Posted by Mike McNelley on Tue, May 29, 2012 @ 10:56 AM

Good investment practices and, now, state regulations and insurance companies have agents and representatives who recommend the purchase or exchange of an annuity support that the transaction is in the purchaser’s interest and is appropriate for the purchaser’s financial needs and goals. As part of this process, insurance companies have ‘Suitability Questions, Worksheets, and/or Acknowledgment Forms’ to be included with applications. Following are some GENERAL guidelines based on discussions with many of the insurance companies – please remember, one insurance company’s suitability information request may differ from that of another, and may or may not be the same as the following commentary. Also, if you have oversight by a broker/dealer or other supervising entity, an insurance company’s suitability requirement does not supersede or replace any other suitability requirements you are obligated to follow.

Topics for Suitability: Some discussion points you should have with your client:

Financial status, net worth and current assets, including any existing annuity or life insurance.
Annual income.
Tax status.
Risk tolerance.
Investment objectives.
Current and future monthly financial needs.
Anticipated need to access cash values in the near future – versus the annuity’s surrender charge schedule and IRS pre-age 59 ½ tax penalty, if applicable.

Net Worth Calculation: Net Worth equals total assets minus liabilities (debts).

This calculation excludes primary residence, household contents, clothing, vehicles and other personal items. If the client owns a business, include the net worth of the business.

Liquid Assets include:

Checking, savings, money market accounts, CDs
Pension and profit sharing vested amounts, 401(k), 403(b), IRA, mutual funds, non-private publicly-traded stocks and bonds.

Illiquid Assets include:

Investment or Rental property value
Existing deferred annuities (not being transferred or exchanged)
Planned premium for this Annuity purchase.

Liabilities include:

Investment or Rental property mortgage amount
Credit card debt
Loans, private or commercial (examples: primary residence mortgage, automobile, student, signature and co-signature)

A Primary Residence is excluded in the net worth calculation since it is considered not liquid for annuity suitability.

What percentage of net worth would be acceptable for an annuity purchase?

In general, any time 50% or more of net worth is in annuities, some companies will not accept an application; others will further review in relation to:

Age: As the client’s age increases, insurance companies expect the percentage of net worth invested in deferred annuities to decrease.
Amount of net worth: The lower the amount of net worth, the lower the percentage of net worth that should be allocated to deferred annuities.

What circumstances will trigger further suitability review?

The client is a senior (age 65 or over) with low or limited net worth.
There is little in liquid assets set aside for emergencies [generally, a person should maintain an amount of liquid net worth equal to 3 to 6 months of their monthly living expenses].
Indicated income without accessing the proposed deferred annuity is insufficient for indicated expenses.
The pending premium for proposed deferred annuity plus other annuity values are equal to or greater than 50% of the client’s total net worth.
The benefit for the client to transfer funds to the proposed deferred annuity is unclear from the information provided.

What circumstances may cause an insurance company to not accept an application?

A client will incur a net loss in account value as a result of the proposed transfer/1035 exchange.
A client is left with no liquid assets set aside for emergencies.
A significant amount or all of a client’s net worth is in annuities with surrender charges.

Or:

The client answers “NO” to statements or questions such as:
1. They believe the product is suitable for them.
2. They have sufficient liquid funds available for living expenses, health care, emergencies, and additional needs other than the money they plan to use to purchase this annuity.
3. They understand that withdrawals greater than penalty-free amounts will incur surrender charges.
4. If tax deferral is a financial objective or tax savings a financial purpose,
  1. that the tax deferred accrual feature of an IRA exists on its own and is not enhanced by the tax deferred accrual feature of this annuity, and
  2. that withdrawals from this annuity to satisfy the minimum distribution requirements of an IRA will be subject to surrender charges if the withdrawal is in excess of the penalty-free amount.
5. They do not expect their monthly household income to significantly decrease during the term of the proposed annuity policy.
6. They understand that, upon full surrender of the policy, surrender charges may reduce the value received below the original premium deposited.
7. The agent has explained how the existing and new annuity policies compare on charges, rates, and other benefits.
8. The agent reviewed their financials before recommending an annuity.

Whose information should be used for suitability determination?

If the Owner is not the Annuitant, complete the suitability based on the owner’s information – i.e. the person paying the premium on the policy.
If the Owner is a Trust, complete the suitability on the Grantor of the Trust, who should be the Annuitant; if the original grantor is deceased, then complete based on the Annuitant’s information.
If the Owner is a Corporation, complete the suitability based on the corporation’s financial information.

As with any suitability determination, the client’s overall individual circumstances will be important. Should you have any questions regarding an annuity and the insurance company’s suitability requirements, please contact Imeriti, 800-921-3100.

Tags: Annuities

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Posted by Mike McNelley on Wed, May 23, 2012 @ 09:37 AM

Wealth stabilization involves a combination of planning techniques, diversification strategies and life insurance to help reduce the impact and volatility a down market has on a couple’s wealth transfer plans.

For estates that contain a significant portion of assets that are exposed to the volatility of the financial and real estate markets, a down market could wreak havoc on a client’s wealth transfer plans. You should consider taking steps to ensure that your wealth transfer plans are not adversely impacted by market volatility.

Failure to take steps to stabilize an estate can result in your heirs inheriting a considerably reduced estate in the event you were to die during a down market. Your heirs may need cash to pay estate settlement costs, estate taxes, tax liabilities from inherited IRAs, 401(k)s, deferred annuities, etc. – and perhaps even to live on. But if your estate has dropped in value because of a poor economy and down market, then it may not be very liquid. Liquidating the adversely impacted assets essentially locks in losses. So, it may make economic sense to plan an estate so that even if death occurs in a down market, assets will not have to be liquidated at depressed prices.

Where does Life Insurance fit into wealth stabilization?

Life insurance can be a useful risk management tool and an integral part of the overall financial stability of a well-planned estate.

One technique in wealth stabilization is to reposition some of the more volatile assets in your portfolio to create a more diversified portfolio and help reduce the impact volatility could have on your wealth transfer plans. Life insurance is a potential asset that may offer less volatility, since the death benefit generally bears no relationship to the financial market fluctuations.

Life insurance can help keep an individual’s or a couple’s overall wealth transfer strategy in place by providing the needed liquidity at death. That way, assets transferred to heirs are planned or sold when market conditions are more positive.

What are the potential benefits of purchasing life insurance for wealth stabilization purposes?

Life insurance is an asset that offers a combination of benefits that may not be available with other alternative assets.

Death Benefit is not correlated to the financial markets.
Death Benefit can stabilize the overall value of an estate.
Death Benefit is correlated to financial needs that arise at death.
Death Benefit can provide an attractive internal rate of return.
Life insurance is tax efficient.

Is life insurance truly non-correlated to the financial markets?

Generally, life insurance death benefit is not correlated to the financial markets. An exception is when an increasing death benefit option is used. Since an increasing death benefit option is a death benefit that combines base face amount and the accumulated value (at death) less any loans, the financial markets could affect the value of the policy’s accumulated value. When a level death benefit option is used, as long as the premiums are paid and the policy remains in force until death, the net death benefit is paid regardless of current market conditions. The amount of the death benefit is not affected by an up and down market.

It would not be accurate, however, to say that the policy accumulated value and premiums are not correlated to the financial markets. In the case of variable and indexed life insurance products, the performance of the cash value may be directly tied to the financial markets. Even universal life insurance products, in which an interest is credited, are indirectly tied to the financial markets. The current interest rate offered by the insurance carrier is dependent upon the performance of the general assets of the carrier, which may be invested in the financial markets. The premium that needs to be paid to keep a policy in force is oftentimes dependent upon the performance of the cash value. To the extent it is, the premium is also somewhat correlated to the financial markets.

How does one calculate the internal rate of return of a life insurance death benefit?

The internal rate of return for life insurance involves comparing the death benefit to the premiums paid and determining what return an amount equal to the premiums paid would have to earn after-tax to grow to the same value as the life insurance death benefit amount. For example, if the death benefit is to be $1 million and the annual policy premium is to be $20,000; the IRR in 20 years would be 7.93% after-tax compounded. That means that if the amount of the policy premiums were invested instead of being paid into the policy, they would have had to earn 7.93% annually after-tax to be worth $1 million at the end of 20 years.

What are the potential sources of funds to purchase the life insurance for wealth stabilization?

The potential sources of funds to purchase life insurance will vary from person to person. One source of funds to pay premiums is current income or cash flow, to the extent you would still have sufficient income to live on. Repositioning (i.e., liquidating) existing assets can also provide proceeds that can be used to purchase the life insurance. Another source is to borrow the funds.

What assets may be ideal to be repositioned into life insurance?

Depending on your circumstances and your overall objectives, it may make sense to reposition any of the following:

Overweighted equity investment portfolio.
Bonds and Certificates of Deposit (CDs).
Annuities.
IRAs and qualified plans.
Assets inside an Irrevocable Trust.

Can assets in a B Trust be used to purchase life insurance?

Any type of irrevocable trust in which you are the lifetime beneficiary and don’t need the income might be a good candidate for asset repositioning. A “B” Trust (also known as a Credit Shelter Trust or Bypass Trust) is created upon the death of the first spouse in order to utilize the remaining estate tax exemption of that spouse while at the same time ensuring that the assets are still available to provide for the surviving spouse. In some cases the surviving spouse will have sufficient assets outside the B Trust and won’t need the income.

Tags: Life Insurance

Posted by Mike McNelley on Mon, May 21, 2012 @ 09:38 AM

Life Insurance is a unique wealth creation and preservation tool that assures the accumulation of a desired amount of liquid capital at death. Depending on the plan of insurance, it may also create more or less capital for lifetime needs.

Many times, insurance values provide for income needs of surviving dependent family members, provide for children’s education, meet “special” financial demands, or relieve survivors of financial management burdens by providing an inexhaustible lifetime annuity. Retention of purchasing value is a discussion to be included in all life insurance reviews.

The following table shows the amount of additional life insurance required to maintain a given purchasing power. For example, if $100,000 of insurance had been purchased in 2001, then an additional $26,943 of insurance would have to be available to provide the same purchasing power in 2012 – i.e., what $100,000 would have purchased in 2001 will require $126,943 in 2012.

Year Policy	Death Benefit of Original Life Insurance Policy
Purchased	50,000	100,000	250,000	500,000	1,000,000
2011	200	400	1,000	2,000	4,000
2010	799	1,598	3,996	7,992	15,984
2009	1,003	2,006	5,016	10,032	20,064
2008	2,730	5,459	13,648	27,296	54,591
2007	4,206	8,412	21,030	42,060	84,120
2006	5,941	11,881	29,703	59,406	118,812
2005	7,843	15,685	39,213	78,426	156,851
2004	9,404	18,809	47,022	94,043	188,086
2003	10,771	21,541	53,853	107,706	215,412
2002	11,743	23,486	58,715	117,429	234,859
2001	13,472	26,943	67,359	134,717	269,435
2000	15,630	31,260	78,149	156,298	312,595
1999	17,074	34,147	85,368	170,736	341,473
1998	18,147	36,294	90,734	181,468	362,936
1997	19,714	39,428	98,571	197,142	394,284
1996	21,806	43,611	109,028	218,056	436,112
1995	23,816	47,632	119,081	238,162	476,323
1994	25,735	51,471	128,677	257,354	514,708
1993	28,007	56,015	140,037	280,074	560,149
1992	30,348	60,695	151,738	303,477	606,953

Calculations are based on CPI-U, Bureau of Labor Statistics.

Tags: Life Insurance

Posted by Jacob Stern on Mon, May 14, 2012 @ 09:02 AM

“Declining discount rates in 2011, including a historic year-end low of 4.8%, drove the pensions of the Milliman 100 companies to a record year-end 2011 funding deficit of $326.8 billion, according to a new report.” This article, published by Warren S. Hersch, senior editor for National Underwriter, proves the frightening reality of the pension funding deficit. Now is the time to speak with your clients about considering supplemental retirement options to ensure their future is protected. The unique features of an Index Universal Life Insurance policy can provide your client with tax-free retirement income PLUS death benefit protection in the event of their early demise. Contact Imeriti today, and let us help you better understand why index universal life is the right choice for your clients.

Continue reading: “Milliman 100 Companies Report $326.8 Billion Pension Funding Deficit at Close of 2011…”

Tags: Life Insurance

Posted by Mike McNelley on Mon, May 7, 2012 @ 10:19 AM

Having enough life insurance should be a key element of your personal financial plan. Hopefully, with some advance planning, you can collect life and disability insurance proceeds free of taxes.

The main reason most people have life insurance is to replace income that would be lost if they die prematurely. Life insurance death benefit payments can generally be received by policy beneficiaries free of any federal income tax (and usually free of any state income tax too).

But what about the federal estate tax? If the tax rules treat you as the owner of a policy on your own life, the death benefit is included in your taxable estate – unless the money goes to your surviving spouse, and he or she is a U.S. citizen. When death benefits go directly to a non-spouse policy beneficiary, such as a child or sibling (even without passing through your estate), the money is included in your taxable estate. If your estate exceeds $5 million (for 2011 or 2012), which it could if you have lots of life insurance coverage, your heirs will stand second in line behind the Internal Revenue Service (and possibly the state tax collector).

Here's the problem: The tax rules say you own a life insurance policy if you possess "incidents of ownership." You have them if you retain the power to change policy beneficiaries, change coverage amounts, cancel the policy, etc.

If having life insurance death benefits included in your taxable estate would cause an estate tax hit, the solution is to set up an irrevocable life insurance trust to own the policy. The trust then pays the premiums, and the death benefits go to whomever you name as the trust's beneficiaries. Your estate is out of the picture. With this arrangement, there's no federal estate tax on the death benefits, and there's no federal income tax either.

However, there are a few complexities with this strategy. If you transfer an existing policy to the life insurance trust and die within three years, the death benefits are included in your taxable estate. To avoid this problem, the trust should purchase a new policy on your life. If that's not possible – say because your health isn't so great – you may have nothing to lose by transferring an existing policy and trying to outlive the three-year rule. But check with your estate planning professional first, because transferring existing policies with cash values in excess of $13,000 could trigger adverse gift tax consequences.

Finally, while setting up an irrevocable life insurance trust can be a great idea, it's not a do-it-yourself project because it's a fairly sophisticated legal procedure. Hire an experienced estate planning professional to get the job done right.

Tags: Life Insurance

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Continue reading: “Milliman 100 Companies Report $326.8 Billion Pension Funding Deficit at Close of 2011…”

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