Thought for the day:

When I was growing up we didn’t have so many warning labels.  Guess we weren’t as stupid then.  –Gene Pastula



If you will read no further:

You have to read further because that is the only reason I am sending this out this week.

Important thought for the week:

Thought for the day:

“We have had our Biblical seven years of fat. (Now)We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds 3% to 4% at best, stocks 5% to 6% on the outside.”​​​​​​​​​  -Bill Gross (after leaving PIMCO)

If you will read no further:

I just watched an interview with a well-known financial planner who committed an unprofessional offense that I see all too often in our business.  When given the opportunity, too many of us take it to trash the other guy.  I listen to planners on the radio and find myself shaking my head when I hear some of them tell about how (unlike others in their community) they don’t overcharge or they do “Real Financial Planning” or they are more objective because they don’t “sell” you stuff like thoseothers do.

In this case the subject was how bad annuities are, and the “salesmen” (hold your nose) that rip off their clients who they suckered in with a free lunch. It is true that there are abuses in the insurance industry; but financial advisors who specialize in securities (free lunch or not) certainly have their share of perpetrators.  I believe that annuities are given a bad rap because most investment advisors do not understand them like they should, only see the bad ones, and after all, they feel they must compete with them.

Clearly there is a market and a legitimate use for these products because they are purchased by the billions each year in spite of a regular tirade by the press every chance they get. Academics from Harvard and the Warton School also endorse them and recommend them as integral parts of a well thought out retirement portfolio.  The clients want what annuities guarantee, Safe, Predictable, Dependable, Stress-Free Results.  Yes, that is what we as professional financial advisors want to offer as well, but we are not on the same playing field as the institutions who have $billions and a passel of actuaries on their teams.  It’s better for us and for our clients if we come to understand these products, how they work, how and why they fit in the portfolio, and why clients want them; and what is the difference between the good ones and the not-so-good ones.

Real Financial Planners have to quit trashing the products and the people who sell them; for then we put ourselves in a place that prevents us from using them when they are most appropriate.

And if Bill Gross is right, that time could come sooner than we would like.



Thought for the week:

Introducing the 529 Plan for Grownups
In 1996 as part of the Small Business Protection Act, Congress approved the Section 529 plan to encourage and allow parents to efficiently pay for their children’s education by saving money while they were growing up to help pay tuition costs for college.  The people who have taken advantage of such a plan expected their children would qualify and attend college and there would be many more affordable options if they were financially prepared in advance.  So, astute financial advisors began encouraging their clients to assure that they could afford the college of their choice, by saving before hand in a Sec. 529 Plan.

Paul planner is one of these astute advisors whose clients are clearly people who think ahead, anticipate their future needs and take intelligent steps to prepare for them in advance.  And Paul routinely points out to all of these folks that they must anticipate the potential need (statistically 70%+) for long-term care at some point during their retirement years.  (It’s interesting that these odds may be pretty much the same as those of their children going to college someday.)  So Paul educates them all on how to prepare for it, because the cost of care will possibly be much greater than that of a college education; and waiting until they retire to prepare is always much more costly and uncertain because of their health at that time.

Paul suggests the 529 Plan for Grownups*.  Instead of funding for college 529 Plan for Grownups funds for long-term care, not by purchasing LTCi insurance but by building an asset over time that will provide significant value when needed to allow complete financial freedom to choose the most desirable option to receive appropriate care when the time comes.

Paul suggested that Jason (46) and Judy (44) incorporate special life insurance policies in their investment portfolio that will also pay for long-term care when needed.  He showed them how, at their ages, this is not a big deal financially as they can just be part of the family’s life insurance program to pay a typical death benefit if the worst happens while they are still young; but by the time they retire the plan will be fully funded and in place to provide hundreds of thousands of tax-free dollars to pay for care if needed. If not, they can pass it on to the kids. In either event, the tax-free internal rate of return on this strategy will range from (believe it or not) over 500% to around 5% depending on when the need occurs.

Paul suggested that they contribute $15,000 per year for the next 10 years to this strategy. Once finished they would have a total of $1million to pay for their care or leave to their children all tax free.  That’s as much as $20,000 per month each if needed for care and whatever portion of the million is never needed for care can be passed to the kids, grandkids or given to charity. Actually, Jason suggested he fund his with one deposit from his bonus he will be receiving this year.  Paul showed him how it would reduce his total required deposits by $8000.

*Special thanks to my son Aaron for his idea

If you would like to see the illustrations referenced above or would like to see one for your client, send me a note at gene@westlandinc.com 

Thought for the day:
“Tact is the ability to tell someone to go to hell in such a way that they look forward to the trip.”  ​​​​​​ Winston Churchill

If you will read no further:
Think insurance is an expensive product? Imagine receiving the growth rate of the S&P up to 13% per year with no taxes and no loss in down years; and the average cost is less than 1% per year of the account value if averaging 7% per year.  Imagine if the return is higher, the cost actually goes down.  And it’s all tax free.  You need to call me to discuss further for your high income professional clients under 50. (800) 238-8144.

Thought for the week:
I have pointed out many times how frustrating it is to get a call from an advisor whose client has asked him/her to look into long-term care insurance.  All too often it turns out that they have been informed they have a chronic health condition that won’t get better and there is a good chance of needing nursing care before all is said and done.  But now it is too late to find an insurance company willing to commit to paying the bills.

Of course nothing is said but most of us suspect that the advisor never brought up the subject previous to this and probably felt correct in ignoring the issue because, “they could afford to self-insure”…which of course they can, and will; and I guarantee, no one will like it.

I recently addressed a question in the CFP All Member Open Forum concerning guidelines for determining “a need range” for long-term care planning.  My answer was as follows:

There is no “need range”.  Many of the folks who “need” long-term care insurance are those who could easily run out of money paying for care.  For the higher net worth individual the question boils down to “how smart is it to not suggest that your client write a check for $4000 each year to fund long-term care because they can afford to pay for it themselves?  Then eventually their family members must write checks for $8000 (or more) PER MONTH, (each month) to pay bills for care for perhaps several years.  That makes no sense at all….especially when you realize that each month of benefit reimburses a year of insurance cost.

“Self-insuring” only seems like a smart idea until you start writing checks for long-term care and realizing that the odds of doing this in the first place was 50/50 at best. That’s when the idea suddenly seems really dumb.

Insurance, the alternative investment for the retirement portfolio.
“Miss Client. I certainly can help you with building your retirement portfolio.  Let’s start with creating a Roth-type plan that will allow you to accumulate money tax free and receive an income-tax free retirement income.  With that and your 401(k) and your Social Security, you should be in great shape for a stress free retirement. The excess money you receive from bonus’ etc. we will use to build you a managed account and hopefully create some serious wealth.”

A few weeks ago I had the opportunity to talk with a woman who is the CFO for a high tech company in Silicon Valley.  She is 38 years old, single and makes almost $300k per year.  She is very smart and particularly inquisitive when it comes to investing for her future.  She has maxed out all she can do through her company 401(k) and doesn’t qualify for a Roth IRA so the rest of her investing will require active management and creative options. She had been exposed to the concept of the Roth Alternative using max-funded, index-based life insurance policies and was referred to me as someone who could answer all of her questions.

She was attracted by the insurance because it offered  a more predictable result.  Once the plan is put in place, she can accumulate large amounts with annual savings, get a reasonable return with safety and still access money from the account any time and all without tax and government restrictions.  And when it’s time to retire, she will receive a healthy tax free income.  Plus any life or chronic care insurance needs she might ever have will be included.

She asked me to show her what she might expect from this strategy over time.  I suggested that she use two carriers for this; first to provide basic diversification and also to add some additional flexibility to her strategy should her situation or desires change downstream.   Both are top insurers, highly rated and both offer a current crediting rate on the cash value equal to what the S&P increases each year (not including dividends) up to 13%. Also she is impressed by the low costs and the complete downside protection on the S&P with this strategy.  All upside and no downside is very compelling.

Imagine receiving a crediting rate up to 13% per year with no taxes and no downside risk; and the only cost is what she must pay for the contract fees and pure insurance included in the deal.  Click here to see the illustration I prepared for her. Then let’s talk and I will explain how her costs are less than half of what she would normally pay.

BE SURE TO READ GENE PASTULA’S ARTICLE IN SEPTEMBER CA BROKER MAGAZINE.


Thought for the day:

Contentment is not the fulfillment of what you want, but the realization of how much you already have.     -UNKNOWN

If you will read no further:

You have a choice from hundreds of marketing companies offering you all the same products from all the same carriers.  How do you choose? …besides finding someone you like on the other end of the phone.   As the quality and complexity of the insurance and annuity products continues to grow, it is even more important that your source be experienced and knowledgeable.  Westland has been supporting the financial planning community for almost four decades with CFP quality advice and service.  We are more than a Quote Service.  We are the associates you wish you had in the office next door to assist you with each client.  Call or email us with your next insurance, annuity or long-term care situation and see what real insurance-based financial strategies look like. Check out our refreshed web site at www.westlandinc.com and read on to get a flavor for the in-depth information Westland client-advisor get when they ask about annuities.

Thought for the week:

There is no doubt that annuities in the retirement portfolio can substantially and predictably enhance the financial results and the emotional satisfaction for the benefit of the client.  Now with products that offer ongoing asset-based compensation to the advisors, they are becoming even more prevalent and acceptable in the financial planning community.

There is more to choosing an annuity than simply receiving a quote of the latest and greatest from your favorite brokerage guy or your BD’s internal insurance/annuity sales desk.  You need to understand the products and how they will work in your client’s unique situation.  Recently I have received more compliments than usual about our Annuity Guru, Josh VerHoeve.  More and more folks are impressed by the level of assistance and understanding he is able to impart and realize that it makes you and your clients so much more comfortable with how the strategies being considered will enhance the value and effectiveness of the clients’ retirement portfolio.  I thought I would share with you a taste of Josh’s expertise and guidance.  Notice the history, the insights and the product knowledge he brings to the subject.

This makes this issue of PEARLS a little longer than usual; but at the end I think you will understand what a knowledgeable annuity expert with years of experience can bring to your planning process.

Notice that Josh doesn’t mince words.  He knows the product and the carrier’s history and has a frame of reference to help him decide on the appropriate recommendation for your client.

Last week an advisor requested Josh’s opinion of a statement from an annuity wholesaler that his well – known product was the best performing Index Annuity since 2006.

It is possible but it would depend on exactly when you bought it and the rates and terms on which you purchased it and your renewal rates. This product was one of the only annuities at the time that had an “un-capped” strategy. The product was proprietary through several marketing companies initially but really took off in sales from 2006-07.

Their best product would allow you to allocate up to 70% of your account to the S&P and 30% to a fixed account and would charge you a spread/fee. The 30% in the fixed account would earn a fixed rate and you would have 100% participation rate on the other 70% and no cap on that money in the S&P but you would have a spread/fee instead. Spreads have varied up to as high as 5%. The most sold product was a 12 year because to get the best blend you would need to buy/sell the 12 year. The original version of the product did not lock in any gains until four years. So you had to wait four years to see what you would earn, but you would get 70% of the S&P less a spread which could work out well.

Assuming a 01/1/2006 issue date and then the first four years from 1/1/06 through 01/1/2010 you would have gotten a big fat zero from the index account and then from 01/2010 through 1/1/2014 you would have done pretty awesome. I have not had any calls or seen any statements raving about the performance however. Even with that assumption I am not sure someone would have kicked that much butt? The S&P was up 60% the 2nd four years so you would have earned 0% the first four years, then 70% of 60%(approximately) the next four years less the spread. So maybe your $100k deposit is $140k or so after eight years? I do know they created adifferent reset version too. So if you had that one I guess you may have done better.

Then there was the request for opinion of a contract that had come to their attention that seemed almost too good:

Thanks for sending this over. They are a B++ carrier (AM Best) that does quite a bit of business in FIAs. There may have been a quarter or two several years back where they even beat Allianz in sales. We generally try to stay away from B rated carriers.

They were also very successful in sales not just because of this product (although it is very good for income) but because of another product still being sold that gives the client ”100% of the S&P” over a period of time. I believe they are banking on the S&P not having a return over a period of time. They also have the ability to drop the rate on the product, which I believe they will do depending on what the S&P does.

Some of the best actuaries out there have told me “off the record” they believe these products are a gamble. They are gambling on the S&P and these policies in general and even this very product you sent me. You and I know that insurance companies are not in the business of gambling but rather in the business of guarantees. They usually do not care what the market does orwhat your client does or what the advisor does or what anyone does. They get a return on EVERY possible outcome because that is how a good actuary prices a product and how successful insurance companies operate. How do you think an insurance company can last for 100-150 yearsthrough depressions, recessions, bull markets, bear markets etc.? It is because they win on every outcome.

Check out the attached vital signs report compared to four of our top carriers we work with, does anything seem to stick out? Comdex in the 40s! 

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

If you will read no further:
For California Associates Only (for now)
As you may know, Westland has never been involved in offering lead generation services as we had never seen one that lives up to its promises and provides quality, cost effective leads…..until now. Reel Money Smarts is a video-centric, personal financial wellness platform that matches you with engaged, enlightened, self-employed head-of-households who are seeking help from qualified financial advisors….like you. Westland Financial has negotiated six months of exclusive referrals generated by the program so we need 10 to 15 California advisors to handle them. This may be the best practice growing opportunity you have ever seen and will eventually spread across the country. This is clearly the most cost efficient lead source you will ever see.

Click here to watch the Real Smarts Video Overview and RSVP here for a webinar on August, 26, 2014 at 12:00 PDT.

Join Tim Morton and Kim Folsom, Reel Money Smarts principle, to get an overview of the Reel Money Smarts program, its benefits and costs. You will learn how your practice can benefit as a verified professional providing services that Reel Money Smarts members want and need. Reel Money Smarts helps you build relationships with qualified business owners– where we make the appointment for you!

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.

Thought for the day:
“How did you go bankrupt?” “Two ways. Gradually, then suddenly.” Ernest Hemingway the sun also Rises

If you will read no further:
Financial advisors are about showing clients and helping them to become financially successful. That means not losing what they already achieve while growing it more. That’s why it is important for you to understand risk in the real sense and learn how to incorporate insurance-based strategies in you clients’ portfolios.

Thought for the week:
Most of what I write in these weekly messages is inspired by what we are seeing day to day in our business and yours. In the past few weeks I have seen an increase in the number of requests for LTC quotes and information from advisors for clients who will have no chance of qualifying for an insurance-based strategy. In the conversation I always try to find out how long the person has been a client of the advisor. I shouldn’t do that though, because it always makes me sad when I find out that they are long-time clients and the condition that disqualifies them has only been recently diagnosed. This means that for the past several years or more they could have set up a plan that would provide significant extra income to cover the additional expenses for care that they now most assuredly know are coming.

I really don’t understand what some people don’t get about a 70% chance of needing long-term care and why an advisor thinks his client can ignore it. Certainly it is very easy to say, “I/you can afford to self-insure” when one is healthy; but it is quite another when it’s time to “belly-up” to a $7,000 or $8,000 (or more) per month care bill. And write the entire check from estate assets for “I-don’t-know-how-long”.

For years we have been focusing on growing assets with a time line that is 10, 15, 20 years or more. Now each day we have clients who are focusing on living off of those assets and many advisors haven’t come to grips with the financial risks awaiting their clients that have little to do with market volatility. All that does is increase the consequences of not preparing. Then eventually, one-by-one the calls start coming in from clients and family asking us to look into some long-term care insurance, “Dad was just diagnosed with Parkinson’s disease”. That’s the call I got on Wednesday. What? All of sudden you don’t want to self-insure????

The same thing goes for income planning. The investment gurus tell us that we should be able to receive an inflation adjusted income from our assets of 2.5 – 4% that will last all of our lives. Sure, if we die at life expectancy (85 – 87). What about 93 – 94? What about the increased uncertainty that an 88 year old lady will endure if she has no guaranteed income? How comfortable is she with the economic news at that point?

If all of your clients have income generating assets in excess of $5million and have unremarkable lifestyles, annuities may not be necessary although the research tells us their lot can be improved if their portfolio includes them. But if you have some smaller clients with $1- 5million you should be moving assets into index annuities and SPIAS like crazy. It’s coming up on 7 years since the last major correction (oh wait, that was “the worst downturn since the Depression). Do you remember what it was like to deal with your clients then? You do know that they are 7 years older now. The 78 year old lady is now 85? Think she will be scared when the next one happens? How will her portfolio perform? How will her capacity to pay long-term care expenses hold up? What will you be telling her and her family about how you have prepared her portfolio to weather the times.

So my point is? Don’t ignore these facts, for yourself or your clients. Don’t let your clients brush you off too easily on these issues. They don’t want to think about the bad things any more than you do. But you know better; and it is your job to convince them to do the right thing.

We can help you.

Consider the retiring client with $1million in financial asset to provide additional retirement income in addition to their Social Security. 70% is in an IRA and 401k; and the rest non-qualified invested $200k in CDs & govt. bonds, and $100k in Blue Chip Stocks, The IRA is 60% stocks and 40% bonds and you will continue to manage that so that he can receive as much income as possible without outliving it. So we are talking about a retirement income her of $35,000 plus another $20k from Soc. Sec. for a total $55k. Hopefully, their home is paid for so their basic expenses are a couple thousand dollars a month less than they might be. If not, perhaps a reverse mortgage is in their future.

This will all work fine until
1. The market crashes
2. One or both of them gets very sick or takes a serious fall
3. Or dies

Thought for the day:
“It has long been my belief that the sight of a good-looking woman lowers a man’s IQ by at least 20 points. A man who doesn’t happen to have 20 points he can spare can be in big trouble.” Thomas Sowell

If you will read no further:

If I didn’t already have a paid up long-term care insurance program for me and my wife, I would allocate a $1million fund to provide extra tax free income to pay for our care, regardless of what kind it would be or where it would be provided.  (Since I have been doing this for over 20 years, I often see the kind of bills people are paying for care, so I am probably more sensitive to the incredible financial impact that homecare will have on our finances.)  I won’t have to reallocate that much all at once because I am leveraging some of my investments into a special tax free fund that instantly creates the $1million LTC fund. In the long run it won’t cost me anything to make an annual deposit from cash flow or just move assets from another investment.

At our age and still in good health our annual deposit would be about $25,000.  That would assure that $1million would be available (tax free) if either or both of us were unfortunate enough to need care for a long time; or $500k would pass to our kids if we never needed it for our care.

I did something similar recently for a 72 year old gentleman whose daughter was on his case about making sure there was money available in case she needed to get care for him someday. We set him up with a $300k life policy with a long-term care rider.  He’s depositing $10,500 per year.  If he ever needs care his daughter can draw down up to $12,000 per month.  If things work out the way he plans and LTC is never major issue, any amount of the $300k not used for his care will be received by her upon his death.  All tax free and everyone is happy.

Thought for the week:
If you spent any time hanging around our offices you would notice how happy we are to see the annuity sales coming in.  It appears that advisors are finally recognizing the value of these interesting.  Clients who have limited assets to fund their retirement (not your fault, they obviously did not get with you until it was too late to really build their retirement assets to your typical level of expectation) need to get as much as they can out of the portfolio.  One of the best ways to do that is to annuitize a portion of the assets and realize a substantial improvement in after-tax cash flow.  So now we can let the rest of the money grow for a while and only tap it for special needs or to offset inflation. 

Most advisors who have been around for a while have a view of fixed annuities based on their original introduction to them 10 or 20 years ago. In fact, for many years, few advisors would ever recommend someone actually purchase annuity income. Today, the carrier’s ability to increase fixed interest rates and guarantee an increasing principal is enhanced by incorporating the addition of derivatives to the portfolio of bonds that back the annual interest. This raises the fixed return without adding risk. The income is determined and generated by combining life expectancy tables with amortization tables to provide the income guarantees without making the client commit his money forever; hence the Guaranteed Lifetime Income Rider.
Even the old style SPIA is enhanced by better actuarial accuracy, combined with the carriers ability to get better returns out of their portfolios while maintaining the same degree of security and predictability which is then passed on to the client.

If the client is still several years away before he needs to take income from his assets, you should definitely consider placing a portion of his portfolio into one of these amazing deferred income products. Call Josh (or email him joshvh@westlandinc.com) to have him take them. Trust me, by the time he finishes telling you how these things work, you will be setting one up for yourself. Once you place some of the client’s money into this unique plan, your client will no longer be bugging you about portfolio volatility. And finally, the ultimate (in my mind)…the ability for the advisor to continue to receive and asset based fee in addition to a one-time up front commission.

This is good stuff.