Last week in Blog #101, we examined a benefit plan for Tom Hamilton, Chief Marketing Officer, a key rainmaker, and a non-owner executive of Acme Ford, LLC. The purpose of that plan is to provide benefits for Tom and his family in the event of:
- Disability;
- Early death;
- Retirement;
- Long-term care needs.
I coupled an Indexed Universal Life policy with a Disability Income policy, both funded by way of a Controlled Executive Bonus Plan using a gross-up bonus. All four benefits were provided for no out-of-pocket cost for Tom -- unless he voluntarily terminates his employment during the first 7 years in which case he owes Acme Ford the sum total of the bonuses paid. (Hence, the use of the word “Controlled” in the title of the plan.)
Here again are Tom’s repayment obligations:
Let’s suppose that Tom likes the benefits but he declines to participate in the plan. This could be caused by several reasons, the most likely being:
- His concern about the potential repayment liability shown in Column (6);
- His reluctance to commit to at least seven years of employment with Acme Ford in light of other employment opportunities that may surface.
Tom asks his broker, “I really like the overall benefits -- is there any way Jennifer and I can duplicate them personally?”
His broker responds, “Let’s try to integrate them into your overall wealth planning analysis and see what we can generate.”
Case Study
Below is a summary of Tom and Jennifer Hamilton’s net worth:
1 Cost basis of $150,000; anticipated additional contributions: $25,000 yearly until retirement.
2 Anticipated additional contributions: $18,000 yearly until retirement.
3 Anticipated additional contributions: $18,000 yearly until retirement.
4 Recently inherited from her father.
5 Anticipated liquidation at retirement (net proceeds reinvested in equity account).
These assets will be used as the basis for an analysis in Wealthy and Wise®, our wealth planning system.
Click here for comments about yields and Monte Carlo simulations.
The Impact of Inflation on Retirement Cash Flow Projections
Inflation -- the governments damage to currency as a store of value.
Tom and Jennifer are ages 40 and 35. Their current after tax income is $250,000, and they would like to establish the future equivalent of that number for their retirement after tax cash flow.
They have 25 years until they expect to retire. Using a 3.00% inflation factor, their retirement cash flow at that time must begin at $523,444 to provide the equivalent of $250,000 in today’s dollars.
To further offset inflation, that $532,444 needs to increase by 3.00% annually thereafter. The illustrations that follow are developed through their ages 95/90 -- slightly past their joint life expectancy of 92/87. The final year’s cash flow is $1,233,531 -- still only $250,000 in today’s dollars.
These can be frightening numbers, but if you believe inflation is here to stay, your retirement plans must take it into account. And who knows if 3.00% inflation is an accurate long-range assumption? This is why Tom and Jennifer’s plan needs to be monitored at least annually in order to make adjustments to all assumptions based on then-current facts and circumstances.
Note: In all cases, be certain your clients participate in arriving at the inflation percentages to use.
In the Wealthy and Wise reports that are available below, the buying power of the desired retirement cash flow is highlighted in red. This is particularly valuable for a client who, when looking at Pages 14 or 59, asks: “Why do you figure I need $1,233,531 of cash flow at age 94.” As the buying power numbers show in the adjacent column, it’s the equivalent of $250,000 in today’s dollars.
Scary, but true -- assuming only 3.00% inflation!
Note to Wealthy and Wise users: The menu prompt to include the buying power column is at the bottom of the Preliminary Data tab.
Net Worth Analysis
Below are the long-range net worth implications for the Hamiltons using their current asset base to provide the after tax retirement cash flow noted above.
| Strategy 1 - Current Plan |
| Hypothetical Net Worth |
Let’s next include the Indexed Universal Life policy. Premiums are $60,000 for seven years with loans for needed cash flow beginning at age 65. We’ll also include the Disability Income policy with premiums of $7,200. Both premiums are funded by allocations from the Hamiltons current asset base.
Below are the long-term net worth results of this alternative strategy:
| Strategy 2 - Proposed Plan |
| Hypothetical Net Worth |
| Including Indexed Universal Life and Disability Income Policies |
Here are both Strategies -- superimposed on one another:
| Strategy 1 vs. Strategy 2 |
Hypothetical Net Worth |
Wealth to heirs is also impressive:
The Takeaways
The Strategy 2 benefits to Tom and Jennifer are considerable:
- No personal out-of-pocket cost for the life insurance and disability income policies;
- A disability income benefit with annualized tax free income of $150,000+;
- $2,600,000 of life insurance death benefit during pre-retirement years;
- A substantial post-retirement death benefit much of which can be advanced in the event of qualifying long-term care needs;
- Annual, tax free, retirement cash flow of $523,444 starting at age 65 increasing gradually to $1,233,531 by age 95 (totaling in excess of $25,000,000);
- Residual net worth in the final year illustrated of almost $19,000,000;
- An improvement in wealth to heirs in all years.
To my knowledge, Wealthy and Wise is the only planning system that can produce these results and illustrate them with year-by-year mathematical backup.
The gain of $7.2 million in net worth is significantly caused by the participating policy loans from the Indexed Universal Life providing a substantial amount of the retirement cash flow thereby putting considerably less strain on their other assets. During pre-retirement years, the cash value of the policy is responsible for replacing assets used for premiums.
Click here to review the illustration for the $2.6 million Indexed Universal Life policy from the InsMark Illustration System. This one is slightly different from the policy illustrated in Blog #101. Instead of using loans from the policy in pre-retirement years to fund the Disability Income policy as we did in Blog #101, we will use asset withdrawals in the Wealthy and Wise analysis referenced below. This provides greater cash flow from policy loans in retirement years.
Click here to review the illustration for the Disability Income policy. (Page 3 is particularly impressive.) Are you covering the disability risk for your clients? Good as the overall benefits are for Tom and Jennifer, without the disability coverage, their plan is a chair with only three legs: death benefit, retirement cash flow, and long-term care. Without the coverage, it likely collapses should disability occur.
Many people object to the cost of disability premiums. If you can blend the cost into an overall wealth plan by using assets as a premium source, the objection usually disappears.
Click here to review the reports from Wealthy and Wise.
This Wealthy and Wise presentation contains 97 pages of reports, partly due to the young age of the clients creating 55 years of data. This requires most reports to go to two pages so in reality, you are only dealing with 40 or so different reports. That still is a ton, but with this System, I recommend that you have all the reports for a given case with you when you are visiting with a client or client’s attorney or CPA. Wealthy and Wise backs up every number shown, and you never know which report you?ll need to answer the inevitable question, “Where does this number come from?” That’s why I provided all of them to you in this Blog; however, most Wealthy and Wise users select a few key illustrations for the main report and put the balance in an Appendix.
Monitoring Fees
The Case Study in this Blog does not include any monitoring fees you might charge as described in Blog #99. If your securities licensing allows it, you can certainly justify annual monitoring fees to keep this Wealthy and Wise analysis up-to-date. Do not treat it as a “one and done” retirement plan. Your clients deserve your regular involvement, and you will lose clients without it. Comprehensive monitoring will also help ward off potential litigants as any Wealthy and Wise evaluation will gradually fall further and further out of date without your participation.
Disability Resources
I know many of you currently have a disability resource, but for those who want a vital new relationship, we strongly recommend Disability Insurance Services in San Diego, CA, an InsMark Referral Resource, for disability income and long-term care.
Quotes are available for:
- Individual Disability Income Insurance;
- Business Overhead Expense Insurance;
- Disability Buy/Sell Insurance;
- Critical Illness Insurance;
- Long Term Care Insurance;
- Bank Loan (ensuring repayment of loans);
- Lump Sum Key Person Insurance;
- Multi-life cases.
InsMark’s Digital Workbook Files
If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.
Digital Workbook Files For This Blog
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Important Note #1: The hypothetical life insurance illustration associated with this Blog assumes the nonguaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable. Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.
Important Note #2: Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner. Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.