Here is a “Retirement Shopping” video.
Are you ‘shopping’ for retirement solutions? You may have growth, guarantees, lifetime income, tax advantages and more on your list … but do you know annuities could offer you all? Here is a “Retirement Shopping” video.
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In last blogpost, we discussed some considerations you should have when deciding opt in or out, now we will introduce a few alternatives.
Alternatives to emerging state-provided options:
Lifestyle consideration points:
In last blogpost, we discussed Washington state long term care act and should you opt in or out.
Program caveatsWashington’s program isn’t intended to be a cure-all. It’s intended to help mitigate costs, not pay for all of them. That $36,500 will be indexed for inflation, but it’s currently a lifetime maximum. If someone needs LTC, it’s very likely it will cost more than $36,500. That means you still need a plan! There are lots of questions to go over before you decide whether to stay in the program or opt out:
In next blogpost, we will discuss the alternatives you could consider. In last blogpost, we introduced the new Washington state long term care act.
How to become eligible for the benefits?For program participants to claim a benefit, they'll need to meet both (a) LTC impairment requirements, and (b) a certain amount of vested contributions to the plan in order to qualify. Currently, here are the requirements:
Recipients can use the money to pay for a variety of types of care: in-home healthcare, assisted living, or a nursing home. Family members can even take state training courses to qualify for reimbursements if they help with in-home healthcare. Will other states follow? It’s likely. Other states that have brought up similar ideas include California, Illinois, Michigan, and Minnesota. In next blogpost, we will discuss the program caveats. What is the Washington State long-term care act?
Effective January 1, 2022, workers in Washington state will see a payroll deduction of $0.58 per $100. That money will go into the Washington State Long-Term Care Trust, created by the 2019 state law, H.B. 1087. In return, that trust will pay a benefit to qualified individuals starting on January 1, 2025 via The WA Cares Fund. That benefit is currently fixed at $100/day, up to a total of $36,500. The program not only provides workers with basic LTC protection – it also aims to reduce the amount the state pays every year for LTC benefits issued through Medicaid. Opting In or Out? Currently, state residents can opt out from October 1, 2021 through December 31, 2022 if they can prove they have other long-term care coverage. The state has defined “long-term care coverage” to help make that distinction clearer. For example, a rider counts as coverage as long as it provides coverage for at least 12 consecutive months. There are exclusions, however – and they’re detailed here. Specifically: “However, long-term care insurance does not include life insurance policies that: (i) Accelerate the death benefit specifically for one or more of the qualifying events of terminal illness, medical conditions requiring extraordinary medical intervention, or permanent institutional confinement; (ii) provide the option of a lump sum payment for those benefits; and (iii) do not condition the benefits or the eligibility for the benefits upon the receipt of long-term care.” Unless they opt out, Washington workers who receive a W2 from their employer will automatically be opted in. There is one catch to the opt-out system, however. Once someone opts out, they can’t opt back in. In next blogpost, we will discuss how to be eligible for such long term care benefits. There are three different interest crediting methods for cash value life insurance products:
Meet Rick and Karen, both age 59, decided that they do not need the annuity for retirement and want to pass the value to their children at death. However, they want to maximize the money they can pass to their children and avoid passing a tax burden. Enter annuity wealth transfer concept, this method helps people like Rick and Karen to minimize tax and leave more assets for their beneficiaries. See details below. Fixed index annuities are long-term insurance products that can help consumers grow their assets, while protecting their principal in changing markets. By allocating a portion of their retirement assets to a fixed index annuity, consumers can reinforce their retirement savings foundation and help: 1. Generate higher growth and income than many fixed income instruments. 2. Protect against interest rate risk and bond market volatility 3. Guarantee more income for life Private Placement Life Insurance (PPLI) has long been a tax-shelter vehicle for ultra-high-net-worth clients, leveraging the tax-deferral build-up of cash value in a permanent life insurance policy but in a structure that accommodates more specific investment choices (for that particular HNW client) and without the sometimes-expensive commission structure that can overlay 'traditional' permanent life insurance.
However, a change to life insurance reserve requirements under the Consolidated Appropriations Act in late 2020 now allows insurance companies to use lower interest rate assumptions (based on a new variable rate tied to current market rates) in determining whether a life insurance policy will become a taxable Modified Endowment Contract (MEC), which has the end result of allowing substantially higher cash value contributions into permanent life insurance without triggering MEC status. At the same time, the rise of a potentially significant increase in the taxation of both ordinary income and especially capital gains under President Biden's proposals is leading to growing interest in a wide range of 'tax shelters' for ultra-HNW clients. The combination of the two is leading to a rapid increase in the number of HNW individuals now exploring PPLI as a tax shelter, with the new, more appealing tax-deferred cash value accumulation potential, coupled with a looming Biden tax increase. Of course, the reality is that surrendering a high-growth life insurance policy is itself still taxable, which means the value of high-growth PPLI, once implemented, can generally only be extracted partially via policy loans, or by holding the policy until death (though that option itself may still be appealing for those otherwise concerned that the Biden administration will eliminate the step-up in basis rules). Because of the complex rules involved in establishing PPLI, it's generally recommended only for those who can contribute at least $2M (and more commonly, $5M+) to the policy. Q. What are the tax consequences of leaving life insurance cash surrender values or endowment maturity proceeds with the insurer under the interest-only option?
A. The interest is fully taxable to the payee as it is received or credited. Under some circumstances, election of the interest option will postpone tax on the proceeds. If the option is elected before maturity or surrender without reservation of the right to withdraw the proceeds, the proceeds are not constructively received in the year of maturity or surrender. But if the right of withdrawal is retained, the IRS apparently considers the proceeds as constructively received when they first become withdrawable. (It can be argued, however, that the proceeds are not constructively received when the policyholder has a contractual right to change to another option.) If the option is elected on or after the maturity or surrender date, the proceeds are constructively received in the year of maturity or surrender. Q. Can a taxpayer deduct interest paid on a loan to purchase or carry a life insurance, endowment, or annuity contract?
A. Interest paid or accrued on indebtedness incurred to purchase or continue in effect a single premium life insurance, endowment, or annuity contract purchased after March 1, 1954, is not deductible. For this purpose, a single premium contract is defined as one on which substantially all the premiums are paid within four years from the date of purchase, or on which an amount is deposited with the insurer for payment of a substantial number of future premiums. When a single premium annuity is used as collateral to either obtain or continue a mortgage, the IRS has found that IRC Section 264(a)(2) disallows the allocable amount of mortgage interest to the extent that the mortgage is collateralized by the annuity. Q. What are the tax results when life insurance or endowment dividends are used to purchase paid-up insurance additions?
A. Normally, no tax liability will arise at any time when life insurance or endowment dividends are used to purchase paid-up insurance additions. Dividends not in excess of investment in the contract are not taxable income, the annual increase in the cash values of the paid-up additions is not taxed to the policyholder, and death proceeds are tax-free. In effect, dividends reduce the cost basis of the original amount of insurance and constitute the cost of the paid-up additions. Consequently, upon maturity, sale, or surrender during an insured’s lifetime, gross premiums, including the cost of paid-up additions, are used as the cost of the insurance in computing gain upon the entire amount of proceeds, including proceeds from the additions. Q. Are dividends payable on a participating life insurance policy taxable income?
A. As a general rule, all dividends paid or credited before the maturity or surrender of a contract are tax-exempt as return of investment until an amount equal to the policyholder’s basis has been recovered. More specifically, when aggregate dividends plus all other amounts that have been received tax-free under the contract exceed aggregate gross premiums, the excess is taxable income. It is immaterial whether dividends are taken in cash, applied against current premiums, used to purchase paid-up additions, or left with the insurance company to accumulate interest. Thus, accumulated dividends are not taxable either currently or when withdrawn (but the interest on accumulated dividends is taxable) until aggregate dividends plus all other amounts that have been received tax-free under the contract exceed aggregate gross premiums. At that point, the excess is taxable income. Q. If a taxpayer gives a spouse a life insurance policy, is the taxpayer entitled to a gift tax marital deduction?
A. Yes. An outright gift of a life insurance policy to the donor’s spouse qualifies for the gift tax marital deduction on the same basis as the gift of a bond or any other similar property. The same should hold for subsequent premiums paid on the policy by the donor. An annual exclusion may be allowed instead of the marital deduction if the recipient spouse is not a U.S. citizen. The primary purpose of life insurance is to provide a death benefit to beneficiaries. It can be designed to meet your changing needs with features such as a flexible death benefit and flexible premiums. The death benefit protection can make life insurance an attractive choice for establishing a self-completing plan to help fund a college education. Earning a college degree today can now cost a significant amount—and that amount continues to rise faster than the rate of inflation. With the spiraling costs of earning a diploma, you should review your options. An option to consider is permanent life insurance. Permanent life insurance provides death benefit protection and a way to potentially accumulate tax-deferred cash value growth. Below is an article from fa-mag.com that discusses using permanent life insurance as a tool for college planning:
September is Life Insurance Awareness Month and a wealth advisor with a specialty in college planning wants more nancial ̀ advisors and parents to understand how permanent life insurance policies (including whole life and indexed universal life) can help fund college expenses. Beth Walker, a wealth advisor with Omaha-headquartered Carson Wealth Management and founder of the Center for College Solutions, a consulting rm in Colorado Springs, isn’t suggesting parents abandon ̀ 529 college savings plans for permanent life insurance contracts (also referred to as cash value contracts) but thinks the strategy deserves a closer look. According to Walker, almost every permanent life insurance contract includes loan provisions that enable the policyholder to borrow on the cash value that has accumulated. A parent is typically the owner and the insured on policies used to fund college, she said. The cash value of permanent life insurance contracts is unlikely to sabotage nancial aid awards because ̀ it’s excluded from the Free Application for Federal Student Aid formula and only a handful of colleges that require the CSS Prole application inquire about the cash value of policies, said Walker. In addition, policyholders can generally borrow up to 90% of the cash value of their life insurance contracts “with just the stroke of a pen,” she said, without having to qualify or have an appraisal. Both of those steps are required when collateralizing a home equity line of credit to pay for college, she added. “The exibility of an insurance line of credit is a phenomenal tool during the college years,” said Walker. She also pointed out that the collateral in cash value contracts continues to compound uninterrupted when loans are taken and policyholders are permitted to repay the loans whenever they wish. Some parents wait until they receive a bonus or until their children graduate college, she said, and others may opt not to repay the loan. Outstanding loan balances are deducted from the payout beneficiaries receive ̀ following the death of the insured. That being said, “I would never advocate that you don’t pay it back, ” said Walker, noting there can be surrender charges and parents might need the payout to fund their retirement. Walker has used cash value life insurance as a college funding strategy with more than 30 client families. She has also funded a life insurance policy to pay for her son’s college education. Starting to fund a permanent life insurance policy when the kids are in middle school or younger is “a complete no-brainer,” she said, “provided the permanent policy is properly designed.” At that stage, parents have many years to build cash value before they’ll need to borrow the funds to fund college. Permanent life policies can still be an attractive way to help parents whose kids are in high school manage cash flow challenges, she said, but at that point the policy will likely be earmarked for retirement. One of her client families bought a house at the height of the real estate market but has no equity in it because property values subsequently crashed, she said. The parents—highly compensated with good jobs and maxed out on their 401(k) contributions—haven’t been able to save much for college for their two children who are now in middle school. According to Walker, the couple is starting to set aside $1,500 a month for college costs through a permanent life insurance policy. The couple will be able to borrow $30,000 a year from the policy and she has factored in a 4% annual inflation increase during the years the clients’ children will be in college. “The rest they’ll have to get through student loans and merit-based scholarships,” she said. The clients plan to repay the loan to their policy by the time they retire. When Walker comes across clients who inherit money upon the death of their parents, she often encourages them to put the inheritance into a permanent life insurance policy instead of taking a distribution that could disqualify the grandchildren from receiving financial aid. Cash value life insurance isn’t the college funding answer for everyone with cash-flow challenges, said Walker, noting, “A confident practitioner would need to run scenarios.” She cautioned that permanent life insurance is a long-term commitment that shouldn’t be taken lightly. “You really have to spend time educating parents,” she said. Consumers often don’t know enough to ask the right questions, she said, and even people with a license to sell insurance also may not be educated on how it can be used to fund college. “Because it’s a complex tool, with a lot of moving parts, “ said Walker, including yearly fees and onetime fees, “you have to really understand what you’re doing.” In last blogpost, we discussed what is Epilepsy. We will continue the discussion below.
Evaluation & Treatment of Epilepsy Evaluation and treatment for epilepsy is typically done via electroencephalography (EEG). An EEG measures the electrical activity of the brain and can help confirm that epilepsy is present. This may also help classify the type of epilepsy. Imaging of the brain can also be a useful tool for evaluating seizures and is usually done with an MRI or CT scan. The goal of epilepsy treatment is to eliminate or reduce the seizure activity with minimal side effects of the treatment. While most epileptics will achieve adequate seizure control with medicines, up to one-third will not. Life Insurance Underwriting for Epilepsy & Seizures Here are the primary questions to a proposed insured who presents with a history of epilepsy or seizures will be asked:
The underwriting of an applicant with epilepsy or seizures looks to several factors including the type of epilepsy or seizures, any known cause, frequency of the seizures, level of control, and any complications. Standard to low/moderate table ratings are typical, depending on the details. We even have a few carriers that indicate Preferred offers may be possible in the ideal circumstances. If you have any questions, please contact us, we will help you gather the pertinent info that we’ll need to help evaluate your case. About Epilepsy & Seizures
Epilepsy, or seizure disorder, is a neurological condition that comes from abnormal electrical activity in the brain. Epilepsy is a chronic disorder that is typically diagnosed once there has been a history of two or more seizures that were not provoked by a specific preceding cause. According to the National Institutes of Health, approximately 3 million Americans have epilepsy. The incidence is highest in early childhood and has recently begun to become more prevalent in the elderly. Types & Causes of Epilepsy Epilepsy is categorized as being either symptomatic or idiopathic. Causes of symptomatic or acquired epilepsy may include genetic birth factors, infections, toxins, alcohol withdrawal, trauma, circulatory and metabolic disorders, tumors, and degenerative diseases. It is termed idiopathic if there is no evidence of an organic brain lesion and no known underlying cause. The majority of cases of epilepsy are idiopathic. Seizures can be subdivided into partial and generalized seizures. Partial seizures are localized to one area of the brain and are either simple or complex. Simple partial seizures have no alteration of consciousness, while complex partial seizures have altered consciousness. Generalized seizures involve both sides of the brain or the entire brain. Types of generalized seizures include tonic-clonic or myoclonic (grand mal) seizures, absence (petit mal) seizures, as well as atonic, tonic, and clonic seizures. Status epilepticus is a medical emergency in which there is a prolonged continuous seizure or multiple seizures without full recovery of consciousness in between and is associated with a high mortality rate that can be up to 20% or higher per episode. In next blogpost, we will discuss life insurance underwriting for Epilepsy. Inflation is a "tax" that has nothing to do with revenue - instead, it diminishes your clients' purchasing power. Today, a 50/50 portfolio of U.S. Treasury bonds and the S&P produces 75% less income than it did 10 years ago, in July 2011. Van Mueller explains how this works, why that last bag of Doritos felt a little lighter than usual, and why now is the best time ever to get cash value life insurance.
========== What is inflation? Isn’t it a very complex concept? Doesn’t the government intend for it to be complex, so that the American people don’t understand that they are being taxed, again, without it being called a tax? Isn’t it a way for the government to tax the poor, middle class and the upper middle class without those groups even realizing what is happening to them? Isn’t it a way for our government to add additional tax revenue from the wealthy? Did you notice I didn’t say super-rich? Most of the super-rich do not pay income taxes. They have planners who put strategies in place to offset the damage caused by inflation and yes, even take advantage of inflation. Shouldn’t our customers be made aware that the same strategies are available to them? So, in its simplest terms, what is inflation? The simplest answer is that it is the lost purchasing power of our money! We will discover later in this month’s newsletter that it is much more complex than that. However, our customers do not desire complexity from us. They desire simplicity. They want to understand exactly what is happening to their money. Our customers do not desire complexity from us. They desire simplicity. They want to understand exactly what is happening to their money. Here is an example of the lost purchasing power of our money that is relevant to many of the customers we talk with. Healthview Services is an organization that reviews Social Security and Medicare and reports on the effectiveness of those programs. They recently reported that if you were receiving $2,000 per month in Social Security benefits in the year 2000, that in 2020 you would now require $2,800 per month to buy the same amount of goods and services. There are two important points to share. First, that increase was during a low inflation period. It even included a deflationary period in 2007 and 2008. Second, the information did not include the massive inflation increase that we are seeing in 2021. How does the dictionary define inflation? In economics, inflation (or less frequently, price inflation) is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the PURCHASING POWER per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and service. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, CPI, over time. There are other indices that are used widely as measurements. 1. Producer Price Indices – This is an increase in costs at the producer level rather than the consumer level. 2. Commodity Price Indices – This measures a basket of commodities. 3. Core Price Indices – Food and oil prices can change quickly. Therefore, most statistical agencies also report a measure of “core inflation.” That removes volatile expenditures like food and oil from a broader index like the consumer price index. Many times, the inflation rate we are reported excludes spending on food, oil and even home purchases. It is dramatically understated. Why? Because the government doesn’t want most of America to realize that their standard of living is being reduced. That’s why people in the know call inflation a “stealth tax.” The government doesn’t want most of America to realize that their standard of living is being reduced. That’s why people in the know call inflation a “stealth tax.” 4. GDP Deflator – This measures all the prices for goods and services against our Gross Domestic Product (GDP). This is a measurement of all the goods and services produced by Americans. 5. Regional Inflation – Prices are very different in different regions of our country. Costs of things could vary dramatically if measured by the north versus the south or the east versus the west or the coasts versus inland United States. 6. Asset Price Inflation – This is a dramatic increase in the price of financial assets such as stocks, bonds and real estate. There are three major sources of inflation. 1. Demand-Pull – When demand for goods or services exceeds production capacity. When people want to buy Giannis Antetokounmpo sneakers and they can’t be produced fast enough, the price increases. 2. Cost-Push – When production costs increase prices. If the price of helium increases for special occasion balloons, that will increase the price for the balloons. 3. Built-In – When prices rise, wages rise also in order to maintain living costs. If wages rise, prices will increase. This has been under control for a while. This reason for inflation is heating up again. In order to understand the impact of inflation in the future we must look at inflation in the past. Let’s look at the last time we had excessive inflation. From 1975 to 1990 we had very aggressive inflation in our country and the world for that matter. Do you know that in the 46 years since 1975 you now need $5,050.11 today to buy the same amount of goods and services that $1,000.00 bought in 1975. That means your money only buys 19.80 percent of what it could buy in 1975. You lost 80 percent of your purchasing power. The average inflation rate over those 46 years is 3.58 percent. That means you need to double your income every 20 years in order to maintain the purchasing power of your money when you began. Even at only 3.58 percent average inflation retirees would need almost a double and another half of a double increase during their life expectancy to maintain their purchasing power if they retired at age 65 and lived to age 95. You need to double your income every 20 years in order to maintain the purchasing power of your money when you began.What happens to the quality of your retirement if you retired in 1975 when the rate of inflation was 9.13 percent and lived through bad inflation like those retirees had to until 1990? What happens to your standard of living? Here are the rates of inflation from 1975 to 1990. 1975: 9.13 Percent 1976: 5.76 Percent 1977: 6.50 Percent 1978: 7.59 Percent 1979: 11.35 Percent 1980: 13.50 Percent 1981: 10.32 Percent 1982: 6.16 Percent 1983: 3.21 Percent 1984: 4.32 Percent 1985: 3.56 Percent 1986: 1.86 Percent 1987: 3.65 Percent 1988: 4.14 Percent 1989: 4.82 Percent 1990: 5.40 Percent Any inflation rate over 2 percent is considered unfavorable. Any inflation rate below 2 percent is also considered unfavorable for the economy. From 1991 to 2020 the inflation rate was in the 2 to 4 percent range. 2021 is the first time it has entered the 5 percent range at 5.05 percent. Simply stated, that means that in 2022 you will need $1,005 to buy the same amount of goods and services that you bought in the year 2021. A cup of coffee was $0.25 in 1970. In the year 2000 a cup of coffee had increased in price to $1.00. In 2019 it increased to $1.59. That’s not a Starbucks cup of coffee, that’s a regular cup of coffee. That is inflation. So, what’s happening with inflation today? Are we creating 1975 to 1990 inflation right now? Let’s review a few things and see if we can figure out what our government is currently doing. The Federal Reserve’s current Quantitative Easing programs created $120 billion per month to $1.4 trillion of newly printed money annually. Jerome Powell said they would reduce this amount in 2022 or 2023. That will probably not happen now. The Biden administration let it be known that President Biden will reappoint Jerome Powell as the Federal Reserve Chairman in 2022. The administration would not have reappointed Mr. Powell unless he agreed to continue President Biden’s strategy going strong into the November 2022 elections. That means no reduced quantitative easing or rate hikes or money tightening strategies for a while. So, if shutting down the economy causes a depression, they will print money. If the stock market crashes 30 or 40 percent, they will print money. If municipal bonds collapse because investors don’t believe our cities and states will be able to meet all their healthcare, pension and debt obligations, won’t they print more money? If our economy continues to struggle because the Delta variant of the COVID-19 virus causes state officials to partially or completely lock down their economies, what will the Federal Reserve do? Won’t they print more money? What if the economy doesn’t recover fast enough. What will the government do? Won’t they just print more money? They don’t really have ANY other alternatives. Don’t believe me yet? Please try to wrap your head around the next few sentences. Our government has printed so much money to offset the negative consequences of the COVID-19 lockdowns that if you add up all the money that our country has ever printed; over 40 percent of that money was printed in the year 2020. This won’t stop soon. There will be trillions for infrastructure, climate change and many other things. We are not allowing our economy to heal itself. We are artificially manipulating the economy to win elections or pursue short-term agendas that promote candidates or party’s rather than the longterm well-being of our country and our country’s economy. Our government has printed so much money to offset the negative consequences of the COVID-19 lockdowns that if you add up all the money that our country has ever printed, over 40 percent of that money was printed in the year 2020.All of this additional liquidity is causing problems globally. There is no place to hide. There used to be global alternatives, however, we sold the Kool-aid to the rest of the world. Since March 2020 central banks have printed more than $27 trillion in stimulus. That is approximately 30 percent of the GDP of the planet. There are no words to explain the eventual damage that will be done to the world’s economy. Using your own common sense, you will also understand that the government continues to mislead on inflation. The Bureau of Labor Statistics shared that healthcare spending has increased only one percent in the last year. If you sell health insurance, you know that is ridiculous. The same Bureau of Labor Statistics reported the housing portion of inflation increased 2.6 percent in the last year. Housing prices have increased over 14 percent. They are currently rising at the fastest rate since the real estate bubble of 2007 and 2008. They are not counting the costs of housing or medical care or food costs or energy costs even remotely correctly. This is even more manipulation Inflation creates dramatically unfair and dishonest behavior in the markets. If you were to use a wine maker as an example, let’s see what choices are required to be made if the Federal Reserve doubles or triples the money supply. If the wine maker is selling his wine for $22 per bottle, he is now confronted with a very difficult decision. Here are his choices: He can continue to sell his wine for $22 per bottle and lose 50 percent or more of his profit, or he can use cheaper ingredients and destroy the quality of his wine and continue to sell it for $22, thus maintaining his profit, or he can double the price to $44 per bottle. The issue with the third idea is that the wine maker will face competition pressures from other wine makers who don’t have as much pride in their product or integrity in the way they operate. Inflation puts financial pressure on individuals to be dishonest. They must weigh their moral integrity against their financial wellbeing. Average individuals gain no long-term benefits from excessive inflation. It is taxation without representation. Inflation puts financial pressure on individuals to be dishonest. They must weigh their moral integrity against their financial wellbeing.Inflation is a tax. It’s not an actual tax like a sales tax or income tax. It has nothing to do with tax revenue. There is no line for it on form 1040 that makes you pay two or three percent of your earnings because of inflation. There is no payment that must be made to account for the rising inflation rates. The inflation tax is unseen. The inflation tax is a “stealth tax.” That is why it is so complicated and difficult to plan for. The inflation tax is a forfeiture on the cash you hold as inflation increases. As inflation increases, cash becomes less valuable. In short, what you save today will be worth less tomorrow. In a recent article in Think Tank Advisor, Dr. Michael Finke who is a professor of wealth management at the American College of Financial Services stated this: “Unfortunately, if these retirees hope to live on income from these investments, they will feel the effects of asset inflation. Asset inflation should also affect the expected growth in portfolios of bonds and stocks. A 50/50 portfolio of 10-year U.S. Treasury bonds and the S&P 500 produces exactly 75% less income today than it did 10 years ago, in July 2011. In other words, $1 million today will produce the same annual dividends and interest income from a balanced portfolio as $250,000 did for a retiree in 2011. Retirees who reach for yield by taking greater risk in credit markets are facing spreads between risky corporate high-yield bonds and Treasury bonds lower than they were before the pandemic, despite a likely tapering in bond buying by the Fed in the coming months.” WOW! Americans have lost 75 percent of the dividend and interest income they were receiving in 2011. How do they make that up? Americans have lost 75 percent of the dividend and interest income they were receiving in 2011.One more thing: Become aware of the word “shrinkflation.” Instead of raising prices, companies are hiding those rising costs by shrinking the size of everyday products. As an example, General Mills shrank its family size cereal boxes from 19.3 to 18.1 ounces. With rising labor costs and ingredient prices combined with increased demand and a shipping crisis, you can expect shrinkflation to expand exponentially in the future. Here are some additional examples of shrinkflation.
This information is why it is the greatest time ever to be an insurance and financial professional and it is without a doubt the greatest time ever to sell cash value life insurance. It is obvious that there are no products by themselves that can overcome the challenges of aggressive inflation. It is also obvious that only STRATEGIES must be used to not be hurt by inflation and actually take advantage of inflation. I know you are all thinking to yourselves, HOW? You already know how. I have been writing this newsletter for years with ideas to beat inflation. We are the only industry that can. Here are several bullet points to remember. We will go into more detail in the months ahead. 1. Never Lose Any Money! 2. Have access to your money that you didn’t lose to take advantage of opportunities when they present themselves. 3. Reduce or eliminate income tax liability 4. Use pennies to buy dollars. Use leverage to make money more effective and more efficient. 5. Have one dollar do the work of many dollars. My dollars benefit if you die too soon, live too long, become disabled, have a catastrophic illness, have a terminal illness, require long term care or wish to supplement your retirement income. All with the same dollar. 6. Finally, learn and use mortality and longevity credits to increase retirement income. So, what do you think? Do you know more about inflation than you ever wanted to know? I hope not. This will be an important concern for every American going forward. Let’s help our customers be in control of that journey. We will continue the case study from last blogpost.
How to evaluate IUL's values against its costs? The best metric for this evaluation is to calculate the IUL's Internal Rate of Return (IRR) - it calculates the product's return after subtracting all the costs. Let's look at the best case and worse case scenarios, respectively. The best case scenario If the insured dies very young, this IUL product would have the best IRR, that's because the power of life insurance is at play here. For example, if the insured dies at year 2, the IRR would be 330% ($277,953 death benefit to beneficiaries). The worst case scenario The worst case scenario happens if the insured dies very old. Let's see if the insured dies at age 100 - after putting in $200,000 premiums. He would have taken out tax-free policy loans of $629,930 ($17,998 times 35 years). The IRR would be 4.56% or a taxable equivalent of 6.81% assuming he was in the 33% tax bracket. Where are the Costs? We assumed 5% return for this policy, why IRR is only 4.56%? That's because all the costs. Given the average mutual fund expense ratio of 1%+, the expense of 0.44% is not really high. Furthermore, this 0.44% expense buys the life insurance over the insured's lifetime, so if he should die young in the early years, his heirs would get multiples of what he puts in, i.e. leverage. If he dies old, the leverage has burnt off, but the 0.44% expense is still not too bad given the expenses in other investment options. Another way to look at IUL's value Another way to look at an IUL's value is to check its IRRs under cash surrender values in year 20, 30, etc. If the difference between the IRR and the illustrated rate is less than 1%, it's still a not too bad option when compared with other investment choices. In last blogpost, we discussed IUL's major costs. Now we will analyze the values one could get from an IUL product, after these costs.
A Hypothetical Example Let's say we have a 45-year old male who is going to pay annual premium of $10,000 per year to age 65. His goal is to achieve maximum ax-free distribution/loans once he retires at age 65. The policy design and assumptions First, we will optimize cash value from this policy by solving for the minimum non-MEC death benefit so we could minimize Cost of Insurance. This solves for $211,000 initial death benefit. For purpose of loan duration, let's assume from age 65 till age 100. Furthermore, let's assume only 5% growth rate for this IUL and guaranteed wash loans (zero-interest net cost loan) to age 100. In solving for the maximum loan amount, we get annual amount $17,998. If this insured person dies at age 82 (life expectancy), he would have gotten 17 years of tax free income - approximately $305,966. His beneficiary would get approximately $275,397 of death benefit. This is a total of more than $580,000 tax free to him and his beneficiaries. So, how to analyze the value of this IUL policy? We will discuss in next blogpost. One of the biggest issue with permanent life insurance products, especially Index Universal Life products (IULs), is IUL's costs. This blog will use a real example to analyze IUL's costs and compare the costs with IUL's values to determine if IUL truly delivers values or not.
IUL's 3 big costs IUL has 3 big costs:
In next blogpost, we will use a case study to compare an IUL's costs with the values the policyowner would get. Below is a excerpt from an article at thinkadvisor.com, it advises financial advisors to give 2 perspectives about annuity:
========================== “From an economist perspective, annuities are wonderful because they give you guaranteed income for as long as you live,” she explains. “But a lot of people see them as unfair because they think ‘I’m going to give this money to an insurance company. And if I live a long time, that’s great. But if I don’t, the return on investment might not look as appealing.” What does she recommend advisors do to help their clients work through this type of thinking? Two options may help, she says. One is to walk through the reasons an annuity is like a pension plan, she says. “If they think of an annuity is like their own personal pension that they’ve been contributing into for many years, it starts to feel a lot more palatable than if it’s just they handed $100,000 to an insurance company,” she says. “Just reframing [the idea] a little bit and getting people to think of it more like a pension than thinking of it as a financial product that you’re hoping to get a return on investment for can change the mindset.” She also recommends “preconditioning” clients when they are younger, and earmarking a portion of retirement savings for an annuity. “You do want to give people the option to back out if things have changed [by retirement], but laying the groundwork of a the plan, and [saying] ‘this is how we’re going to do this, and this money is earmarked to go into an annuity,” I think helps.” In last blogpost, we discussed the reasons for exchanging life insurance policies to annuities. Now we will take a look at a case study.
Life Insurance to Annuity Exchange Exchanging a life insurance policy for a NQ annuity is a permitted nontaxable exchange, provided the:
A Case Study: Joan Jumps from Life Insurance to Annuity Joan, age 55, owns a permanent life insurance policy. It’s underperformed her expectations. She’s considered her reasons for ownership carefully and decided she no longer needs it. Her situation:
If Joan desires income now, she could exchange the life policy for a single premium immediate annuity (SPIA). She would buy the SPIA with a $115,000 premium (the life policy’s cash value) and the SPIA would have a $160,000 cost basis. She would have an exclusion ratio of 100% and, provided she lives that long, would receive her payments tax-free for nearly 30 years (29.6 to be exact, representing her remaining life expectancy). Payments received after that point will be fully includible in her taxable income. In year 23 Joan would recover the total premium paid. If Joan prefers income later, she could exchange the life insurance policy for a deferred annuity. Finally, Joan can also add additional funds from her savings. By doing so, she’ll increase the monthly amount of protected lifetime income she’ll receive from the immediate or deferred annuity. Any additional premium would also be recovered tax-free from the annuity payouts. Questions to Consider
Consider Your Options Of course, you can always surrender the old policy. But, if there’s any gain in the policy, you’ll need to include that amount in your gross income on your tax return. There it will be taxed as ordinary income. Gain is generally determined by subtracting the total premiums you’ve paid (your cost basis) from the policy’s current cash value. Even if there’s no gain in the policy, there may still be a good reason not to surrender it. If you’ve paid more into the policy than its current cash value, you’d be walking away with a loss that you can’t claim on your tax return. Exchanging a policy that’s “underwater” (i.e., its cash value is less than the total premiums paid for it) for a nonqualified (NQ) annuity can:
A life insurance policy might be underwater for a variety of reasons. One reason might be lower-than-expected interest rates on whole life or universal life policies. Another reason might be lower-than-expected subaccount values in variable life policies. In next blogpost we will discuss life insurance to annuity exchange. |
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