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Testing Financial Tolerance For Private Retirement Plans (Part 1) How many times have you heard that "life insurance costs too much"? Lots of times, probably - but have you ever heard anyone say a "CD costs too much?" Probably not. How many times have you heard "I'm up to here in life insurance?" Again, lots of times, probably - but never, "I'm up to here in stocks." It is an interesting distinction that people make, and it is caused by the perception that life insurance premiums are an expense - not an investment. If you are 25 years old and buy some term insurance, life insurance premiums are an expense. But what if you are age 45 and have several different classes of assets - CDs, bonds, stocks, etc.? Why can't investment-grade life insurance be considered an asset class? Again, it is perception - caused largely by those selling the product. What if there were a way to show a client that a life insurance purchase is merely a reallocation of assets from one class to another? That is precisely what this article (and the next several) will show. Case Study Background: Tony and Samantha Callahan are ages 45 and 40 respectively. He is a professional sports agent, and she is CEO of a large non-profit hospital. Between them, their gross income exceeds $700,000 and, after tax, their net income is $450,000. Their current Net Worth is almost $2,000,000. Please take a moment to examine their assets on the Client Information Summary (click here). Assume you want to present to them a variable universal life insurance policy providing supplemental retirement benefits. You prepare an illustration for $2,500,000 of coverage bearing five $100,000 premiums and show policy loans of $175,000 starting after 20 years -- coinciding with their expected retirement. (You can review the policy illustration by clicking here.) There is nothing fancy here - no split dollar or executive bonus - just the personal acquisition of this policy. Be honest now - as you approach the interview, how do you feel? Can this couple realistically be expected to "spend" 22% of their after-tax income on new life insurance? Solution: They are far more likely to acquire this policy if you present it as having nothing to do with their income and everything to do with a reallocation of their assets. We will prepare a comparison for them that measures their current retirement plan against a revised plan in which the premium for the new life insurance policy is funded from their current asset base. Note: Their current retirement plan calls for $240,000 of after tax retirement income in today's dollars - indexed at 3% for a cost of living adjustment. This means that, in 20 years, their first retirement payment must be $433,467 and, if they both live another 30 years thereafter, their cumulative after-tax retirement cash flow must total $20,622,359. Fortunately, using Tony and Samantha's own assumptions, their current plan does provide for this level of retirement cash flow - with plenty left over. Their Net Worth under their current plan - again, using their assumptions - is projected to grow from its current base of almost $2,000,000 to over $56,000,000 during the 50 years studied. Let's inject the new life insurance policy with the understanding that not a nickel of their income pays for it. Instead, we will reallocate assets to acquire it. The graphic below (from our InsGift System) shows the comparison of the two strategies: Strategy 1 (red) is their current plan. Strategy 2 (green) includes both the funding for - and the living benefits of - the new life insurance policy. Here is what this analysis is all about: Long range, it will cost this couple almost $18 million if they don't acquire this policy! During the early years of the analysis, there is a very slight dip in their Net Worth - due to policy surrender charges. (With a lighter-load policy than the one utilized, this could be mitigated.) However, by year 6, Strategy 2 takes the lead and the spread continues to widen thereafter. Note: You can review the year-by-year numerical results of this InsGift evaluation by clicking here. Tony and Samantha's heirs are better off, as well, as the graphic below demonstrates: Long range, they are better off by more than $8 million. Conclusion: During the last several enhancements of InsGift, we have gradually been adding retirement strategies to the System's estate and charitable capacity. And, if "death taxes" are repealed (I personally do not think they will be eliminated), we have developed InsGift to the point that you will have a dynamic retirement planning system available for your client base. I do not believe there is any other software program in the country that integrates life insurance and retirement planning the way InsGift does. Otherwise, the story told in this article would be "old news" - and it isn't. Like other InsGift studies, however, the power of the analysis lies in the fact that the Tony and Samantha can make informed decisions about the value of life insurance as an asset category. As this couple approaches retirement, they may well become more interested in wealth preservation strategies, so this is by no means the end of the evaluation process for them - because wealth preservation planning usually plays a greater and greater role as clients age. The procedure outlined in this article allows you to claim them as clients now with a data base of their assets. If you keep this up to date, you have all you will need later to prepare wealth preservation strategies for their consideration. The next article in this series covers a situation similar to Tony and Samantha's, but involves a couple much closer to retirement. Downloading Data: Space prevents the inclusion of the various backup reports from InsGift that support the graphs displayed in this issue; however, InsGift users can review all reports and related menu inputs we used to create the analysis in this issue by downloading the InsGift Workbook named MA116.!wb from the Workbook Download section of this website. On our main webpage, click on Producer's Center, then click on the Workbook Download icon at the top of the next page, then click on Marketing Alerts. After downloading the Workbook, you can import it into your InsGift System by clicking on Client Workbook/Import Workbook on the Main Toolbar of Version 4.0 (or higher) of that System. To download the Workbook now, click here. If you are not licensed for the InsGift System and want more information about it, please contact an InsMark Account Executive at 1-888-InsMark (467-6275), or click here. |
