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Call today: 720.344.0312 Recent LTC Articles Exploring All Options Means Better Solutions And More Sales National Underwriter October 11, 2004 By Wilma G. Anderson Tax-deferred plans like 401(k) and profit-sharing plans are great, but what can you do when your pre-retirement client is already contributing the maximum to his or her plan and makes too much money to be eligible for a Roth IRA, or is a business owner looking for additional solutions? If you don’t explore all the options available to pre-retirees, you could be missing opportunities to help them do better and thus lose sales. Before doing pre-retirement tax and investment planning, try to set up your client with a long term care insurance policy from a rock-solid company. While it is difficult to persuade people in their 40s and 50s that they need LTCI, the decision is vital. LTCI buys clients freedom from long term care costs. Once they’re covered, you can plan without having to set aside contingency funds to pay for a nursing home, home care or assisted living. But many clients in their 40s and 50s won’t consider LTCI right away. If your client wants to focus on investments first, don’t fight it. Do that planning first, win the client’s trust and then address LTCI afterwards. Let’s look at a real-life example. Jim is a successful 50-year-old homebuilder with 2 kids in elementary school. The sole owner of his company, he already makes maximum retirement-plan contributions and is ineligible for a Roth IRA. Jim wants to retire at 60 and has some fears about outliving his money during retirement. He asked me to put together a plan to ensure that he’ll have plenty of income for himself and his family if he lives to age 90. He’s willing to take some investment risk but wants to nail down guaranteed income first. Jim was willing to buy LTCI at the start, and that helped simplify planning. To create his investment plan, I assumed a 3% inflation rate during retirement and surmised that he’ll earn a minimum of 5% on his income investments during the next 10 years, coupled with the power of compounding. When Jim retires, he’ll be in a different situation than the accumulation phase he’s in now. And he’ll need both growth and income from his retirement assets. At retirement, we’ll create "income ladders" composed of fixed-income investments, such as immediate annuities, bonds or CDs. These will provide safe, steady, dependable income he’ll need to replace his paychecks in retirement. An individual who retires always has to balance immediate needs, which require liquid assets, with long-term retirement objectives, which require that some assets remain invested and continue to grow. As advisors, we have to be sensitive to this issue and remember the ‘liquidity taxes’ when a client begins to receive money from investments, IRAs, 401(k)s and pension plans. With this in mind, I recommended for Jim a 10-pay variable universal life policy. Like a Roth, VUL offers tax-free withdrawals (up to the basis) later on, but unlike a Roth, VUL is available to upper-income investors. A VUL policy allows a policyholder to shelter more income than a Roth by overfunding the plan up to the limits of a modified endowment contract. Plus, there’s the death benefit for his family’s protection. It’s one of the most flexible, potent financial instruments. When I explained to Jim how the VUL policy would work, he was floored. The advantages were so compelling, he bought it right away. I recommended a $1 million policy that has an $11,600 minimum annual premium. The policy will be paid in full by age 60, his projected retirement age. The biggest advantage is that the policy allows him to invest additional funds (up to $65,900 annually) without becoming an MEC, which negates the tax advantages. Assuming he overfunded the policy 8 out of 10 years, I projected a $1.8 million accumulation in 12 years. Jim liked the flexibility VUL provides. If he has a bad year, he can skip overfunding and then just pay the annual premium. In good years, he can make up the shortfall from previous years. Let’s suppose 2004 is a bad year, and he pays the minimum premium. But 2005 is a great year, so he contributes $120,200 (two times $65,900 minus $11,600). Now, let’s fast-forward. If Jim dies before retirement, his family is protected with at least a $1 million death benefit that can grow once the cash value exceeds the threshold. But under a happier scenario, Jim lives a long, full life in retirement. If he needs the money for extra income, he can take either loans or withdrawals from his policy tax-free. Withdrawals are tax-free if they don’t exceed the policy’s basis and loans are always tax-free. So, Jim can take money out to travel around the world or send his grandchildren to college or do whatever he likes. But perhaps the income generated by his taxable investments and mandatory distributions from his retirement plan will be ample and Jim won’t need to take any money out of the VUL. In that case, the death benefit and the cash accumulation inside the policy will continue to grow and his beneficiaries will get full proceeds when Jim passes away. Jim’s plan illustrates an important principle: Don’t put all your retirement eggs in one basket. It’s important to diversify not only among asset classes but also among different vehicles to provide the greatest tax-advantaged benefit for the client while minimizing risk. By expanding your horizons, you’ll not only do the best job for your clients, you’ll also do very well for yourself. Click here to return to list

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