Blog #146: New Logic for Permanent vs. Term (Part 1 of 3)

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“Buy term and invest the difference” continues to be the siren song of the uniformed — folks like Dave Ramsey and Suze Orman.  I have written several Blogs on the inefficiency of term insurance.  Click here to access an inside page of the Blog Index to review them when you have some time for study.

But for now, I want to explore a new way to counter the Permanent vs. Term argument.

Case Study 1a

Tom Robinson is age 35.  He has decided that Indexed Universal Life (“IUL”) is the policy for him and is considering $600,000 in face amount with premiums of $20,000 a year until his expected retirement at age 65.  Values are illustrated at 7.00%

Tom is in a combined federal and state marginal income tax bracket of 35.00%, and I have prepared a comparison to 30-year term with a face amount of $600,000 coupled with a side fund of an indexed tax deferred account (like an Indexed Annuity) yielding the same 7.00% as the IUL.

The term premium is among the lowest I could find on the web -- $525 for $600,000 of 30-year level term.

blog-146-image-2-illustration-indexed-ul-term-insurance-indexed-deferred-annuity

*The smallest face amount that produces a non-MEC
(increasing death benefit for 30 years; level thereafter)
Red arrow = income tax shrinkage.

Here is the tax calculation for the Indexed Annuity:

  1.   $1,968,405 = value at end of year 30
  2.   $  584,250 = 30 x $19,475 (cost basis)
  3.   $1,384,155 = gain in the contract (a – b)
  4.   $  484,454 = income tax at 35.00%
  5.   $1,483,951 = net proceeds (a – d)

Note:  Unless the income tax bracket tops out at 35.00% in 30 years, the income tax on the gain in the Indexed Annuity side fund would be considerably higher due to the $1,384,155 gain in the contract being taxed all in one year.  But let’s be positive and hope for a future top tax bracket of 35.00%.  (The IUL fortunately does not have to deal with this risk.)

Now comes the new illustration strategy – a tax free participating loan of $1,483,951 is scheduled on the IUL at the beginning of year 31 that is sufficient to empty the Indexed Annuity when $1,483,951 is withdrawn from it.  The annuity is effectively surrendered while the life policy continues on – with the most extraordinary results.

Real Wealth Involves Sustainable Cash Flow

The transaction leaves sufficient value in the IUL that, starting the next year, it can support tax free annual loans of $100,000 for supplemental retirement cash flow through Tom’s age 95 (and continuing should he live longer).  This produces cumulative retirement cash flow of $2,900,000 for a total of $4,383,951 including the $1,483,951 realized at retirement.  In addition, the IUL has residual cash value remaining at the end of the analysis of $1,336,676.  The Indexed Annuity is depleted at Tom’s age 65.

So -- as Tom’s 30-year term insurance expires, he arrives at retirement with IUL producing tax free capital of the identical amount of after tax capital contained in the annuity side fund ($1,483,951).  The IUL also generates $2,900,000 in further retirement cash flow plus residual value of $1,336,676 at the end of the analysis.  The IUL is the clear “winner” – it’s not even close.

Here is a snapshot of the summary on the bottom right of Page 3 of 12 of the illustration available below:

blog-146-image-3-surrender-the-annuity-at-age-65

Below is a graphic of the results:

Term Insurance and an Indexed Annuity @ 7.00%
vs.
Indexed Universal Life @ 7.00%
Image 1

blog-146-image-4-term-insurance-and-an-indexed-annuity-vs-indexed-universal-life

Click here to review this comparative illustration from the InsMark Illustration System produced by the Permanent vs. Term module on the Personal Insurance tab.

The key illustration pages are Pages 2 and 3 of 12.  Equally important are the four pages that follow which detail the Indexed Annuity’s values.  Bear down on these four pages to be sure you follow the tax implications of the transaction.

As you can see on Page 8 of 12, the indexed annuity would have to earn 10.35% to match the results of the IUL (335 basis points more than the IUL at 7.00% – almost half again as much).

The graphics starting on Page 9 of 12 are particularly informative.

Case Study 1b

If Tom were to retain the $1,483,951 in the IUL at age 65, his annual after tax retirement cash flow could increase to $204,044 through his age 95 (and continuing should he live longer), a rather amazing result.  This would, of course, mean the deferred annuity could also produce after tax cash flow if it is not surrendered, but only an after tax amount of $204,044 for eight years, then $180,082 for one year, at which point it would be depleted.

Here is a snapshot of the summaries of Case Studies 1a and 1b:

blog-146-image-5-case-study-surrender-annuity-at-age-65-vs-retain-annuity-for-income

Click here to review this comparative illustration from the InsMark Illustration System produced by the Permanent vs. Term module on the Personal Insurance tab.

Conclusion

Hey, Dave Ramsey and Suze Orman, what do you think of us now?

Buy term and invest the difference?  As usual, cost bears no relationship to value.  Clearly, term insurance has its place for those with small budgets or covering short-term needs, but not as a participant in alternatives to cash value life insurance.

“Fallacies do not cease to be fallacies because they become fashions.”
— G.K. Chesterton

The next time you run into a prospect that raises the “invest the difference” argument, ask this question: “Do you dislike cash value life insurance so much that you’ll sacrifice yield just to avoid it?”

This almost always generates this response, “What do you mean?”

Respond with, “I need fifteen minutes to show you.  When can we do that?”

Try asking it this way with a hostile attorney or CPA who indicates a preference for term, “Do you dislike cash value life insurance so much that you’ll recommend your clients sacrifice yield just to avoid it?”  Be prepared, it will annoy them.

Sales suggestion:  Always bring a comparison to term and invest the difference with you to any interview – even if you think you won’t need it.  You may not need it, but is it ever valuable if you do.  You never know when this issue will surface.  Imagine an interview where your prospect (or his attorney or CPA who happens to be present) brings this up just as you are ready to close the sale.  The comparative analysis requires a demonstration of the math involved, and it is difficult to do it without the proof of the numbers.  So have several of them with you.

Click here for some information about preparing this illustration that will be helpful if you want to duplicate as I have shown.  (Downloading the digital workbook file for Blog #146 below will also be helpful as you can see the precise keystrokes I used in the InsMark Illustration System to prepare the illustration.)

More on the Subject

In Blog #147: New Logic for Permanent vs. Term (Part 2), I’ll examine buy term and invest the difference with the “difference” in an equity account with growth at 7.00% plus a 2.00% dividend, the latter being the missing component of the typical index associated with IUL.  (It’s the price paid for no downside below a 0.00% yield with IUL.)

I’ll also discuss the impact of what happens to this analysis in a future world of increased taxes.  Although the election of Donald Trump likely delays this from happening, I think it is ultimately inevitable in view of the expected growth of the federal deficit due to unfunded entitlements and the lurking menace of major increases in interest rates on federal debt.

In Blog #148: New Logic for Permanent vs. Term (Part 3), I’ll examine permanent vs. term in the context of a comprehensive Wealthy and Wise® evaluation comparing retirement cash flow, net worth, and wealth to heirs.

 

InsMark’s Digital Workbook Files

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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.

 

Licensing InsMark Systems

To license any of the InsMark software products, visit our Product Center online 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.

For help on how to use InsMark software, go to The Quickest Way To Learn InsMark.

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.

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Testimonials

“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 Gold Power Producer®, Grafton, WI

“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’s Checkmate® Selling strategy is still one of the most compelling tools to bring a client to a definitive decision, based on their best case alternatives!!!  Solid mathematical comparisons that prove the validity of our insurance solution!!!”
Frank Dunaway, III, CLU, Legacy Advisory Services, Carthage, MO

 

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.

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.

“InsMark” and “Wealthy and Wise” are registered trademarks of InsMark, Inc.

 

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More Recent Blogs:

Blog #145: The $23 Trillion Market

Blog #144: Don’t Burn the Nest Egg®

Blog #143: Premium Financing Opportunities In The Small Case Market

Blog #142: Increased Taxes Are Coming

Blog #141: Strategic Philanthropy

 

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 #145: The $23 Trillion Market

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(There are no InsMark presentations used in this blog.  It is a an informational blog only)

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Bob Ritter's blog 145 the 23 trillion dollar market

As of 2016, there are approximately $23 trillion dollars located in IRAs and qualified plans.

For high net worth individuals, the total taxes on IRA and qualified pension plan dollars can be as much as 70% (when you count income tax and estate tax).  That said, most economists believe that these tax rates will go higher (maybe much higher).  There are two main reasons for this.  First, our government has run up huge amounts of unfunded liabilities (i.e. Social Security and Medicare) that demand higher tax revenues from U.S. citizens in future years.  Second, taxing IRA and qualified plan dollars of the wealthy is one of the easiest ways that politicians can increase tax revenue (without the corresponding political cost to them in terms of votes).  So, even if you think there’s only a 50% chance that overall tax rates will go up on these pension plan dollars, it would be wise to help your wealthiest clients diversify some of their retirement assets into tax free investment alternatives.

Oh boy, do we have an exciting strategy for you.  It’s called the Qualified Leverage Strategy (“QLS”) and this plan can be used to substantially reduce the tax bite on these retirement plan dollars (as well as diversify away from the risk of higher taxes in future years).  For a quick 4 minute summary of the QLS concept, check out the video below:

Scheduled Webinar

To learn more of the details of the QLS plan and how you can implement it with your clients, there will be a LIVE one-hour Webinar on Thursday, November 17th at 11 AM (Eastern).  This Webinar is entitled “Learn How To Substantially Increase The After Tax Income From IRA And Qualified Plan Assets”, and it’s FREE.  Simply click here to register.  You’ll receive all of the following details:

  • How to transfer pre-tax IRA and pension dollars into tax free life insurance contracts;
  • How to unlock your client’s retirement plan assets;
  • How to unlock your retirement plan assets;
  • How to protect against the tax rate increases that are likely to come;
  • How to become one of the very few advisors who know this strategy;
  • How to show your clients you have the capacity to greatly increase their after-tax retirement income;
  • How to show your clients they can greatly increase their charitable endowments without any decrease in their current cash flow;
  • How to show clients they can increase the net wealth transferred to heirs.
  • ALL WITHOUT PAYING UNCLE SAM! LEGALLY!

Chris Jacob will be presenting the Qualified Leverage Strategy during the webinar.

Chris is one of the top life producers in the country and has an ability to analyze these plans that is truly remarkable.

More About Chris Jacob

Chris Jacob imageChris Jacob, CFP is President of Cadeau, a wealth management firm located in St. Louis.  A graduate of the University of Illinois with a degree in economics, he has been in the financial services industry for thirty two years.  Chris is a Platinum Power Producer and has incorporated InsMark as an integral part of his practice since 1987.  Chris is a member of Dan Sullivan’s Strategic Coach Program.  He employs a sophisticated array of retirement and estate planning strategies for High Net Worth clients and advisors for preserving, protecting, and perpetuating family wealth.  He is past president of the International Association of Advisors in Philanthropy and has spoken at Top of the Table twice in the last four years, most recently at this September’s meeting in Quebec.  Chris has been married to his wife Geralyn for twenty nine years and has three children and two grandchildren.

Licensing InsMark Systems

To license any of the InsMark software products, visit our Product Center online at 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.

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!

Testimonials

“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

“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 Gold Power Producer ®, Grafton, WI

“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

“InsMark is an absolutely mind blowing experience.”
Larry Gustafson, InsMark Platinum Power Producer ®, Denver, CO

 

Important Note:  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 #144: Don’t Burn the Nest Egg®

Blog #143: Premium Financing Opportunities In The Small Case Market

Blog #142: Increased Taxes Are Coming

Blog #141: Strategic Philanthropy

Blog #140: Zero Taxes for Social Security - InsMark Style

 

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