the entire duration of the illustration.)

Below is the key graphic from Laura’s Various Financial Alternatives illustration:

Various Financial Alternatives

blog-110-img-3-Various-Financial-Alternatives-illustration

Click here to review the entire illustration from Various Financial Alternatives.

It is remarkable that the best alternative shown against the IUL is the Equity Account which terminates at Laura’s age 78 — way too early for retirement cash flow to cease.  Long-range the IUL produces almost 3 times as much after tax retirement cash flow even though the Equity Account is illustrated at 200 basis points more yield.

The Equity Account requires a yield of 11.36% (including the 2.00% dividend) to match the results of the IUL illustrated at 6.85%. See Page 4 of the Various Financial Alternatives Illustration for details.

Note:  At first glance, the account values for the Tax Deferred Account in Column 3b on Pages 2 and 3 may look too low.  Be sure to review Pages 10 and 11 for clarification.

You may find the illustration from Various Financial Alternatives too busy with numbers.  In this event, I recommend Other Investments vs. Your Policy from the InsMark Illustration System which compares the life policy to your selection of just one of the alternative investments.  We selected the Equity Account with the same assumptions used in Various Financial Alternatives.

Below is the key graphic from Laura’s Other Investments vs. Your Policy illustration:

Equity Account vs. Indexed Universal Life

blog-110-img-4-Other-Investments-vs-Your-Policy-illustration

Click here to view the entire illustration from Other Investments vs. Your Policy.

Combination Illustrations

A good combination of illustrations couples Life Plan (for simplicity) with Various Financial Alternatives (for comparisons).  Click here to view it.

You can print combinations of illustrations by using the icon below that appears on the lower right of the Main Workbook Window.  (Be sure you have all the illustrations for the combination you want in the same workbook.)

blog-110-img-5-Workbook-new-preview-print

Conclusion

While InsMark has plenty of advanced illustration capacity, our comparative Supplemental Illustration formatting is what has made us so popular to so many.  I hope it proves useful to you.

I am not suggesting that you ignore Laura’s multiple-page Basic Illustration from the insurance company — only that you disregard it as your primary presentation tool.  It is complex because it serves too many masters: actuarial, legal, compliance, you — and finally, Laura.

Please understand that the purpose of InsMark is to augment the carrier’s Basic Illustration; however, our Supplemental Illustrations are not valid without this footnote (or some carrier-approved variation of it) appearing at the bottom of our numerical data:

This illustration assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  This illustration is not valid unless accompanied by a basic illustration from the issuing life insurance company.

 

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

Blog110.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.

 

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

“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 Power Producer®, Overland Park, KS

“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, InsMark Power Producer®, Grafton, WI

 

Important Note #1:  The hypothetical life insurance illustrations 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.

Important Note #3:  The information in this Blog 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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Blog #109: The Key to Tax-Efficient Strategies in Retirement Planning

Blog #108: Profit Sharing Plan vs. Indexed Universal Life (Part 3 of 3)

Blog #107: Profit Sharing Plan vs. Indexed Universal Life (Part 2 of 3)

Blog #106: Profit Sharing Plan vs. Indexed Universal Life (Part 1 of 3)

Blog #105: Stretch, Charitable, Roth (Three Smart IRA Strategies)

 

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