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Testing Financial Tolerance For Private Retirement Plans (Part 2) Case Study Background: Let's examine James and Allison McNamara, ages 55 and 50 respectively. He is a self-employed architect, and she is a partner in a law firm. Like the Callahans we studied in the previous article, their gross income exceeds $700,000 and, after tax, their net income is $450,000. Their current Net Worth is $3,500,000. Please take a moment to examine their assets on the Client Information Summary (click here). They intend to retire in 10 years, and assume you want to present to them a variable universal life insurance policy providing supplemental retirement benefits. You prepare an illustration for $1,600,000 of coverage bearing five $100,000 premiums and show policy loans of $175,000 starting after 20 years - 10 years past their expected retirement date. (You can review the policy illustration by clicking here.) 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 that produces no retirement income until 10 years after they retire? 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 - and if you can deal with the 10-year gap in retirement income generated by the policy. As we did in the previous article, 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: Like the Callahans, the McNamaras 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 10 years, their first retirement payment must be $322,540 and, if they both live another 30 years thereafter, their cumulative after tax retirement cash flow must total $15,344,972. Fortunately, using James and Allison'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 3,500,000 to over $20,000,000 during the 40 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 (blue) 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 $6 million if they don't acquire this policy! Like the Callahans, during the early years of the analysis, there is a very slight dip in the McNamara's 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 the McNamaras' InsGift evaluation by clicking here. James and Allison's heirs are better off, as well, as the graphic below demonstrates: Long range, they are better off by almost $2.6 million. Conclusion: The closer clients get to retirement, the more likely they have a substantial asset base; however, the less likely you can effectively present cash value life insurance producing supplemental retirement income due to the years of policy seasoning needed before loans and/or withdrawals become efficient. With a typical transactional approach to the sale, this is almost always the case; however, if you integrate the policy's results into an InsGift analysis, the program merely searches out the shortfall in needed retirement income from other available sources and integrates the scheduled policy loans whenever they kick in. The technique outlined in this Marketing Alert will work even if a couple is retired! During the last several enhancements of InsGift, we have gradually been adding retirement strategies to InsGift'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 software program in the country that integrates life insurance and retirement planning the way InsGift does. Otherwise, the story told in this Marketing Alert would be "old news" - and it isn't. Like other InsGift studies, however, the power of the analysis lies in the fact that the James and Allison 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. 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 MA117.!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. InsGift System: 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. |
