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(Presentations in this blog were created using the InsMark® Illustration System)

Recently in Blog #180, we announced a critical upgrade to our comparison modules in the InsMark Illustration System involving the ability to compare internal plan costs.  In addition to values, you can now illustrate the difference between investment taxes and fees vs. the mortality and administrative expenses of life insurance.  The alternatives never match up to the life insurance, and this feature is a significant breakthrough in illustration capacity.

We typically use an illustration like our Various Financial Alternatives (VFA) where you can compare cash value life insurance to a variety of investments, e.g., a taxable account, a 401(k), a tax deferred account, an equity account, etc.  We also compare the life policy to just one other investment using the Other Investment vs. Your Policy illustration module.  We also address “buy term and invest the difference” by including a companion term policy with an alternate investment using the Permanent vs. Term illustration module.

Click here for an 11-minute video for specifics of this strategy including details of the data input procedure.  (It is the same for all three comparison modules in the InsMark Illustration System.)

In my next Blog #185, scheduled for posting in January 2019, you will see a presentation of illustrations and graphics featuring this concept.  The Case Study involves a client in a 30% tax bracket contributing $19,000 to a 401(k).  We recommend retaining only that portion of the 401(k) matched by the employer, $4,000 in our example.  We also recommend diverting the after tax cost of the $15,000 unmatched balance, $10,500 in our case, to Indexed Universal Life (IUL).

The results will not only stun you but also prove conclusively that life insurance is a far better alternative than retaining the unmatched portion of a 401(k).  This result applies to virtually all taxpayers up through age 55 (or even age 60 for those planning to delay retirement until age 70).

In my subsequent Blog #186, I’ll address this same issue for a more upscale client with even more dramatic results.

Below is a Flow Chart of a comparison of a 401(k) to Indexed Universal Life:

401(k) vs. Indexed Universal Life

Licensing InsMark Systems

To license the InsMark Illustration System, visit us online or contact Julie Nayeri at Julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President — Sales, at dag@insmark.com or (925) 543-0513.

Testimonials

“InsMark is the Picasso of the financial services world — their marketing savvy never fails to amaze me.”
Doug Peete, Past President, Top of the Table, InsMark Silver Power Producer®, Overland Park, KS

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag.  I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

“The reason I use InsMark products is because they are so good at explaining financial concepts to all three parties: 1) the producer trying to explain the idea; 2) the computer technician trying to illustrate it; 3) the customer trying to understand it.”
Rich Linsday, CLU, AEP, ChFC, InsMark Platinum Power Producer®, Top of the Table, International Forum, Pasadena, CA

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Important Note #1:  The hypothetical values associated with this Blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Life insurance illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

Important Note #3:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner when policy loans are present and net cash values are so low that the income tax on the gain on surrender (calculated using gross cash values less basis) is more – often significantly more – than the net cash surrender value.

This lurking tax bomb can be present in all forms of whole life and universal life where policy loans of any type are utilized.  It can be avoided, and you, the producer, are key to making sure your clients are aware of how to sidestep it.

A tax bomb can be avoided if the policy is neither surrendered nor allowed to lapse, since the policy death benefit wipes away the income tax liability.  The foundation of this special treatment is IRC Section 101.  This statute provides that the proceeds of life insurance maturing as a death claim are exempt from federal income tax.  This applies to the full death benefit, including any cash value component whether loans exist or not.

Can your clients remember these facts years into the future?  If they are incapacitated, will family members understand the issues?  It is probably best to file a short note with the policy – something like this (although your compliance officer will likely have preferred language):

If/when you take policy loans on this policy, be sure to talk to your financial adviser before surrendering or lapsing the policy in order to anticipate unexpected tax consequences that may otherwise be avoided.

Does this note make it harder or easier to deliver the policy?  It’s harder if you haven’t discussed it with your client; easier if you have.  And that’s the point – you should discuss it.

Some life insurance companies have concierge units that monitor loan status at the point of lapse or surrender, and you would be well-advised to select an insurance company with this capacity.  To be effective regarding the tax bomb, such carriers need to be proactive in their client relationships, not merely reactive to client inquiries.  I hope that ultimately the policyholder service division of all life insurance companies will bring this potential liability to the attention of those surrendering or lapsing policies, particularly those policies with 50% or more of the gross cash value subject to outstanding loans.