SEPTEMBER IS LIFE INSURANCE AWARENESS MONTH

 

Thought for the day:

Ever notice that people never say “It’s only a game” when they’re winning?   -Ivern Ball (I don’t know who he is either)

 

If you will read no further:

We have been seeing a significant increase in term insurance sales lately. That is either because of our incredible marketing and the knowledge and experience of our life experts Randy Masciarelli and Nancy Woo; or there is an increased concern about creating a financial hardship in addition to the personal devastation cause by an untimely death. BTW, I wonder just when there is a “timely death”

This is a good place to point out the difference between a Financial Advisor and an Insurance sales person. An insurance sales person is the one on the other end of the line (or the email) when you call for a term policy. He/she makes sure you get the least expensive or the easiest to qualify for. (period)

The Financial Advisor takes into consideration the ultimate need and the best way to insure within the context of the rest of the clients’ financial portfolio. We help you do that. Just contact the aforementioned experts at (800)238-8144.

 

Thought for the week:

Term vs perm

The cost of term insurance and permanent insurance is basically the same. Term insurance covers pure mortality risk that is paid for out of after-tax earnings from your work or from “the invested difference”. Permanent insurance is the combination of pure mortality plus the “invested difference” (the cash value) used to fund its cost. Any true cost differential between the two is not for the insurance, but for the guarantees involved. The best way to purchase insurance is to move (or create) cash savings into a cash value account and purchase as much pure insurance as is practical at pure mortality cost using the tax free interest generated by the cash (Permanent Insurance). Then purchase the remainder using term insurance understanding that it cannot be counted on to be in force later on in life when the client must surely die. The Permanent Insurance will reimburse the estate for all the money spent on all the insurance in force for his/her lifetime, and then some…tax-free.

Life Insurance is one of the few things that guarantees to perform as promised regardless of what unknowns occur and when. We don’t know what the economy is going to do or when it will do it and how it will affect us. Pure term insurance provides modest (if any) guarantees past the term period. The term portion of whole life or universal life (permanent insurance) is guaranteed to be available until death, even if that is not until over age 100.

To try to determine which is the most cost efficient is an exercise if futility until after the individual has died. And then it doesn’t much matter. If the insured dies soon, does anyone really care if he paid 5 years of whole life premiums or five term premiums? If so, they need to get a life. And if the client doesn’t die during the 20 year term period but is terminally ill at that point with only a couple years left, in retrospect would he prefer to have purchased a permanent policy? My experience tells me… ALWAYS!

Life insurance should be acquired based on how much of life’s risk you would like to lay off on the insurance company and what you are able to pay for the service. But one thing is for sure. Forty years of watching clients has taught me that “self-insurance” is only a great idea until it’s time to write the checks. Then they scramble to find an insurance company to step up; and are truly disappointed when none will.

PS: Annuity sales are continuing their steady increase as more and more of you are learning to make your recommendation in the context of providing the client with dependable predictable cash flow while helping them increase their legacy. This is going to be especially important as we continue forward into a period of greater uncertainty and low stock market gains. Send us a note if you would like to have Josh VerHoeve or Tim Morton call you and explain further how to demonstrate this to the client.

Thought for the day:
Knowledge is knowing a tomato is a fruit. Wisdom is not putting it in a fruit salad.      -Unknown

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For California Associates Only (for now)
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Thought for the week:
When your client buys an Index Universal Life Insurance policy he/she is actually depositing the premium into a cash value account that credits the balance with interest equal (typically) to the annual gain in the S&P up to 13% percent, locks it in and protects it from going down when the S&P loses value. Then the pure mortality cost of insurance is deducted along with some small fees. When the client dies the heirs get all of the cash in the cash value account plus the pure (term) insurance… income tax free. The result is that the pure insurance is very cheap and paid for with relatively high tax free interest. That’s what a Financial Planner does for a client.

You should see what happens when the policy is constructed so that the least allowable amount of insurance is purchased and the cash is allowed to build for retirement. This creates an alternative to a Roth IRA with none of the typical restrictions. The cash builds quickly at a tax free rate that competes with most conservative equity-based investment strategies, but with no down-side risk. Then it becomes a source of tax free retirement income and a tax free distribution of the remainder at death. That’s what Financial Planning does for a client.

Nancy and Randy can tell you all about how to set up a retirement “investment” strategy for your younger clients who aren’t ready to give you $50k or more to begin their retirement planning.

I have some bits and pieces this week that I think are important and generally interesting. They are kept brief so you won’t get bored. But pay attention because you will find yourself using them someday.

LTC Riders vs Chronic Care
In the past 18 months almost every insurance carrier has come out with a Chronic Illness rider they are promoting to be for long-term care; and they are. However, they have taken the cheap approach with these and qualified them under Section 101 of the IRS code which applies to life insurance. So, several things to be aware of with these if the client is buying them specifically as an LTCi strategy:
· The condition that justifies a claim must be permanent and irreversible. So many situations where a care giver is only required for several months to a year or more can be denied if there is any possibility of improvement or recovery.
· Typically, only a portion of the death benefit is accelerated and that amount is not really known until the claim is approved…. Like buying a policy without knowing what the benefit will be.
· Unused death benefit is often heavily discounted so the distribution for LTCi comes at great cost.
If you really intend to provide your client with an LTCi strategy (and you should) you should stick to the carriers whose riders are true LTCi qualified under Section 7702 of the code, Lincoln, Genworth John Hancock and State Life are the best right now. These do not require permanence and do not degrade the death benefit when taking accelerated benefits. And be sure to call us for assistance with these. No one knows more about these plans than the folks at Westland. And when something/anything better comes along we will have it and of course will let you know. For a complete discussion of this subject get our white paper by going to our great new website here  and click “White Paper-Linked Benefit vs Hybrid”. While you’re at it, you might want to take a little tour around the site as it is brand new and we are very proud of it.

Annuities are becoming more main stream in Financial Planning.
The Treasury Department recently issued final rules making deferred income annuities even more desirable for many retirees. Deferred Income and SPIAs (Single Premium Immediate Annuities) are rapidly becoming the most popular strategy for boomers planning and or managing their retirement. And now the government is offering incentives to encourage the use of annuities to further enhance retirement security by allowing an investment of 25% up to $125k of qualified plan assets to be exempt from the Required Minimum Distribution calculation beginning at 70½. So if a client takes a portion of their IRA or 401k and moves it into a qualifying deferred income annuity they will save the taxes (approx. $1500) by reducing the amount to calculate the RMD until they pull the trigger on the income. Pretty cool.

Actually, none of the carriers have finished modifying their products to comply with the regulations; but we should know when the major players have products available. Look for current info from Westland Financial. In the meantime you should be building your knowledge of how these incredible instruments work to increase the clients’ income as well as their legacy. Call Josh VerHoeve and let him help you with a case.

Thought for the day:

I always wanted to be somebody, but now I realize I should have been more specific.

Lily Tomlin

If you will read no further:

Too bad because you will miss a very profound message. But OK. At least take a moment soon to go to www.westlandinc.com and view our new website launched just a few days ago. It is designed for simplicity and functionality. Forms, information, proposal requests and access to information from our major carriers; all easily accessed in an attractive new package at www.westlandinc.com.

Thought for the week:

When compared to other investment options for liquid assets for medical emergencies the creation of a large asset from small deposits (life insurance) is a most desirable alternative.

Those who say that life insurance is a bad investment are not relating to real life.

Since everyone dies, we know exactly what the end result of a life insurance program is going to be. Because we don’t know when any individual will die, we don’t know how efficient the program will be.

•   Walt purchased a $1million life insurance policy at the age of 47 and died from a brain tumor at age 53. Anyone disagree that (no matter what Walt paid for it) he made a good investment buying that policy…an IRR of about 92% per year?
•   Sharon purchased the same kind of policy at the age of 63 and died at the age of 93. After 30 years of paying premiums….an IRR of about 4.5% per year. Should have put her money in a mutual fund. Who knew?

When you sell life insurance for a living you must concentrate on the “need”. That is what all the critics of insurance focus on. How expensive is it, and do you really “neeeed” it? You will sell only to those clients to whom you can effectively point out that the individuals untimely death will leave a significant deficiency in the financial condition of those he/she leaves behind. Then you must be convincing, and good at motivating them to take action to “purchase” the policy so the money will be there “in case” they die.

On the other hand, if you are a financial planner or investment advisor you can clearly see the value in your clients’ portfolio and to their family of having a portion of their assets “invested” in a life insurance policy. And the way you can tell if it is a good value is to know when the insured will die and then you can calculate the rate of return. In most cases the tax free rate of return is about 4.5% if one dies at age 93 and much greater (8.5%/yr.) if you are lucky enough to die at 85 and EVEN GREATER (24%/yr.) if you are EVEN LUCKIER and die at 75…..well, hopefully you get my point.

Now consider the risks of Critical, and Chronic Illness that (in many cases) occur before death. Just think of the rate of return on your money if you are lucky enough to have a heart attack or kidney failure or need a lung transplant after only 10 or 15 years of owning and paying for that policy. That is assuming your advisor was wise enough to make sure the insurance you were “investing in” contained an acceleration rider to access a portion of the death benefit while you are still alive and need some big bucks to cover the cost of that lung transplant.

Westland Financial affiliated advisors are just such advisors because they are constantly being informed of the value of committing a portion of their clients’ portfolio to an insurance policy that creates large assets just at the time it is needed, no matter when that may be. And yet….if it is never needed, the heirs will think of them as a hero for doing such a good job of protecting the portfolio from life’s many occurrences that could have befallen their folks and maybe caused great damage to their portfolio just when it was about to make great gains in the upcoming bull market.

The End

 Watch this short video on Critical Illness

Thought for the day:

If you will read no further:

If you are not just an investment advisor (or wealth manager) to your clients it is quickly becoming clear that you must become more knowledgeable about insurance and annuity products; when they are appropriate and how they work. Unless you have been specializing in insurance for years, it is wise to affiliate with a quality marketing organization (I have one in mind) that understands the business and the tax laws to be sure your client is properly served and taking appropriate advantage of the benefits available through the innovative products emanating from the insurance industry.

For example, no one should own life insurance that doesn’t provide access to the death benefit for terminal or critical illness. Start with your own insurance policies. Call Nancy Woo or Randy Masciarelli at (800)238-8144 for more information and assistance. You will be surprised at how simple it is to provide increased value for yourself and your clients.

Thought for the week:
As more and more of our planners are coming to us for insurance evaluations and fine tuning of their clients’ life insurance policies, we are noticing how often the tax implications are being ignored when policies are lapsed….especially when there is a large loan outstanding that is causing the policy to lapse without value.

When a policy lapses with loans against the cash value, it is not uncommon to see the owner incur an income tax as a result of “phantom income”. Any time a policy lapses or is terminated, the possible taxable gain is calculated by totaling the premiums paid, subtracting the dividends received (if any; as they are a refund of excess premiums) to ascertain the cost basis. Then find the difference between the cost basis and the cash value to determine if there is a taxable gain. It is not unusual to see policy loans ignored as they reduce or eliminate completely any net cash available; but this is where some glaring errors can be made. This is because interest has been accruing and added to the loan. So even if there is no net cash value to be received from the policy upon termination, the total loan actually represents the total cash value in the policy that is often in excess of the cost basis. For example, a $100,000 loan minus $80,000 in net premiums paid equates to $20,000 of ordinary income; yet the owner will receive no proceeds when the policy terminates. This is the “phantom income” and will sometimes represent significant gains and the carrier will issue a Form 1099R reflecting the taxable amount.

Before considering terminating a policy with a cash value loan or exchanging it for a new more efficient one, it is important to receive a statement of cost basis from the insurer so that any taxable income is known in advance; such information can then be used in the process of determining a strategy going forward….with no surprises.

Contact Randy or Nancy before allowing any client’s policy to terminate.