Most people see insurance as a cost, not as a tool to help them with their success. Not a place to put money into for its value. Yet, life insurance, correctly planned, is a tool for success for the following reasons:

Whole life insurance provides real value for the policy owner who owns the policy throughout their lifetime. Here’s why; as we plan our life financially we must look at decisions we make regarding money based upon how it will impact our lives. Not only while we accumulate money, but during the next two phases of life; wealth distribution (retirement) and wealth conservation (estate planning).

Life insurance takes on a new role at retirement. It becomes asset insurance. This is the time that most people think you no longer need life insurance. For instance, if we arrive at retirement with four million dollars and we utilize traditional financial thinking and withdraw interest/earnings on the account of 4% we would generate $160,000 per year. That $160,000 would be taxable at their tax bracket. Let’s use 35%, which means there would be a tax of $56,000 leaving a net income of $104,000 per year, every year, until he or she dies. And the retiree will have left $4,000,000 to their children, charity, etc. If the person needs more than $104,000 a year he will need to dig into the principal, earn less in interest in the following years, and consequently leave less behind in his legacy.

A good analogy is that the 4 million dollars is in jail. He cannot enjoy it for if he spends it, it would deplete and the interest would go down. He has to toggle between the lifestyle he wants to enjoy during retirement and the legacy.

Now let’s compare that with your client owning permanent life insurance at retirement age 65. This individual arrives at retirement with the same four million in cash, but also owns four million of permanent life insurance. An equal amount of money but allocated differently. What would be the result?

Well, to start with he does not need to be concerned about eating into his legacy. That is taken care of. But he also doesn’t need to be too concerned about eating into his principal. In fact he can take an annual net income more than twice as much as the chap without insurance each year for 20 years! He can live to enjoy that money. He can spend more and enjoy more during his retirement.

The “Trade-Off” Between Leaving a Legacy and Retirement Income

There are more choices and security for the person who uses life insurance as part of their retirement. Here’s why: If you look at retirement planning and estate planning there is a battle that exists between one’s lifestyle and one’s legacy. By developing a plan that includes life insurance, whole life, you may be able to create the best results for both your lifestyle during retirement as well as the legacy you leave behind. Let’s look at this from a conceptual perspective.

The chart represented in this attachment looks like a choice (click here). In fact some people have gone as far as placing a bumper sticker on their car that says “I am spending my children’s inheritance”. This is the “see-saw” effect. He has to trade off between more money for retirement and a smaller legacy or a larger legacy and less money to enjoy retirement.

Most do not recognize that there is another way. And the beauty of it is in its simplicity. What if you can have both the maximum legacy and the maximum retirement income? What if both can be accomplished without the negative impact on the other. What if both can be realized despite the many potential risks and eroding factors that exist in our economic climate today. Retirees need to rethink the positions of their assets, so their plans results are good.

Whole Life Insurance does exactly that. Using the same base number as above, this 65 year old retiree has 4 million dollars when he hits retirement but also has a 4 million dollar whole life insurance policy. As he does not need to worry about eating into the legacy portion, he can live off both the interest and the $4 million principle. Assuming this person will live another 20 years after retirement to the age of 84, he could take a gross income of $294,000 per year compared to the person without Whole Life Insurance who can only take $160,000. And he will be paying less in taxes giving him between $238,000 and $290,000 to spend every year for the next 20 years.

In this example, the person without permanent life insurance will be able to spend over a 20 year retirement, after taxes, $2,080,000. The person with life insurance will have $5,226,217 to spend after taxes. Both still leaving $4 million in their legacy. Click here for a graphic representation showing the annual withdrawal, taxes and net income for both individuals.

A good financial plan needs to provide income for many years. For instance joint life expectancy of a healthy 60 year old couple is 94. So the income needs to last for a very long time. And during that period the income needs to be protected from:

1. Inflation;
2. Taxes and the potential of increased taxes;
3. Market downturns and volatility (and the effect of withdrawing money from a portfolio that declined or is declining);
4. Healthcare costs and long term care;
5. The economic needs of children.

All of these factors significantly impact the probability of success for the retiree.

Having whole life insurance as part of a portfolio significantly impacts the options, choices and flexibility for the retiree. As the individual who planned their life with whole life insurance can consume, spend, enjoy and gift their wealth knowing that a safety net exists to provide for legacy value, they can have a greater chance of enjoying their wealth, because consuming their principal will not be at the expense of depleting their legacy while their other assets can be enjoyed for retirement.

Once the client begins to recognize the value of this type of planning process the light bulb goes on and they begin to see whole life insurance as a tool to help with their overall success rather than a cost. Instead they will see it as a financial asset that creates a unique package of benefits that allows the insured to spend and enjoy his/her assets in a way that does not exist in the traditional ways most approach retirement planning.

This is just one example of the benefits of Permanent Life insurance. In advising your clients on what is best for them, it is important to understand their needs, their desires and most importantly what they want their money to do while they are still alive and what they want their money to do once they are no longer around.

Knowing your tools and which one is right for your client also requires that you as an advisor, know the different products out there and the benefits and drawbacks of each. You are welcome to contact me at michael@michaelfliegelman.com for ideas and recommendations on succeeding in your practice.

Michael first published this article in www.producersesource.com

Modern Portfolio Theory,
Asset Classes,
and Life Insurance¹

Don’t Put All Your Eggs
into One Basket
__________________________________________________________

The simple idea behind Modern Portfolio Theory (MPT) is diversification of asset classes to achieve the best risk/return ratio for your needs, lifestyle, financial situation, and personal preferences. The first step is to identify asset classes. Most advisors agree that the primary classes include:

• Equities (common stocks)
• Fixed Income (bonds and mortgages)
• Money Market (cash)
• Guaranteed (annuities)
• Real Estate

The next step is to diversify assets among and within these classes in order to offset both systematic risk – recession, interest rates, and the like – and unsystematic risk – or risk specific to individual stocks, businesses or industries.

No matter what precautions are taken, there is typically some reduction of earnings from all of the above asset classes due to:

• Volatility
• Inflation
• Taxes
• Fees

For example, from 1977 through 2006, total equity returns of Large Cap stocks (comparable to the S&P 500TM) reflected a nominal compound annual rate of return of 12.27%. With the effects of taxes and investment fees (2.63%) plus the compound inflation rate (4.45%), the actual compounded rate of return over the 30-year period was 5.19%.³

Timing is Everything
_________________________________________________________

For those seeking less short-term risk and volatility, Treasury Bonds had a 30-year compounded real rate of return over the same period of within a range of 0% – 2%, and Municipal Bonds produced a compound return of 1.8%. The shockingly low reward was a trade-off for the higher security of capital during that time. In a shorter time frame from 2001 – 12/31/2006, Large Cap stocks produced a real return of just 2.02% while International Stocks were up 10.01%.⁴

Life Insurance as an Asset Class
_________________________________________________________

The uncertainty of risk versus reward can delay development of a sound financial strategy, so consider this smart alternative. Life insurance is an ideal vehicle to integrate into the idea of Modern Portfolio Theory as an asset class of substantial value, meeting all of the designated important criteria. Here’s why:

• The death benefit provides cash when needed most.
• The cash value provides the policy owner with living benefits similar to a fixed account with a guaranteed minimum return, and may be used as a supplement to retirement income, mortgage or loan repayments, or a wide range of other applications.
• The tax-deferred cash accumulation can be accessed income tax-free.
• The death benefit is payable income tax-free and quite possibly estate tax-free.
• Policy proceeds are typically beyond the reach of creditors.
• The policy is funded with affordable periodic payments that, over time, are inherently leveraged to a capital sum.
• Unique to life insurance – With a Waiver of Premium rider,⁵ a policy is self-completing in case of disability.
• The death benefit is based on the event of death – not a market event that can cause a downturn in value.
• Premiums may be funded with capital earned from other invested assets in lieu of budgeted income.
• Permanent life insurance can produce at least as favorable a long-term result with less risk within an equity and fixed income portfolio than a portfolio without life insurance.

The Synergies of Life Insurance Plus Investments in an Efficient Portfolio⁶
________________________________________________________

Retirement Planning

To provide income beyond Social Security during retirement, many people rely on employer-sponsored plans, investments, and life insurance. As the time to retirement gets shorter, it’s wise to scale back on more risky investments and increase the stability of fixed components. The following charts demonstrate the value of integrating life insurance with a bond portfolio rather than purchasing additional bonds.

Value of Bond Component with Income Purchasing More Bonds

Asset Values of Bonds and Life Insurance

The charts evaluate growth of a $500,000 initial investment from age 45 to age 90. The first chart shows that the investment in bonds, growing at an assumed constant 4% rate of return over the years would accumulate an asset value of $2,920,588.

The second chart compares the results if the $20,000 initial bond income was used to purchase a whole life policy with the results of an all-bond option. During the first 19 years, the all-bond option produces slightly higher accumulations than the bond/cash value alternative, then the values utilizing life insurance rapidly increase, outstripping the bond value alone in the later years. This coincides with the years when an individual may want additional resources to draw upon for income, as inflation and the cost of living could have outpaced Social Security and a pension.

Legacy Planning

Because the life insurance death benefit is paid in full at the event of death, no matter what the “timing,” the legacy value of the bond/life insurance combination delivers a significantly greater result in every year.

Legacy Value of Bond Plus Insurance Death Benefit

The synergy in funding a life insurance policy from the income stream of a component of a fixed portfolio is this – it will typically produce a more favorable result because the return will be higher and the risk lower – achieving the ideal “efficient frontier” highly sought in the applications of Modern Portfolio Theory.

Let’s Look at Another Example

This variation evaluates the 45-year-old’s $500,000 municipal bond/fixed component in the ability to maximize retirement distributions as well as the legacy value at life expectancy:

Option 1: $500,000 Bond Investment Converted to Income at Age 65

Option 2: Bond income to pay $20,000 annual premium on a 20-Pay Whole Life Insurance Policy; $1,064,171 Face Amount; Amortize Income from Age 65 – 89

Take-Aways

________________________________________________________

1. Diversification is critical for a well thought-out portfolio.

2. Risk profile and time horizon are both important considerations in developing investment choices.

3. Permanent life insurance is a qualified asset class, and provides the ideal capstone to a solid, balanced financial strategy.

________________________________________________________

1 This brochure is derived with permission from Life Insurance as an Asset Class: A Value-added Component of an Asset Allocation, by Richard M. Weber, MBA, CLU and Christopher Hause, FSA, MAAA, both of Ethical Edge Insurance Solutions, LLC.

2 Asset Allocation, Roger C. Gibson, McGraw Hill 2000. Third Edition.

3 A Study of Real, Real Returns, Thornburg Investment Management, 2007.

4 Ibid.

5 Riders may incur additional costs.

6 Charts and examples derived from Life Insurance as an Asset Class:
A Value-Added Component of an Asset Allocation, by Richard M. Weber, MBA, CLU and Christopher Hause, FSA, MAAA. Please note that deduction of all applicable fees and charges could result in lower performance than shown in examples.

The Guardian Life Insurance Company of America

7 Hanover Square New York, NY 10004-4025

www.GuardianLife.com

Pub. 4082I (03/08)