Friday, March 29, 2024

How Generational Marketing Can Lead To Multigenerational Wealth
Planning

0

Growing wealth is one thing. Maintaining it and having confidence knowing that there is a plan for the next generation is something completely different. This is what financial professionals constantly impress upon their high-net-worth clients. Helping American families leave a lasting legacy for future generations is at the cornerstone of our industry—and the promise of America. It is not a novel concept to make plans for your assets after you pass; however, we’ve seen time and time again many children and beneficiaries within these families are not always equipped to manage their inherited estate when the time comes.

Cornelius Vanderbilt was one of the richest men before he died in 1877, leaving a $100 million estate to his heirs. While one would think this kind of inheritance would be enough to maintain the family fortune for years to come, in just four generations the Vanderbilt descendants lost it with reckless spending and declining investments. A family reunion in 1973 with 120 Vanderbilt descendants revealed that not a single one of them was a millionaire.

Unless there is a plan for wealth transfer, most beneficiaries will spend it. Seventy percent of high-net-worth families do not retain their wealth beyond the second generation according to the Williams Group wealth consultancy. While generational wealth is an important concept for clients to understand, what many financial advisors don’t realize is that the same concepts hold true for their own practices as well.

A multigenerational business is one that is able to build the wealth of the first generation to care for the clients through their lifetimes, then to provide ongoing financial planning to heirs. Not only is your relationship with your clients important, but your relationship with their families has to be strong as well. Otherwise the wealth that is passed down is at risk of leaving you and your business. The question becomes, then, how do we retain clients across generations?

According to research conducted by Cerulli Associates, a Boston-based research and consulting firm, family meetings and regular communication was rated the most effective wealth transfer planning strategy, followed by educational support and organized succession planning. Other popular strategies include enhancing technology platforms, adding services to align with competitors, and providing additional tax planning services.

This is particularly important right now as America prepares for the biggest transfer of wealth in its history. Heirs in the U.S. can expect to inherit $72.6 trillion over the next quarter century, more than twice as much as a decade ago. Who’s poised to inherit all of that money? Almost half of all U.S. wealth transferred over the next quarter century will come from the top 1.5 percent of households, who are high-net-worth-individuals. Your clients. For people born between 1965 and 1980, also known as Generation X, they are anticipated to inherit approximately $30 trillion over the next 25 years. Millennials will inherit $27.5 trillion, Gen Z $11.5 trillion, and Baby Boomers $4.1 trillion. If advisors are hoping to manage those assets down the road, generational marketing may be a beneficial strategy to understand how to increase client retention with high-net-worth clients and future-proofing a financial practice.

Generational marketing is driven by the simple fact that different generations have their own values, interests, and priorities that shape buying behaviors, including their responses to ads and technology use.

Generational marketing focuses on using a combination of data, preferences, and sociocultural and economic factors to create targeted content that connects with clients on a personal level. For example, 57 percent of Generation X say they’re still recovering from the Great Recession today, and therefore are more likely to save for retirement due to financial anxiety than spend their disposable income. Seventy-five percent of millennials and Gen Zers, who grew up with modern technology, use smartphones to shop online. Some might respond well to new innovations, while others prefer that their products and services stay the same.

When it comes to discussing financial planning and money management with clients, one of the very first things you try to understand is who they are and what shapes their relationship with money. It’s how we connect with people on a fundamental level. From age, to gender or geographic location, to sociocultural context, there are many factors that you can take into consideration when developing a marketing strategy framework for your business. With so many competing factors, how do we know where to focus our efforts? One answer comes in generational marketing.

Jason Dorsey, the #1 generations keynote speaker, is the president of the Center for Generational Kinetics and is known for delivering brand-new insights into generations through his behavioral research around the world. He’s passionate about unlocking emerging trends to help businesses grow faster, and his research can give you a good starting point in leveraging generational marketing in your business.

One area that you can focus on right now, and that we will take a closer look at together, is methods of communication. When establishing lines of communication with your clients, it’s important to understand what works best for them so that you increase the likelihood of getting the desired response, whether that’s a phone call, text confirmation, or something else. Each generation exhibits different behaviors when it comes to how they use technology to communicate; this information can be used to inform your marketing strategy.

Let’s start by segmenting the population by generation:

Baby Boomers hold the most purchasing power and have the most discretionary income of all the generations. While they may have spent the majority of their lives without modern technology, this generation has embraced it. Many of them have smartphones, tablets, and Facebook accounts, and use social media for online shopping. The best way to appeal to them is through coupons, special offers, and email marketing campaigns.

Grammarly, for example, informed baby boomers about their special offer through email campaigns. For a limited time, they claimed to want to help this generation improve their writing, and offered them a 46 percent discount on their annual premium plan. They qualified for the offer simply by age. In addition to the great offer, the email’s simple layout, large text, and contrasting colors made it easy to digest and understand exactly what was being given and how to get it.

Gen X is both the smallest generation and the bridge between baby boomers and millennials. While they might have had parents that grew up in a time of economic prosperity, Generation X grew up in a recession, which has made them more likely to be cautious with money their entire lives.

They tend to be brand-loyal and rarely steer away from what they know. This generation also responds well to nostalgia, such as marketing campaigns that feature celebrities or music that they associate with their childhood.

They’re also more active on social media platforms like Facebook than baby boomers, meaning Facebook ads and pages—especially those with customer reviews—are some of the best ways to keep them up-to-date on new products and services.

Amazon used Facebook ads to target Gen Xers for their Black Friday deals, resulting in a very successful campaign. The sample product and its rating especially helped to capture their interest, as Gen Xers typically trust customer reviews and honest opinions.

Millennials are not only the largest demographic in the workforce but the largest generation in history. This generation places more importance on authentic brand messaging than previous generations, seeking out brands that are socially and environmentally aware. They also prefer user-generated content over marketing campaigns when making a decision on a product or service. Eighty-two percent of millennials value peer reviews and word-of-mouth advertising from family, friends, and influencers. A successful way for them to stay engaged with your brand is through SMS marketing, social media, and user-generated content.

Segmentation and personalization are certainly strong marketing trends that can propel a business forward. Unlike segmenting by demographics like gender or location, generational segmentation creates a more complete picture of target markets on their journey to becoming clients. It helps companies determine where to find them, how to communicate with them, and how to turn them into loyal clientele for generations to come.

Regardless of how well clients may prepare for the future, the possibility of an unexpected event disrupting the best of financial plans is always present. In these situations, life insurance can be a solution. It may provide an equitable distribution of the estate and reductions in estate taxes, and at the same time can help the family feel protected in case of the unexpected.

You can set your practice apart by creating an environment that provides the best financial planning to your existing clients and relieves money-related fears of the heirs. Employing generational marketing tactics is key in retaining the heirs of high-net-worth clients and building a more profitable business.

Giving Guaranteed Income A Raise

The development and use of income riders on fixed index and variable deferred annuity contracts over the last number of years has been widespread. Many consumers are now reaching the age to “turn on the income faucet.” But are these the only income options available for clients with deferred annuities? They are not. A single premium immediate annuity is worth a look. SPIAs have seemingly been forgotten as a mechanism to generate guaranteed lifetime income for those with in-force annuities or other funds.

We recently encountered a case for a hard working business owner named Jack. Jack had purchased a deferred annuity with an income rider years ago. Now in his 70s, he’s finally ready to receive income from that vehicle.

Jack’s current annuity has an income withdrawal base of $729,985, and a 6.00 percent income factor that would generate $43,799 annually in guaranteed lifetime income. The current contract value is $659,151 with a $417,400 cost basis.

Yavorsky-Table-0522

His current annuity contract performed well and suited his needs in the deferral phase, but, rather than turning on his income rider, Jack and his advisor decided to look around to see if there were any alternatives.

Jack explored the amount of guaranteed lifetime income that the current contract value would provide if the $659,151 was 1035 exchanged to a new single premium immediate annuity.

Considerations
The SPIA rates must be compared to the annuitization rates of the in-force annuity. The rates currently provided might allow a higher payout than the purchase of a new SPIA (though this might be less apt to occur if new interest rates continue to rise).

The client must recognize that he’s giving up control of the annuity. Once the SPIA is turned on it cannot be changed or turned off. While that may be somewhat mitigated by current features in many SPIAs—commutation allowances, payment advance features, etc.—it must be taken into consideration.

One must be careful if choosing a life with period certain payout on the SPIA as an early death would favor the income rider payout. However, a long life would likely tip the scales in favor of the life with period certain SPIA.

Ultimately, each situation must be considered on its own. But when it comes time for a client with an in-force deferred annuity with an income rider to start implementing the payout phase of that annuity, it would be prudent to review payout options from a SPIA or the current annuitization values of the existing contract. Pluses and minuses need to be weighed. And, while a SPIA in lieu of “turning on the income rider” might not be a fit in a particular situation, it will likely look more favorable if interest rates continue to rise.

Leveraging Fintech As An Accelerator To Benefit Both Yourself And Clients

FinTech continues to be a popular topic of conversation among advisors in the financial services profession. In my recent conversations with advisors, I’ve found that many have a natural tendency to feel defensive in response to the future role FinTech will play. Some advisors view FinTech as their competition and others worry that FinTech will take over their role.

However, advisors should take note: Clients want FinTech. In fact, according to a recent MDRT study, 56 percent of respondents surveyed stated they want their finances handled by a mix of human advisors, robo-advisors, and other technological tools.

While clients want an integrated approach, navigating the ongoing advancements in FinTech can be challenging—and a bit overwhelming. I invite you to take a step back, and think of technology as an accelerator that allows you to better connect with clients and automate your process, enhancing your client service and saving you time.

Embracing FinTech to Better Connect with Clients
The same MDRT survey found the top perceived benefits of working with a human advisor over a robo-advisor was the opportunity to establish trust and build a relationship through human interactions. This means we have an opportunity to leverage FinTech in our practice to provide great client service, while still providing them with the “human touch” they want.

Utilizing an open-minded strategy that embraces FinTech will allow you to work with all forms of investments and platforms to supplement your clients’ needs. Don’t just think of FinTech as robo-advisors. Other forms of FinTech software like eMoney can be beneficial in strengthening your client relationships and helping clients to better plan for their future.

When discussing FinTech with prospective clients, embrace the conversation as a way to build meaningful new client connections. If new prospects are familiar with using forms of FinTech, open up the conversation and allow them to share previous experiences. Ask them what went well, or what challenges they had, to understand how you can better serve them.

When prospective clients approach me for guidance on FinTech, but already have experience using various FinTech tools, they are still seeking advisement from a human interaction. These situations present an opportunity to build trust, share value-based goals and address your underlying mission as an advisor. Embracing the conversation of FinTech with prospective clients offers them support in areas where technology can’t.

Using Fintech to Serve You
FinTech can benefit advisors beyond client service, as it can help to automate financial tasks and improve overall efficiency when managing aspects of financial planning.

One example of this might be using automated tools to eliminate the human element of specific tasks while handling money to reduce potential error. Integrating FinTech solutions like filtration systems, financial planning software and number crunching tools helps to provide clients guidance on future outcomes. Utilizing financial planning tools like Cube and Planful can allow for more integration with other FinTech software while also minimizing error.

I encourage advisors to keep an open mind when exploring FinTech and the future of FinTech. Current trends leveraging behavioral technology, navigational technology and AI in finance have recently gained popularity as accurate forecasting tools for financial advisors.

How to Stay Positive with FinTech Top-of-Mind
When broaching FinTech with clients, it is helpful to have an agnostic approach toward technology, and not have any biases towards using a particular technology, model, methodology or software. It’s important that you keep an open heart and a quiet mind, to eliminate any prior judgment. I encourage you to get involved and help shape the future.

It’s my personal opinion that if we’re not actively integrating FinTech into our practice, we should take a hard look at if we’re in the right profession. Being a financial advisor is a privilege, and we have the ability to help clients improve their lives, providing comfort with financial stability. If FinTech can help, why shouldn’t we use it?

To help eliminate feelings of negativity towards FinTech as an advisor, I encourage you to stay educated and up to date on new financial technology, tools, and different software. Learning more about the various forms of FinTech solutions, and not just focusing on the topic of robo-advisors, will help us prepare for future situations to better serve our clients.

FinTech Is A Business Imperative

With the COVID-19 pandemic having accelerated the digitalization of insurance and financial services to a previously unseen pace, one might assume our industry has made progress on closing its long-running technological gap. Not so, according to a January 2022 MDRT survey on FinTech (https://www.mdrt.org/globalassets/digizuite/21268-en-mdrt-study-americans-seek-humantech-synergy-in-financial-services.pdf). First, the good news: The survey results reaffirm the value of and need for human financial advisors for Americans of all ages. But the results also reveal ongoing disparities between consumer expectations of FinTech incorporation and what clients are seeing from their insurance brokers.

These consumer expectations will continue to rise, making it more and more difficult for brokers who are already behind to catch up. As we hurtle toward an ever more digital future, effective incorporation of FinTech will make the difference between brokers who prosper and brokers who struggle to keep afloat.

Incorporation and Communication
According to the survey results, 41 percent of Americans have a human financial advisor. While this underscores the continuing importance of insurance and other financial planning professionals, it also means a wide range of knowledge and comfort with technology from clients. Insurance brokers must be ready to meet clients where they are—and the more technology they can effectively use within their practice, the easier that task will be. Fifty-six percent of Americans want their finances handled by a mix of people, robo-advisors and other technological tools, but the exact balance will vary from client to client.

The best thing FinTech can do for an insurance broker is enhance their ability to build genuine relationships with clients. This was the real benefit of virtual meeting platforms in 2020 and 2021—if broker-client relationships were purely transactional, everything could be handled over email alone. But clients want more—the survey found that 51 percent of consumers want financial services professionals to use multiple communications platforms. Most clients will not email you, follow you on Instagram and watch your YouTube videos. But the more options for engagement you present, the easier it is for clients to engage with you on a platform they already use.

It’s also important for brokers to communicate the technology they use behind the scenes. According to the survey, 75 percent of consumers find it extremely or very important that financial advisors use cybersecurity tools like password managers or two-factor authentication. But only 35 percent of clients report their advisor using such tools. Some technologies, like social media, are very visible. Cybersecurity is not. Even if it will never directly impact an insurance policy, brokers can still take the opportunity to deepen clients’ trust in them by explaining their personal cybersecurity toolbox.

Proactively communicating your technological options and capabilities will also help prevent clients from being disappointed when you can’t use their favorite program. Insurance and financial services professionals often have stringent compliance requirements around technology usage, meaning we often cannot accommodate sudden client requests. Demonstrating the tools you already use and your confidence in them will boost your clients’ confidence in you.

Embracing Digital Finance
Even as financial services professionals’ technological options grow, so too does the popularity of robo-advisors. The MDRT survey found that 17 percent of Americans currently use a robo-advisor service, including 21 percent of 18-29-year-olds and 26 percent of 30-44-year-olds. Robo-advisors, clearly, are an established part of the financial services landscape. So how are brokers and other advisors to compete with them?

We may not actually have to compete with robo-advisors at all. According to the survey, 69 percent of robo-advisor users also report having a human financial advisor. Robo-advisor users are also just as likely as non-users to say that they want human involvement in managing their finances. Insurance brokers may not even need to significantly adjust their prospecting to account for these new platforms. Most robo-advisor services focus on investments—they do not cover life, long term disability or other insurance policies that most Americans will still need at some point in their lives.

Another trend that’s clearly here to stay is learning about finance and investments through social media. The MDRT survey found that 68 percent of Americans use at least one social media platform for this purpose. We use social media for everything, so it was probably inevitable that we would start seeking out financial information on social platforms. Younger Americans, especially, are also receiving financial content from places not necessarily associated with serious financial planning. Among 18-29-year-olds, 31 percent are learning about finance or investing on TikTok, 28 percent on Reddit and 21 percent on Discord.

Insurance brokers do not need a dozen social profiles to chase clients and prospects across the internet. They do need to know how to combat financial misinformation. It’s not that social media is a particularly worse source of knowledge—even financial advisors and insurance brokers can be wrong after all. Rather, brokers must internalize that it’s no longer uncommon for Americans to trust the people and pages they follow on social media as much as they trust family, friends and coworkers. Clients will still tell brokers about the “brilliant” idea their sibling had at Thanksgiving, but they will also talk about Reddit and Facebook now too.

At the end of the day, the digital demands of our industry are driven by clients and prospects. Brokers can choose to be caught in a never-ending game of catch-up, or they can take the necessary steps now to embrace the altered landscape. The brokers who take the latter approach will see their clients feel more satisfied and their practices not just grow but thrive.

The World Is Watching

On December 14, 2021, a dear man passed away. You would not have heard of him. His obituary says, “He had a long and wonderful life.”1 He was 85 years old when he passed.

I first met Joe (Pete) Eastridge in 2012 at the dump in Union County, Tennessee. That was where, at age 76, he was working. The dump is open Monday, Wednesday, Friday, and Saturday (just in the morning). Residents drive up and unload larger items into huge dumpsters, or regular garbage into the compactor. Pete helped guide people’s decisions and operated the compactor.

“Hi, I am Dave. My wife and I just moved into the area.”

“I’m Joe Eastridge, but friends call me ‘Pete.’”

“Nice to meet you. Can I call you Pete?”

“Reckon so. Just about everybody has since grandpa gave me that name. I have an older brother named Bill. Grandpa took to calling him ‘Trigger Bill.’ When I came along, I was given the name Joe, but he started calling me ‘Pistol Pete’ and so I have been Pete ever since.”

Over the next several years, Pete and I enjoyed numerous delightful conversations. I learned how to tell when his back was bothering him, even if he made every attempt to hide the pain.
The Wednesday after Labor Day weekend, 2014, I had a full load because my wife and I had hosted numerous guests for four days. When I pulled into the lot, Pete was not at all himself. I had to ask.

“What’s going on, my friend?”

“Something terrible happened two days ago, in my yard. A man died.”

“What? Oh no! How? What happened?”

“He was there trimming my trees. I have six that needed branches cut. He was on the last tree and decided not to use his rope to tie in. He fell about 60 feet and landed on his head. I watched him die.”

My mind was racing. A tree trimmer? We had a strong storm that year, back on June 15. A microburst. It took down two large white oaks on our property. Snapped them in half about 15 feet high on their 20” diameter trunks. The man we hired to clean up the fallen trees and knock down the remaining trunks was Jimmy Brantley. Thirty-seven years old, strong as an oak tree himself, Jimmy truly impressed us. He worked hard, was extremely skilled, and exuded kindness.

“Pete, what was the man’s name?”

“Jimmy Brantley.”

Now I was grieving twice over.

Jimmy died on September 2, 2014. His obituary says he “passed away peacefully in the arms of our Lord.”2 Well, maybe so. He certainly died dramatically, but I pray he was caught in the arms of God.

A Guess Ventured
These two men, Pete and Jimmy, were of modest means. They had that in common. They shared something else: They were genuinely decent human beings. They worked hard. They made a difference.

My guess is, neither one of them had ever been given sound financial advice from an independent financial advisor. Did someone help Pete plan for retirement? Doubtful. Why was he still working, back pain and all, at 76? Did Jimmy own life insurance? He was engaged to be married when he died. Did his fiancée, Julie, receive death benefits to help her remember his enduring love for her? No.

Independent financial professionals are busy chasing the affluent market and the large sale and staying focused on managing assets.

Lessons from Ukraine
In 2018 I began traveling regularly to Eastern Europe. This includes four trips to Ukraine so far. I was there most recently in October 2021 for three weeks.

I planned to be in Ukraine this Spring from February 21 to March 11. When things became too dangerous, we switched our in-person seminars to on-line webinars.

On Wednesday, February 23, my team delivered a Webinar on “Emotional Intelligence in Times of Crisis.” There were 114 people, mostly university students, in attendance. The next morning, they all awoke before dawn to air raid sirens and explosions.

Since that fateful day I have been keeping in touch with as many of our Ukrainian friends as can be reached.

Not a single one of these people are wealthy or affluent. None of them wields power, enjoys fame, or has broad influence. Yet, while the world is watching, these very same people are proving to be powerfully inspirational and rich with courage, generosity, and tenacity.

Consider these examples:

  • Rather than flee her country, Oksana decided to stay and serve the people of Irpin. She told me that she had saved up food and water and other provisions to last a few weeks. The day the war began she went to her church where members were preparing a hot meal for the hundreds of people fleeing the shelling. She said, “I just help distribute the food, sit and listen to their stories and ask them if I can pray for them.” On March 8, she was finally forced to flee. One headline that day read: “Russian Troops Pounded the Town of Irpin. Now They’re Moving into Ukrainians’ Homes.”3
  • I met Martha in her hometown of L’viv. She refused to leave her country. Instead, two weeks into the war, she was enormously busy. “Our church is helping internally displaced people and refugees—there is a lot of work to be done. I am emotionally exhausted, but I am also able to interpret for TV journalists, and I am very blessed with that since I love to do it. I do not plan to leave Ukraine before our victory. It will surely come. It is my land, and I will defend it with arms if needed.”
  • Artem is mild mannered and a hard worker. “I took my mother to the West border of Ukraine. Hopefully tomorrow she will go to Germany. I am right now in the Ukrainian army. We are having training sessions now.”
  • Polina translated for one of my seminars in Kyiv. She wrote: “Right now I am in Budapest with my mom and my sisters. Our dad couldn’t cross the border because of the laws that require men to remain in our country. He transports material needed by the army and helps people out of dangerous zones. We are quite worried for him.”

These are the acts of service and selfless attitudes of ordinary people.

Where Are the Powerful?
It may be just my jaundiced view but, in general, I have found few inspiring stories of heroic acts performed by the wealthy and the powerful. (In truth, it was one such man who started the war in Ukraine.)

Meanwhile, the stock markets reflect the news. The fluctuations are like an EKG of how the investors are feeling about their world. Fuel prices soar. Inflation rages. Uncertainty abounds. The wealthy experience the most dramatic reversals of recent gains. Investment advisors are scrambling to find better ways of protecting assets.

Important Questions for the Independent Financial Professional
Who do we look to when we are in a crisis? Your water line breaks. Do you call the owner of the plumbing company? A fire breaks out in your attic. Do you call the mayor? Amazon messes up your order. Do you complain to Jeff Bezos?

If we look to the common person when we are in great need, are we there for them in their need?

Everyday people will always prove to be the ones who right the wrongs of the powerful. They are the ones who pick up the pieces. Should we not be willing to offer them our best?

Application:
A friend and very successful financial advisor once told me, “I just cannot afford the time to meet with, and give advice to, people in the middle-income range.”

Really? We brainstormed, and she found out maybe it comes down to how we view the opportunity. She believed that prospecting for middle class clients was not cost-efficient. What if there was no cost to prospecting?

If an independent financial professional truly believes in the products and services our industry represents, and compassionately sees the needs of the vast middle class, time can be allotted, and the expense justified, by simply leveraging everyday encounters with people of modest means.

It starts by asking a few simple questions:

  • Have you planned for, and are you and your family prepared for, the unexpected?
  • Have you put in place the process to send money ahead into your future?

Examples:

  • An insurance agency utilizes DoorDash® or Uber Eats® to have food brought in when clients come to the office for lunch appointments. The person delivering these meals is of modest means. They are already at the office. “Do you know what we do here? We help people achieve their dreams and stave off financial nightmares.”
  • In an asset management firm, the toner cartridges and printer paper arrive by delivery van. The very person dropping off the package likely needs the services of a financial professional. There is only one way to find out. Ask.
  • In a financial planning office, all the ceiling fixtures needed to be retrofitted with LED lights. The person who came to install them was in the office for several hours. A casual conversation could uncover needs that can be met.
  • All the planners in a financial advisory firm go out to eat at a nearby restaurant. The server is someone they all know by name but know nothing about. It only takes one interested person.
  • The internal computer network of an independent financial services office requires an upgrade. Outside expertise is needed. The woman who brings the needed expertise is in the office for a day and a half. The financial expertise she needs is available, and only needs to be offered.
  • When visiting an important client, the financial advisor strikes up a conversation with the office manager. More important than discussing the news, recent sporting events, or the weather is discovering how he can best be served.

Summary
The marketplace is full of people like Pete and Jimmy. The independent financial professional who wants to make the greatest difference in the world can start by paying attention to the people who make the world go around.

Who is going to be the belt or belt loop to hold them up when they need our products, processes, and expertise? Who will be the real hero?

The world is watching.

Footnotes:

  1. https://www.dignitymemorial.com/obituaries/tazewell-tn/joe-eastridge-10488803.
  2. https://www.cooke-campbellmortuary.com/memorials/james-brantley/1940899/obituary.php.
  3. https://www.buzzfeednews.com/article/christopherm51/ukrainians-fleeing-russian-bombing-irpin.

Tip Of The Iceberg: America’s Soaring Debt

0

On April 12, 1912, the crew on the Titanic was slow to react to warnings of an iceberg ahead. By the time the captain called for a drastic course change and reversed one engine to turn the ship, it was too late.

You can think of financial planning in the exact same way. As financial professionals, we look past the short-term noise of inflation, interest rates, and market volatility to prepare clients for what this means for their money in the long term. We help Americans construct portfolios that have the potential to generate lifetime income, carving out a clear and safe path to retirement.

Talking about the journey to retirement reminds me of a boat story that puts this analogy to great use.

The year was 2010 and I was about to embark on a private 11-day yacht trip on the Empress from San Diego, California, to the Columbia River, which acts as a border between Washington and Oregon. This was my first-ever opportunity to explore the Pacific Northwest, just like Lewis and Clark in 1805. I couldn’t wait to set my eyes on Astoria, Oregon, the beautiful scenery, and all the other landmarks penned during the Voyage of Discovery. This was about to be the opportunity of a lifetime.

As someone who had never set foot on a boat before, I convinced the Empress’ captain, a seasoned skipper, to let me on board the 74-foot yacht. I expressed that I would be a great addition to the small crew despite not knowing a single thing about boats. A bow, stern, hull, starboard, and port were all foreign words to me back then. I was able to convince the captain that my kitchen skills and my ability to make a French press coffee or cappuccino would be a valuable addition on this journey. He agreed, as he sipped his first cup of coffee.

On the first night on the Empress, I was told that I would be guiding the yacht up the Pacific Ocean. The moment that I heard him say that my watch shift went until six o’clock the next morning was the moment my heart started pounding. How was somebody who had never driven a yacht be expected to keep it afloat throughout the night? I quickly learned that everything that I needed to be successful in the endeavor was already being done for me—we were on auto pilot. It turns out that my real job was to watch the radar, which seemed simple enough. The radar would identify any real dangers and give the crew enough time to prepare for incoming danger. Well, it would be an understatement to say that the radar saved my life. Since I was set up for success with the autopilot feature, my first night of watch went perfectly. I was equipped with the tools I needed to have a great first night’s watch. This really makes me wonder how many more lives could have been saved if the Titanic had today’s radar technology and could have possibly had enough time to prepare for the iceberg and avoid hitting it altogether.

Today, I use the same radar skills that I acquired in 2010 to help financial advisors and their clients avoid potential icebergs. How are we using the information we have available at our fingertips right now to protect your client’s money in the future? A looming iceberg that has been on my radar for a while is the massive national debt that continues to pile up year after year after year. In fact, on January 30, 2022, the national debt reached $30,000,000,000, a figure that’s incomprehensible at the best of times.

What’s really alarming about this figure isn’t so much how big it has grown, but how fast it is accelerating. The national debt has doubled since 2012, and by 2026 it is expected to reach $52 trillion. For the first 231 years of the country’s history, we racked up $5 billion in debt. Over the last 12 years, we’ve grown it by another $17 trillion.

The national debt is a combination of annual government deficits, pandemic relief, bailouts, ballooning health care costs, defense spending and interest on the debt itself. This, though, is just the tip of the iceberg, and the part below the water is also something we need to take very seriously. Two leading inflationary indicators are on the rise, again. Oil hit $95/barrel and the 10-year-T-bill rate hit 2.05 percent. Mortgage rates are pushing four percent. The Social Security trust fund requires a lot of money to maintain and is expected to be depleted by 2036. Not to mention, the Russian and Ukraine crisis is putting a lot of pressure on the U.S. Federal Reserve to act. It is easy to understand why many people are starting to pay close attention to the national debt.

That’s why my radar is on high alert as the national debt continues to threaten American’s standards of living. For taxpayers, anyone who makes roughly $86,000 annually is considered to be in the top 25 percent of earners, and this group pays roughly 86 percent of all taxes collected. Any move by any administration to start addressing any of the issues on the radar in essence means that you and I will be taxed extra. By the stroke of a pen, the tax brackets will increase. What we don’t know is when and by how much. In addition, the rising national debt could impact Americans in the near future with higher interest rates, higher product prices, and lower investment returns.

Let’s next introduce a few prominent people in the industry. What do David Walker, Peter G. Peterson and Maya MacGuineas have in common? All three are using the analogy of a radar and are seeing the same impending doom that I am: The national debt is going to cause havoc on American taxpayers. The problem is simple to understand, but very difficult to tackle. The simple part would be to raise taxes and cut federal spending.

David Walker is former U.S. Comptroller General. The Comptroller General of the U.S. is the highest-ranking accounting position that oversees accounting policy. They are appointed for a 15-year term by the President of the United States. David resigned in 2008. Why do you think? In essence he said, “My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country, including advocating specific policy solutions and courses of action. This move will enable me to sharpen my messages and bring focus and attention to the fiscal and other key sustainability challenges that I and others have been discussing during the past several years.” The challenges he mentions is national debt and the inability of the U.S. to spend within its budget. Think for a second, why would anyone leave such a great position to advocate for more awareness about the national debt?

Peter G. Peterson began his public service in 1971, when President Richard Nixon named him Assistant to the President for International Economic Affairs. One year later, he was named U.S. Secretary of Commerce. At that time he also assumed the chair of President Nixon’s National Commission on Productivity and was appointed U.S. Chairman of the U.S.—Soviet Commercial Commission. He again took on a public service role from 2000 to 2004, when he chaired the Federal Reserve Bank of New York. There is not one other person who has committed so many resources to bring the national debt to the forefront of every American. Why is that? Well, in his words, “In creating this foundation, I am giving back a lot of my resources and myself to try, in my very small way, to give my children’s and grandchildren’s generations the same opportunities to share in this American Dream.”

Maya MacGuiness, is president of the Committee for a Responsible Federal Budget. “The growing national debt threatens every American. We borrow so much from abroad and that means that those interest payments leave our economy. That’s one of the ways that our standard of living fails to grow as much as it otherwise would,” said MacGuineas, noting that “our standard of living is lower than it otherwise would have been.”

There are several ways to get involved. First, you can consider joining the Peter G Foundation, which will empower you with the facts and data so that you can write your state congressperson and make your voice heard! At the end of day, we need to stabilize the national debt to 50 percent or less, reduce spending to 23 percent of GDP, freeze domestic discretionary and defense spending, moderate spending growth on healthcare, and start to address social security. Any of these changes will take time, so patience and long planning are the keys. It’s like the extra weight we gain after the holidays, easy to gain and difficult to lose, so we start a weight reduction regimen today.

What can you do to protect yourself from the massive iceberg steaming ahead? Start by creating a tax shield from your current buckets of money. Not sure what I mean by buckets? Let me explain. After over 20 years in the industry, I’ve started to see money in colors and classify each of these as buckets—yellow, green, red, blue, and gray.

Yellow bucket: This is your till bucket. Like a cashier till, paying for gas, groceries, insurance, mortgage payments, etc. The other section of your yellow money is where you store three to six months of emergency money. You can expect a modest return of around .25 percent to .50 percent in this bucket.

Green bucket: This is your retirement bucket. This is where most Americans start building their personal retirement plans using a 401K plan. Usually, it’s mutual funds or similar, and you have the choice to be aggressive or not. You can expect eight to 10 percent growth over the long haul.

Red bucket: This is your tactical bucket. Either professionally managed or DIY, like those that made money with GameStop. You can expect exceptional growth or losses, usually around +30 percent/-30 percent.

Blue Bucket: This is your tax shield bucket. This is money that grows tax-deferred and supplements your income during retirement but can also be used strategically for other uses like college planning, buying a car, etc. You can expect around five to seven percent return. No negative market losses.

Gray bucket: This is your guaranteed income bucket. This will complement your social security and increase your protected income number; your PI is the percentage of guaranteed income that covers your essential expenses in retirement. You can expect two to four percent return. No negative market losses.

We know that tax rates will rise in 2026 when the Tax Cuts and Jobs Act sunsets. We’ve recently had the stock market pullback over the last few months which creates the opportunity to convert at a discount. We’ve also had advisors in and out of the workplace creating a temporary dip in a client’s typical taxable income.

While this is not a “free” Roth IRA conversion, it is a wonderful way to help offset the cost of doing a Roth Conversion, which is the biggest reason clients balk at the idea. We can use an annuity with a bonus to help offset the tax costs. Keep in mind we would not want to pull the taxes out of the converted Roth IRA, but instead use cash equivalents to cover the tax bill.

Ultimately, we create a tax advantage using the tax code, and give the clients access to extra income or legacy to the beneficiary.

To circle back to my story on the Empress: the journey to the Columbia River was incredible, and the Pacific Northwest is one of the most beautiful landscapes in the world. I’m positive that the modern radar played a huge role in the safety of everyone on the Empress. As the skipper of your boat, you have all the tools you’ll need to navigate your clients towards retirement. I hope you are helping clients establish diversified money buckets, tax shields, and national debt awareness to keep them safe from financial icebergs that can and will cause destruction in the near future.

I’m Dead. Now What?

What If?

My father passed away seven years ago. He was 93 when he died, but his mind started deteriorating six years before that. Alzheimer’s stealthily stole the essence of who he was, and watching him lose a step here and there was painful for our entire family. We were very close and I miss him every day. My dad would have preferred to die of a heart attack while enjoying a long walk but, as it turned out, he had a long time to consider what was just over the horizon. A loving and conscientious husband and father, he thought carefully about the comfort and safety of his wife and family after he was gone.

Among the many wonderful gifts my dad gave my mom, my siblings, and me was a thick file labeled “What If.” Compiled when he learned he might soon be unable to manage his affairs, the file contained important information we would need when he was gone. This included everything from his funeral and burial wishes, to details on his finances, to a list of important advisors such as his attorney and accountant. He told us how he wanted his funeral service to flow, who should speak, even that women should wear brightly-colored dresses and men should wear ties.

My dad’s What If file contained passwords we would need, banking and personal property information, account numbers, and instructions on how to find the things we would need to handle his estate and move on. He furnished information about his life insurance policies, such as company names and policy numbers. Knowing what was to come, he left advanced directives instructing us specifically under what circumstances he would want to be treated for medical conditions and when to let him go. With his What If file my father even reminded us that he had given each of us jewelry and cherished items when he was first diagnosed with Alzheimer’s, and expressed his personal thoughts and wishes for each of us and our children.

Did he forget to include anything? After spending several years working on his list, my dad covered nearly everything we needed to know. After he passed away the What If file was with us every step of the way.

The Sh*t Show: Your Client Who Lets Things Slide
My dad was meticulous in covering all of his bases, but he knew, and had the courage to face, what was coming. Sadly, many of our clients refuse to acknowledge that death could be right around the corner for anyone, postponing preparation for some amorphous time in the future. Millions of people paint this sad self-portrait. In 35 years of working with insurance agents and their clients, I’ve seen too many people neglect to leave useful instructions for family and executors, afraid of even mentioning what is inevitable for all of us. In the aftermath, I’ve seen those they left behind struggle to handle everything from settling an estate to notifying their friends and social media connections of their passing. Where do we find the healthcare proxy, the advanced directive, the will? If she never expressed her wishes, should we keep a loved one alive once there is no chance of recovery? Where did he keep the burial plot deed? A safe deposit box could contain a fortune in jewelry or gold coins, or the original will; in most states you cannot get through probate without an original will (a will should never be kept in a safe deposit box, but that’s a different article). How can we use a safe deposit box key if we have no clue what bank holds the box? What do we do about credit cards, debt, auto leases, business interests? If we can’t find login information, social media accounts may remain active indefinitely, and every year Facebook followers will be reminded to wish the deceased a happy and fun birthday.

Clients neglecting to update, and share, their plans risk their estates ending up very different from what they thought they’d planned. When the loved one dies the family searches frantically and often unsuccessfully for online banking and investment information. In such a situation, an ex-spouse or former business partner might still be the beneficiary of life insurance (and thrilled with the oversight). If there are no contingent beneficiaries designated, the courts might have to decide who receives the insurance.

“I’m Dead. Now What?”
Death comes to all of us—the only question is when. As insurance advisors we know there is nothing more important than helping our clients plan for it. To be a great insurance adviser, part of your job is also to look out for the peace of mind of your clients and, by extension, their loved ones. I’m Dead. Now What? is the quirky title for one of several peace-of-mind planners (a few have toned-down titles such as What To Do When I Die). You enter the information in the guided planner and make sure your loved ones know where to find it. Like my dad’s What If file, these volumes foster a sensible approach to organizing a person’s legal matters, health directives, financial affairs, estate documents, personal instructions, and more. The books suggest you make provisions for pets, insert personal letters to loved ones, and outline charitable donations that you would like made in your memory. I’m Dead. Now What? has a section titled, “What to Pay, Close and Cancel,” with space for providing the account and contact numbers for credit card companies, utilities, landlines and cell phones. In the life insurance section there is space to list each policy with the name of the insurance company, the face amount of insurance, the policy number, who the beneficiary(ies) are and in what percentage, and customer service or claims phone numbers. (Note—no insurer will require a beneficiary to produce the original policy.)

A Practical Gift
What an impact you would make if you gave each client this valuable gift of an organizer like I’m Dead. Now What? For about the price of a bottle of Merlot, you can set a spark that can lead to an in-depth conversation that may naturally flow to estate planning topics such as keeping wills and life insurance up to date, correct ownership and beneficiary designations, annuities, and funding for long term care needs. If you want to be an exceptional insurance advisor, take the leap and talk to your clients about preparing their loved ones for their final days, even if they are in fine health now.

A Powerful Accumulation Tool For The Ultra Wealthy

In the last few months I have been getting a lot of questions around Private Placement Life Insurance and Annuity (PPLI/PPVA) products. Specifically, people are looking closer at these products in light of the proposed and expected changes in the tax code. While I am far from a tax expert, I think it is safe to say that we should eventually expect an increase, especially for the wealthy and ultra high net worth individuals. How do these products potentially help, and what do they do? Here at The Leaders Group, we have an in-depth knowledge of insurance products, and PPLI is no exception. Some of the top salespeople in the country for these products call Leaders Group home. With this experience, I hope to help demystify these products a bit.

There are a lot of moving parts in a PPLI policy, and it is very easy to get into the weeds and get incredibly lost if you dive too deep too quickly. That said, on the surface, they work fundamentally similar to standard “shelf” life insurance and annuity contracts. Just like their standard issue cousins, PPLI and PPVA contracts are an efficient way to provide preferential tax treatment for a client. The insurance products still provide a tax-free death benefit and the annuity products are still tax deferred, with funds taxed at the client’s rate at the time of distribution. So far, so good. What separates PPLI products from the pack are the type of clients that make sense and the flexible nature of the underlying investments.

PPLI products are not for everyone. If you don’t have a client that has at least $5 million in the bank that they don’t need access to, you probably want to look elsewhere. For the life products (as opposed to annuities), there should also be a life insurance need because, even with the preferential tax treatment, there may be ways that are more cost effective for a client to invest their money. In some situations it may even make more sense when comparing the various fees for a client to stick with a standard life insurance product. From a sales perspective PPLI/PPVA products are traditionally utilized for high net worth individuals that are looking for a tax efficient way to grow their investment portfolio. The discussion is normally led from an investment standpoint, meaning it is much more crucial to know the specific manager/managers that the client uses or would like to use. Once you know this you can work in conjunction with the client and product sponsors on what the best investment structure is to fit the client’s needs.

There are two standard ways to structure investments inside of a PPLI/PPVA product. The first is more akin to standard VUL or even mutual funds where the manager has an investment strategy that they adhere to for all the clients. In the PPLI/PPVA world, this setup is called an IDF, or insurance dedicated fund. If a client does not have a specific manager in mind, or if the manager they want to work with is already set up as an IDF, this is an easy option as most, if not all, of the due diligence at the carrier level has already been completed. The alternative setup is called an SMA or separately managed account (some carriers have different wording, as I know at least one uses the MSA acronym). In this instance, the client can work with a manager of their choosing, even if the manager is not currently working in the PPLI/PPVA space. This also gives the manager greater flexibility, allowing them to manage each client account a little differently and closer to each client’s specific needs. With either an IDF or SMA the manager will need to determine whether they want to be set up directly with a specific carrier or if they would like to outsource the compliance and accounting to a third party platform like SALI or Spearhead. The most important thing to take note of in regards to the asset management is that the managers need to adhere to strict guidelines around investor control, and while they can work toward goals that the client has, the client cannot ultimately guide the specific investment decisions.

One of the greatest values of PPLI/PPVA products is the flexibility allowed for the customer, manager and advisor. The areas mentioned previously are some of the many possible levers that can be pulled for customization, with client cost being another major consideration. The carrier, manager and financial professional all have flexibility on their compensation. Not to mention the location where the client assets are domiciled (usually in a trust) also has an impact on the total cost. There tends to be a lot of policies in places like Alaska, South Dakota, Nevada or other states where premium taxes are low. All of these are things that should be taken into consideration and, luckily, the various carriers can help you navigate all of the potential pitfalls.

In a nutshell, PPLI/PPVA products are for high net worth individuals with plenty of disposable cash that they want to see grow in a tax advantaged fashion. If you are familiar with standard insurance and annuity sales concepts, many of the implications of PPLI/PPVA are similar. The flexibility and customization that comes with these products are a big piece of what sets them apart and where it is easy to get overwhelmed if you don’t have the experience. Luckily our team here at Leaders, including some gracious advisors in the space, and our carrier partners are all here to help if an opportunity comes up. The products are definitely not for everyone, but can be a good tool to have in your arsenal if you are working in the ultra high net worth space.

Alternative Asset Based Funding For Long Term Care: Long Term Care Life Settlements

0

Long term care life settlements first emerged in the insurance secondary market 15 years ago as an offshoot of traditional life settlements. An overlooked asset owned by millions of seniors came into focus by care providers, political bodies, Medicaid departments, advisors, and policy owners as the realization that life insurance policies are personal property of the owner—but millions of dollars’ worth was being abandoned by seniors every year.

Typically, the owner of a life insurance policy experiencing the loss of two or more activities of daily living (ADLs) will be confronted with the choice of surrendering or lapsing a life insurance policy if they no longer need or can no longer afford to keep their policy in force. As an alternative to abandoning their policy after years of making premium payments, they can elect to pursue the sale of their policy through a life settlement and then could use the funds in a tax-advantaged manner towards long term care needs depending on their medical condition.

Long Term Care Life Settlements
The long term care life settlement is designed specifically for people who own a life insurance policy and need funding resources for senior living and long term care support and services. It enables life insurance policy holders in need of senior living and long term care resources to sell their life insurance policy to a third-party buyer for cash that is placed into a long term care benefit account. The benefit account protects the capital and is used to make automatic monthly payments toward senior living and long term care services.

Funds provided from the long term care life settlement are tax free for those diagnosed chronically ill (two or more ADL impairments).

Long Term Care Benefit Account
The long term care benefit account is a no-cost, non-interest-bearing account held with a federally chartered FDIC insured bank. Similar to a health savings account (HSA), there are no waiting periods or claims to file to access the capital. The account is ready to start making payments toward care immediately upon funding by the long term care life settlement.
The account is flexible so payments can start at a designated amount, for any form of care, and can be adjusted as needed to meet changing care requirements. If the insured passes away before the funds in the account are utilized, the remaining balance will transfer to the named account beneficiaries tax-free.1

Any form of medical or long term care can be covered by the long term care benefit account, such as:

  • In-Home Care
  • Assisted Living
  • Skilled Nursing Care
  • Memory Care
  • Nursing Home
  • Hospice

Payments are made automatically on behalf of the insured directly to the health care provider, and the funds can’t be removed from the benefit account until death, ensuring guaranteed payment.

The policy transaction is specifically designed to conform to the secondary market regulations that govern life settlements, and the benefit account is administered specifically to be a Medicaid qualified spend down of the asset proceeds. By obtaining the fair market value for the life policy, and then at the direction of the policy owner putting the funds into an irrevocable FDIC insured bank account which can only be administered third-party to pay for qualified long term care services, the long term care benefit account is a regulated financial transaction, and it’s a Medicaid qualified financial vehicle to help cover the costs of long term care.

Medicaid Spend Down
Account funds paid towards medical expenses and long term care are recognized as a Medicaid qualified spend down. This means that the person benefiting from the account will be private pay for as long as there are funds in the account but, once the account has been depleted, they can make an immediate transition to Medicaid.

Long term care benefit accounts also qualify to be used with the VA Aid & Attendance Benefit, a reverse mortgage, or an income annuity.

Regulatory Endorsements and Bi-Partisan Support in Congress
The National Conference of Insurance Legislators (NCOIL) and the National Association of Insurance Commissioners (NAIC) support the use of life settlements to pay for long term care and have specifically cited the use of a long term care benefit account as an innovative consumer option.

Congress introduced a bi-partisan bill into the House of Representatives to create a “Senior Health Planning Account” (SHPA) based on the long term care benefit account, which would allow anyone who executes a life settlement to then shelter the proceeds tax-free in the SHPA exclusively to pay for the use of health and long term care related expenses.

Long Term Care Life Settlement Case Studies2

A son helps his mother move into assisted living:
Policy Size: $100,000
Policy Type:
LTC Benefit Amount: $35,000
Monthly Payments to Assisted Living facility: $2,000

Faced with his mother’s need for assisted living and a lack of funding to pay for it, Dave contacted us to see if he could tap into his mother’s $100,000 life insurance policy that they were planning to abandon due to an inability to pay. Within 30 days he was able to sell his mother’s policy and set up a long term care benefit account with $2,000 monthly benefit payments that began the day the account was funded.

This enabled Dave to move his mother into her top assisted living community choice where she would live alongside her friends and relatives.

Policy owner about to abandon a term policy discovers it’s a tax-free way to pay for needed long term care:
Policy Size: $500,000
Policy Type: Convertible Term
LTC Benefit Account: $200,000
Monthly Payments for In-Home Care: $5,000

After a recent six-week rehabilitation stay and declining health, Sarah was faced with a potential need to lapse her $500,000 term policy due to unaffordability. Her agent contacted us to evaluate her policy.

Sarah was able to sell her term policy for $200,000, which was placed into a long term care benefit account that paid $5,000 in monthly payments for in-home care. We also assisted Sarah in selecting a top homecare company who would ensure she would receive the best possible care–which she could now afford.

Policy owner rescues policy to pay for assisted living community:
Policy Size: $400,000
Policy Type: Universal Life
LTC Benefit Amount: $175,000
Monthly Payments to Assisted Living Facility: $4,000

While James was already living in an assisted living facility, he was quickly running out of money to pay for it. After working with the assisted living facility to understand his health needs, we were able to assist James in receiving $175,000 in tax-free compensation for his $400,000 universal life policy.

Within 30 days the policy was settled, and the proceeds were placed into a long term care benefit account with $4,000 automatic monthly payments made directly to the assisted living facility, covering the assisted living costs for the next three years.

Husband and wife use both life insurance policies to pay for all of their senior care needs together:
Policy Size: $600,000 total across two policies
Policy Type: Non-Convertible Term
LTC Benefit Amount: $175,000 combined
Monthly Payments for In-Home Care: $7,000 combined

Bill and Julia each owned $300,000 term life policies on each other. They were beyond the policy conversion deadline and the premiums had become too expensive for them to maintain, so they were considering a lapse.

When their agent contacted us, the policies were in grace and within days of lapsing. We worked quickly to assess the policies and determined that they qualify for a long term care life settlement. We paid the premium to reinstate the policies and get them back to an in-force status. We then enabled Bill and Julia to sell both policies for a combined $175,000. This windfall enabled them to set up a long term care benefit account that would pay for the in-home care they needed for the next three to five years.

Son helps his mother convert policy and move into assisted living before he deploys for Afghanistan:
Policy Size: $100,000
Policy Type: Term
LTC Benefit Amount: $39,000
Monthly Payments to Assisted Living Facility: $2,100

Doug and his siblings were struggling with how they would pay for the costs of moving their mother into an assisted living community. An added challenge was the fact that Doug would be leaving for Afghanistan within the next 90 days for a tour of duty.

Doug’s mother owned a $100,000 life insurance policy that was going to lapse if they did not immediately make an expensive premium payment. The family was trying to determine what their options with the policy might be, when the assisted living community suggested that they consider a long term care life settlement to fund a long term care benefit account.

We assisted Doug and his mother to complete the policy review and settlement process which enabled them to receive $39,000. Doug moved his mother into the community and payments from the long term care benefit account began immediately.

Conclusion
Today’s life settlement is a well-regulated financial transaction providing a number of consumer benefits that in particular can help seniors struggling with the costs of retirement and long term care. In 2020, there were approximately $4.5 billion of life settlements completed.

There are about 7.5 million long term care insurance policies owned in the United States today. By comparison, there are over 255 million life insurance policies currently in force. Unfortunately, too few policy owners understand this fact and as many as nine out of 10 life insurance policies are in danger of being abandoned before paying out a death benefit. In fact, on an annual basis, seniors own around $230 billion of life insurance death benefit that could potentially be sold through a life settlement instead of lapsed or surrendered—but the majority of these seniors are unaware of the settlement option as a better alternative for their policy. Millions of seniors own life insurance policies that after years of making premium payments they will lapse or surrender without realizing their policy is actually an asset that has secondary market value.

But should seniors abandon one of their most valuable assets like this? The answer is no. After years of premium payments, they should no sooner abandon their policy than they would abandon their home after years of mortgage payments. Before the owner of a life insurance policy would abandon their asset, they should first look to the life settlement market to find out what the actual resale value of their policy is. Life settlements can pay as much as 10 times any cash surrender value and it is certainly a better option than lapsing a policy after years of premium payment for little to nothing in return.

Rescuing life insurance policies before they are lapsed or surrendered has been an overlooked opportunity for policy owners and most advisors—but that is changing. Every day, people are seeing TV commercials about this option and coming to realize this can be a solution to help them pay for the expensive costs of long term care at the time that care is needed. Political leaders are waking up to realize life insurance policies are a massive pool of assets sitting in the hands of seniors who for the most part have no idea the value of what they own. The use of long term care life settlements can delay the need for someone to go onto Medicaid and save taxpayers millions of dollars every year. As consumers and the entities that are funding the exploding costs of long term care keep seeking new private market solutions to fund these costs, tapping into billions of dollars of life insurance policies through a long term care life settlement before they are needlessly abandoned is an option that continues to grow every year.

Footnotes:

  1. For recipients under the estate tax threshold.
  2. Names have been changed to protect the identities of policy owners and their families

Pay Yourself First

A Slow Start
When I was 26, I had already been married for four years to my first wife, I was expecting my first child and working at a large CPA firm in downtown Chicago. Sounds good, right?! But I also lived in a one-bedroom apartment, had too much debt and a too low credit rating. Like many young people today, I had little to no financial training. My parents never prepared me, my teachers never taught this subject in school, and I was missing a vital piece of my ability to be successful. Sure, I had attended college and achieved a double major in accounting and economics and was about to attend graduate school. But I was financially illiterate as to how to manage my own money. Sounds hopeless, right? Or, maybe for some of you, familiar?
Fortunately, I met a person who owned his own brokerage general agency and had access to other financial products besides insurance. As I lamented my inability to get ahead, get out of debt and get a house, he made one simple comment to me, “Slades, you need to pay yourself first.”

I asked him to explain what he meant because, to tell you the truth, I had no clue. “Slades, you will never have anything in savings if you don’t make a concerted effort to pay into your savings first, whatever it is, with each check, and start to save for your future.” I wasn’t sure that I could do that financially, but he set me up with a simple mutual fund for just $25 per month.

I know that does not sound like a lot but trust me it was. The $300 I saved in the first year was small, but the path it put me on was worth way more. As my pay increased and I paid off debt, I was able to boost that monthly amount and improve my savings significantly. Years later, I still have that same mutual fund account, albeit worth a lot more, as well as several other savings and investment vehicles. Also, I have taught the “pay yourself first” concept to my children.

You might be saying, “Slades, that’s a nice story, and I’m glad it worked out for you. But how exactly does this relate to me or my clients?” I’m glad you asked. I think this is a concept we can help our clients apply in their own lives and increase our depth of relationship with the client. Everyone can use some form of financial training and education. To this day I still balance my checkbook to the penny every month. I use a very popular software tool that I have had for over 22 years, but it works, and I am able to manage my money very easily.

Our HNW Clients
We may think that because they have money, our high-net-worth (HNW) clients don’t need this type of education but they do and, more importantly, so do their kids. These clients are looking for ways to get their kids off to a good start as well as transfer assets to their children and set them up for financial growth for the future. What better way than to approach your HNW clients and speak with them about setting up an IUL for the kids? Think of LIRP for children or maybe a CLIRP. Funny name and I don’t really think it will catch on, maybe C-LIRP would be better. The concept is a way to get your kids saving for retirement long before they will ever have their first job. In addition, it can provide a financial backstop should things get financially tougher for them when they get older.

The Product—How it Works
Below is an illustration on a one-year-old male for an income-focused IUL with an initial death benefit of $100,000 and an increasing death benefit. The annual premium is about $1,950 or around $165 per month.

By the time the child graduates college at age 21, the parents will have paid in about $39,000 in premiums but the policy will have over $70,000 in accumulation value on a non-guaranteed basis.

After the child graduates college and wants to purchase their first car, imagine they are able to take out their first loan at a very reasonable rate…from themselves! The payments are going back into their IUL to pay themselves back, not to a bank or auto financing company.
This IUL also has a return of premium (ROP) feature. So if the market does not perform as expected, the parents or the child can turn in the policy and get all of their money back. The only thing lost is the opportunity cost of what could have been earned in another savings or investment product.

All of us who sell IUL policies know that they should never need this feature or should ever have to use it. But what a great peace of mind to know if they do need it, it is there. In addition, what a great way to close the sales process for your agent by letting their client know that as long as they pay the target premium every year, they will always have the ability to receive their premiums back on the product in years 20-25. That’s six opportunities to take advantage of the 100 percent refund.

The Sweet Life
If there is no need to touch the money until retirement then, at age 65, after paying for 64 years at less than $2,000 per year, the child, now ready for retirement, will have over $1.3 million in non-guaranteed surrender value and over $1.6 million in death benefit. If they retire later at age 70, it would be $1.8 million in non-guaranteed surrender value that could be used to fund retirement and over $2 million in death benefit.

As you can see, the concept is pretty simple. Approach all of your current clients and show them how easy it is to transfer cash to their children and provide a way to set them up for future growth and cash accumulation.

The Objection
I know what some of you are thinking and I also know what pushback you might receive when you present this to your clients. “What if I invest the money in a mutual fund instead of buying an insurance product?” You absolutely could do that and when you run a straight future value calculation on $1,950 for 64 periods at 6.25 percent, the future value of the mutual fund, assuming you could get 6.25 percent every year, is closer to $1.5 million versus $1.3 million in the IUL.

The good news is the cost of insurance charges for your kids are extremely low in an IUL policy. In fact, in the first 20 years, they never exceed $85 per year as illustrated.

The IUL has about $1.3 million in cash surrender value and the mutual fund has about $1.5 million. However, this does not net the value of the mutual fund after taxes. Taxes would need to be paid on accumulation for investment products every year in addition to the taxes due on any withdrawals.

The IUL provides similar accumulation in a tax-favored product that also provides your client with a death benefit option for their child. So they always have a life insurance benefit, and it includes a safety net that is not available in the mutual fund with the return of premium.
I think by now you can understand how passionate I am about our industry and how much I believe in this product and the options it provides. I am also passionate about leaving a legacy for our children and wealth transfer. I hope you can use this idea in your practice as you help your clients with their long-term financial planning needs.

WordPress › Error

There has been a critical error on this website.

Learn more about troubleshooting WordPress.