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.

Michael “Slades” Sladek is vice president of Brokerage Sales at Mutual of Omaha. In his current role he is responsible for sales and marketing to industry leading NMOs and BGAs and managing a team of seasoned sales professionals.

Slades has spent 30 years in the financial services industry. He is an accountant by training and started his career at KPMG Peat Marwick as a tax accountant in the late 1980s.
Slades has a Bachelor of Science in Accounting with a double major in Economics from Northeastern Illinois University and received a Master’s of Science in Taxation from DePaul University.

Sladek can be reached at Mutual of Omaha, 3300 Mutual of Omaha Plaza, Omaha, NE 68175. Email: