Category: Distribution

7 Ways To Use The Death Benefit

 

In this recent presentation, Truth Concepts™ did for The National Network of Estate Planning Attorneys we demonstrate how to determine the rate of return on the cash value of a policy as well as take you through the 7 ways to use the death benefit.

This is also a good tutorial on the use of the Funding, Diversification and Distribution calculators.

 

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Am I Too Old To Buy Whole Life Insurance?

“I wish I would have known the whole truth about whole life insurance 40 years ago so I could have taken advantage of all the benefits you have described to me,” a brand new prospective client said to me. “I love what you are saying and it makes so much sense, but I am just too old to implement what you are talking about. At my age, it will just be too expensive.  But it scares me to death thinking about running out of money.”

“Many of our clients say exactly what you just said, ‘I wish I would have known about this _____ (fill in the blank) years ago,'” I replied to George.

George had been referred to me.  I had spoken with him on the telephone a number of times, but today was the first time we had ever met in person.  George was 70 years old, but I would have never guessed hearing his voice over the phone. The last time I talked with him, he insisted we meet the next time my travel brought me to his hometown.  When I discovered I had a conference that would bring me through, I arranged a meeting with him and his wife, Barbara.

“Let me tell you a story,” I continued.  “There once was a 6th-grade class that was learning about aerodynamics.  The teacher told the children that at the end of the section, they were going to have a test that would be taken in teams of two students.  No one said anything but they all were thinking ‘oh I hope I do not get paired up with Tommy.’  Tommy was a rather rowdy and rough boy who didn’t seem to do well in school.  Some of the kids thought he had a learning disability, while others thought he just did not care to apply himself.  The second to last day, the teacher announced the teams for the final exam to be taken the next day.  To Jed’s surprise, he was the one who was paired with Tommy.”

“The next day the teacher told the children to get with their partner as they all headed outside for the test.  It was a warm, but slightly windy, spring day.  The class was led to the playground and each given a piece of paper.  ‘You are to make from your sheet of paper something that will adhere to the principles of aerodynamics we have learned about during this section of our science unit.  When you have completed your task you will be judged by how far and how straight your creation flies.’  Jed was terrified as he had noticed that Tommy didn’t seem to pay much attention during science.  Jed asked if Tommy had any ideas and Tommy replied he had none.  Jed hurried to the teacher and asked if he and Tommy could go last.  While the other students worked quickly to fold, cut, tape, and sculpt their papers, Tommy just sat there.”

“At long last, it came time for Jed and Tommy to be tested.  Jed had folded a masterpiece of an airplane which he proudly stepped to the line and threw as best he could.  His airplane did not go the furthest, nor did it go the straightest, but it was one of the top 4.  The two of them could still take first place if Tommy would have only made an airplane and been in the top 12 of the class.  Tommy walked up to the line and just stared into the distance for what seemed like a really long time holding his untouched piece of paper by the corner.  He finally grabbed the paper and wadded it up into a ball and chucked it.  His ball of paper went twice as far and straighter than anyone else’s.”

“George, I want you to be like Tommy for a moment,” I said.  “Tommy had been taught all the laws of aerodynamics.  He violated most of them, but the one thing Tommy did have was imagination.  You have been taught and ‘consumerized’ to think in certain ways, but right now, let’s use some imagination.”

“Okay, I can do that,” George replied.  “You have taught me a lot of great truths about what you do.  So I’m open to what you have to say.”

“Ok, great. Thank you for your vote of confidence,” I smiled at him. “The first thing we are going to do is make an initial statement about whole life insurance:  ‘I can spend my legacy money while I’m living by acquiring a simple permission slip.’”

“George, you have done an amazing job saving for retirement. You have accumulated a sizable nest egg of 2.5 million dollars,” I complimented him.

“Yes, but that is also the amount of money I want to pass on to my heirs. I don’t have anything else to put into a life insurance policy you’ve been telling me about. I’m too old for that to work.”  George explained.

“Okay, well, for now, let’s concentrate on what you have saved. We’ll call that your legacy money,” I said. “Typical financial planning says if you can make your legacy money earn 4, you will never run out of money. If your account is growing at 4% your nest egg’s value will stay the same and you can pass that amount on to your heirs.  Take a look at this Distribution Calculator,” I said pointing to my screen.  “How much net spendable money will you have after you pay your taxes?”  I asked.

“Looks like $76,360, which is about $15,000 more than what we spend currently in a year,”  George said as he reached for Barbara’s hand.

“I am happy to hear that. This typical strategy will work if you only take out and live on the earnings of your nest egg each year.  The scary thing is, what if your nest egg earns zero – or worse – loses money one year, are you prepared to go without any money that year?”  I grinned at the two of them. “Not to mention that this also ignores the loss of purchasing power of your money each year – inflation often has a big impact on retirement income.”

“Inflation is something we should not ignore. My older sister is on a fixed income and they are scrambling all the time to determine what they will cut out of their lifestyle just to make the money last.”  Barbara said.

“I know what you mean, and that’s exactly what I’m talking about. It’s painful for me to watch people in that situation, and it’s happening more and more often.”

“Let’s take a look at a different approach – a “wad up the piece of paper and throw it” kind of approach,”  I said.  “I am going to input another scenario and propose you take out $220,000 a year.  As you can see you will have a net spendable amount of $196,000 for about 15 years.  Under this current plan, you have to die when you are 85.  Can you arrange that?”  I joked

“Well if I had a crystal ball and I knew for sure, I would go along with this plan, but we simply do not know,” George said.  “Let me ask you something: is the calculator correct here saying I will only pay $292,328 in taxes, while under the typical plan I pay $945,596?”

“Yes, those numbers are accurate.  I guess you get the difference instead of Uncle Sam,” I said.  “And, I agree with you about not having a crystal ball, so we are not going to spend the entire $196,000 each year,” I said. “I am proposing that you purchase a whole life insurance policy for $110,000 a year and then live on $83,360 a year, which is slightly more than the typical plan.  I am going to include the life insurance premium in the calculator and it looks like this:”

“You have my attention, keep going,” George encouraged me.

“Now that looks like you simply have $10,000 more a year to live on, but if you look at it from a percentage point of view, this plan we are talking about is a 14% increase in your net spendable income over the typical plan,” I pointed out. “If you do not spend that much, you will save it and have it as a hedge against inflation later on,” I said.

“Please remember, at age 85 your $2.5 million will be spent.  To keep you at the $83,000 we will start taking withdrawals from your life insurance policy of $60,000 a year,” I said pointing again to my screen.

This allows you the peace of mind that you will never outlive your money,” I said.  “Now, please notice the amount you will pass on to your heirs when you pass away.  Has it increased?” I asked.

“It is higher until I am 89, then it is a little less… can you scroll down for me?”  George asked.

“Ah, that is better.  Well, the amount to my heirs goes below the amount I told you I wanted to pass on when I am 89.  I am not sure I like that,” George said.

“Remember what I said our beginning statement was?  I can spend my legacy money while I’m living by acquiring a permission slip,” I said.  “The life insurance gives you permission to spend your legacy money, as well as some other assets you have.  For example, you have a wonderful home that is paid for.  Do you think the kids would mind if you use some of the equity to help support yourself?” I asked.

“No, of course not,” Barbara added.

“With this death benefit in place, you have permission to use the equity in your house to help you live a little better.  When you get to 89 – and I hope you are still healthy at that age – you could enter an agreement for a reverse mortgage. This should easily grant you about $50,000 a year, and it’s not taxable.  Take a look at what this does to the amount you pass on to your heirs,” I said.

“Hey, I like that! It does go below the $2.5 million for one year but then starts to increase again.  I like this permission slip,” George smiled.

“Do you feel like Tommy yet? Can we just take the typical plan and wad it up into a ball like Tommy did and throw it?”  I asked.

“I sure do. Let’s get started!”  George said. Barbara agreed.

 

-Jason Henderson for Truth Concepts

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How To “Retire” With Enough Money, Plus a $4,588,332 Cushion (John & Jane Jones Pt. 9 of 9)

Time has a way of flying by. John and Jane were now 71 years old. This meeting was going to be one of the most important meetings I would ever have with them. This meeting was certain to prove to them that following my advice all these years was going to pay off.

As a result, I did a little extra preparation for the meeting by gathering information about the current cash values of their policies and their other assets. Their 401(k)’s had about $470,000 combined. The cash value of their life insurance policies was $4,588,332. This figure did not include the policies they had purchased for their two sons because they had given the policies to their sons as Christmas gifts a few years back after the boys had helped repay their student loans to the policies.

The business John and Jane had purchased and run for 10 years had been sold and the net proceeds from that sale were $184,000. I also opened the file with notes from all our meetings and read through it. I came across an interesting page of notes from the first meeting. They were 24 years old, newly married, and had $20,155 of credit card debt when they first came to see me at the insistence of Jane’s parents. John had wanted to get rid of the “terrible whole life policy” Jane’s parents had purchased for her when she was a baby.

He was insistent they needed a higher rate of return to get anywhere financially in life. In my notes, I had written a question I posed to them during that meeting: “Do you think it would be possible for the two of you to have $3,000,000 in assets by the time you are 70 years old?” Neither had thought it possible, regardless of the rate of return.

“John, Jane it is great to see you,” I greeted them with a warm smile and firm handshake.

“It is good to see you as well,” John replied. “Is it ok if we retire now?”

“You have certainly learned to be more direct in your old age,” I joked with him. “No, it is not the time to retire, but it is time to enjoy some passive income for a while. If you retire, according to one definition of the word, you are “taken out of service.” You still have a lot to give back to the community and to your grandchildren. How are they by the way?”

“Absolutely the cutest grandchildren on the planet,” Jane bragged. “If I knew having grandchildren was so much fun, I would have had them first!”

“For many years I have been telling you that when you understood the whole truth, sound financial decisions would be easier to make. I have a calculator that will help guide you as you start to live off your assets. It is called the Distribution Calculator. I have already loaded some information.

“What are we looking at?” Jane asked.

“The $654,000, is the total of your 401(k) balances ($470,000) added to the net proceeds from selling the business ($184,000). I am assuming you are going to get 5% return on that money and that you will live on the interest being generated by this amount of money. Of course, there is Social Security of about $50,000. So your net income will be around $77,055 per year.” I explained.

“That is not as much as I thought we would be able to have,” John said. “We haven’t been extravagant with much. We have saved roughly 12% of our income during our working years. Why isn’t there more?”

“You are also impatient in your old age,” I jokingly said. “But you are hitting on something that most of your peers are facing. Well, your peers who have not had the good fortune of working with our office. You, on the other hand, in addition to that amount, also have the cash values of your life insurance policies. Those are powerful and empowering assets. I am going to change this calculator to show an alternative use of your 401(k)’s made possible by your whole life insurance policies.”

“As I said before, the number labeled “Net Spendable” on the left side of the page, $27,055 per year, is what you will be able to spend if you live off the interest generated by your sum of money. Most people are locked into this scenario because they do not want to run out of money – which, by the way, is the biggest fear of people your age.

“The numbers on the right show how much you’ll have to live on each year by spending the interest and the original principle.”

“Wow, that is $20,000 more a year. It is almost twice as much as the numbers on the left,” John said.

“The numbers on the right are getting larger every year. Why is that happening?” Jane asked.

“On the right, you are withdrawing principle and interest from the account. Each year your principle is reduced the interest earned is also reduced, which require fewer taxes to be paid.” I explained.

“What happens when we are 92?” John asked. “Remember the life expectancy thing we did several years ago? I am supposed to live to 110. Will we be out of money?”

“The reason you can enjoy the spend down technique is that you have $4,588,332 in cash values of your life insurance policies. In other words, the cash values act as a cushion to you so you can spend all of your $654,000 you have worked so hard to save.”

“There are so many options for you because of those policies. For example, if you think you needed more income, you could annuitize $1,000,000 of your cash values today and have a guaranteed $60,000 a year income for as long as you live. That would bring your annual income somewhere in the neighborhood of $160,000 a year for 20 years and then reduce to about $110,000 when you are 92 ($60,000 from annuity plus $50,000 Social Security). But remember, you would still have $3.5 million in cash values that keeps growing.” I said.

“These are some impressive numbers. There are a lot of trips to the snow cone shack with the grandkids in those numbers. I cannot tell you what a relief it is to not worry about of running out of money. As you said, many of our friends are scared to ‘retire’ because they fear running out of money. I feel bad for them,” John lamented.

“Do you recommend that we annuitize $1,000,000 of our cash values?” Jane asked. “I don’t think we need that much income.”

“That is the whole point. You have OPTIONS. You get to decide what you want to do and when you want to do it. As long as you don’t do anything really crazy, you will never run out of money. That thought should not only be comforting, it should be exciting.” I said.

“Are you saying you are not going to be around to help us avoid something really crazy?” John asked.

“I am NOT retiring if that is your question. I love what I do and I love helping people understand the whole truth about money and then benefitting from that knowledge to become truly financially free.” I sort of boasted.

“Thank you. I am serious. Thank you for everything,” Jane said.

“Yes we could never thank you enough,” John added.

As they left, I thought about their last statement. Yes, I had made commissions working with John and Jane but that wasn’t the most valuable thing. The process of teaching them and having such long time friendships had a value I could not put a price on.

 

-Jason Henderson for Truth Concepts

 

 

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How to show different payout timeframes on distribution

How do I show a 50 year period but a 20 year Pay Down so that Distribution 1’s income is still based on Interest Only and Distribution 2’s income could for example, use a death benefit to improve cash flow and spend Interest and Principal but only for 20 years.  If I show a 50 year measurement of money the second person doesn’t run out at age 84, but I want to illustrate 50 years for both examples, but Distribution 2 running out in 20 yrs. 

Make the Illustration Period (Years) be 20 first.  Note you can also put 65 in place of 1 in the Year column so it shows 65-84 instead of 1-20.

Then turn off the automatic Pay Down calculation (click on the “PayDn” button on Distribution 2 so it is no longer blue).  Then change Illustration Period (Years) to 50 which will stretch out the illustration to 50 years and you will see that the Pay Down amount does not change so it runs out of money in the 20th year.

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