Life Insurance Case Study for Solo & Small Firms Section October 2, 2013

Transcription

1 Life Insurance Case Study for Solo & Small Firms Section October 2, 2013 Presented by: Joe Chenoweth, CLU, ChFC, AEP Vice President, Estate & Financial Planning* Dallas Parkway, Suite 850 Addison, Texas (469) *Registered representative of, and securities and investment advisory service offered through Hornor, Townsend & Kent, Inc., (HTK) Registered Investment Advisor, Member FINRA/SIPC. HTK does not offer tax or legal advice. Clients should always consult a qualified advisor regarding their individual circumstances. ARMOR is independent of HTK

2 2 The Case Mark, age 27, joins large Dallas law firm Starting salary $85,000 $100,000 in student loans Age 30, marries Sara & buys 1 st home Practice going quite well Compensation up to $140,000 Age 31, twins! Age 32, starts own solo practice Struggles with cash flow 1 st couple of years Thrives the next 8 Age 42, hires Amy, age 32, as 2 nd attorney Age 44 makes Amy, now 34, a partner Firm now has 4 support staff Going into peak earning years for Mark Age 67, thinking of retirement

3 Age 27 & Single Needs (?) for life insurance $100,000 in student loans New car loan Doesn t want parents to feel obligated to pay off loans if he dies Fraternity brother = life insurance agent Explains the living values of permanent life insurance Guaranteed annual increases in cash value Cash value not correlated to any other investments Tax deferred growth Tax free access Guarantees of future insurability Mark buys $150,000 whole life policy with 2 riders Waiver of Premium in event of disability Guaranteed Future Purchase Option Options on additional $100,000 at ages 28, 31, 34, 37 & 40 $134 per month premium 3

4 Age 30 & Married Mark s student loans down to $60,000 Mark s $140,000 Sara s student loans = $35,000 Sara s $80,000 New home mortgage = $200,000 Both incomes required for new lifestyle Fraternity Brother Comes Back 4 Explains: Need to cover mortgage & Sara s debt = easy math Perfect use for term insurance Need to protect income stream for each other = not so easy math

5 How Much Life Insurance? Total of debts + % of income? Multiple of income? What you can afford? As much as an insurance company will issue? Sophisticated formula: FV of income desired, adjusted for inflation for the time period Then PV back to today using conservative ROR assumption Not so sophisticated formula: How much income desired each year? What ROR can be earned on invested capital? Divide the little number into the big number

6 How Much Life Insurance? Total of debts + Emergency fund if none exists + Projected estate settlement costs + College fund if appropriate Capital needed/wanted to replace income Using appropriate formula

7 What Kind Now? New marriage New house New furniture Etc., etc., etc. = Large need + low cash flow = Level term insurance Normal choices are 10, 15, 20 year durations Current pricing for male, age 30, preferred nontobacco for 20 year term is +/- $1.00 per $1,000 Equate to leasing with option to buy Guaranteed convertible to permanent without evidence of insurability

8 Age 31 & OMG Twins! Mark s income up to $165,000 Sara s income still around $80,000 BUT She may not want to return to work! Fraternity Brother Comes Back Explains: Need to plan for college Need for extra coverage on Sara if she chooses not to return to work Rent-a-Moms are very expensive 8

9 Age 32, Starts Own Firm Mark s income??? Office lease obligation Line of credit for furniture, equipment & living expenses Sara still working - income around $85,000 Fraternity Brother Comes Back Explains: Need to replace lost benefits Need to protect line of credit obligation Suggests 10-year level term Sara is beneficiary BUT Collaterally assigned to bank as their interest may appear DO NOT make bank the beneficiary!!!! 9

10 Starts Own Firm Mark s income is a struggle 1 st two years Thrives for next 8 Bigger, better office Concentrating on saving for emergencies and college Bigger house Sara quits working to raise the children Explains: Fraternity Brother Comes Back Ability to use Automatic Premium Loan provision of whole life policies to pay premiums during the start up struggle Helps exercise Guaranteed Purchase Options as they come due on 1 st whole life policy Begins converting his term insurance 10

11 Age 42 Mark s income steady at +/- $200,000 Hires Amy, age 32, as 2 nd attorney to help grow practice Bigger, better office Still saving for college Explains: Fraternity Brother Comes Back Reasons to continue to convert his term insurance When twins are ready for college can access cash values income tax free to supplement other savings He is now licensed to give financial advice and sell investments 11

12 Age 44 Amy has really helped grow the firm Makes her a partner Bigger, better offices Still saving for college Fraternity Brother Comes Back Explains: Need for buy-sell agreement funded with life insurance and disability buy-sell insurance Need for key person insurance for the firm on the rainmaker 12

13 Age 49 Firm is rocking! Twins start college College savings may not be enough! Fraternity Brother Comes Back Explains: His permanent life insurance is source of tax free cash for college via: Surrendering Paid Up Additional insurance purchased over the years with dividends and/or Policy loans 13

14 Age Peak earning years for Mark Now concentrating on saving and investing for retirement Twins marry and have children Gifting for grandchildren s education Fraternity Brother Comes Back Explains: 3 phases of wealth 14 Accumulation, Distribution, Preservation Now is the time to really ramp up on Accumulation So Distribution phase will be enjoyable Converts the last of Mark s term insurance to permanent

15 15 Age 67 Mark is wealthy Wants to retire Same two fears as all retirees regardless of wealth 1. Running out of money 2. Not being able to leave a legacy Explains: Fraternity Brother Comes Back Why he should not trust the safe withdrawal rate concept during retirement How owning the death benefit of permanent life insurance can assist him in the Distribution phase of his wealth Asset protection Volatility buffer

16 Why Fear the Safe Withdrawal Rate? Prior research, using Monte Carlo analysis, has told us the safe withdrawal rate in retirement (distribution phase) = 4%. More recent research says 4% only gives a 50% probability of success! A 2.8% withdrawal rate produces +/- 84% probability of success! That s only $28,000 per $1million in assets! BTW a successful iteration of a Monte Carlo probability run ends with $1 remaining! What if? 16

17 Why Fear the Safe Withdrawal Rate? What if you are on that safe withdrawal rate and There is another 30% market correction? The safe withdrawal amount produces far less income If you take it, how do you ever make up for the loss? Your actual ROR turns out to be lower than projected in arriving at your safe withdrawal rate? Inflation proves to be higher than projected? Income tax rates increase leaving you less spendable income out of your safe withdrawal? You live longer than projected? 17

18 Owning the Death Benefit in Retirement Gets you off the Monte Carlo curve The death benefit you own creates a permission slip To totally spend down that same amount of retirement assets Solves for both fears: running out & the legacy Fewer assets produce a higher income Creates a volatility buffer in event of another market correction Rather than take a distribution from a reduced asset base, take your income from the life insurance cash values Allows time for the asset base to recover Many more reasons but these three the strongest 18

19 Tale of 2 Successful Attorneys Attorney A Retires with $5,000,000 assets available for retirement Because he has the asset base he sees no need to continue his life insurance ROR on retirement assets assumed to be 6% Life expectancy = age 90 Safe withdrawal rate is between $200,000 (4% older research) and $140,000 (2.8% newer research) 19

20 Mark Tale of 2 Successful Attorneys Retires with $5,000,000 assets available for retirement Has $5,000,000 in permanent life insurance No need for safe withdrawal rate ROR on retirement assets assumed to be 6% Life expectancy = age 90 Mark s permission slip allows him to spend down the whole $5,000,000 of assets Mark s retirement income = $ 383, 389! 2.7 x Attorney A s income 20

21 Case Summary Financial success is about building a successful strategy for maximizing your wealth potential The strategy will utilize many different financial products Lots of uses for various types of life insurance along the journey How much, what kind, and when requires a licensed, ethical, professional advisor How to find one of those? Same way your clients find you Recommendation from someone whose judgment you trust 21