Your Cash Value Life Insurance Has Value!

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Jim Lorenzen, CFP®, AIF®

People often purchase cash value permanent insurance, throw the policy in a drawer or filing cabinet, and forget about it.   This could be a big mistake.

Most all permanent insurance has a cash value and that cash value has real value you shouldn’t ignore!  First a quick word about  what permanent insurance is.

Term vs Permanent

The terms themselves should tell you something.   Term insurance is simple:  You’re renting death benefit protection from an insurance company.  It’s like a lease, in a way.  You’re premiums stay level until the end of the lease.  You can renew your lease, but the rent will be higher.  How high depends on the length of the initial lease.   If you’re 40 years of age, and in good health, the purchase of a 20-year term policy means the ‘lease’ will be up when you’re age 60.  If you no longer need the death benefit, you simply let the policy expire.  If you do, you’ll either have to renew at what will likely be a much higher rate or buy a new policy, which means re-qualifying health-wise.  You might be able to convert to a permanent policy with the same company if your term policy offers that feature, but you’d still be paying the higher premiums.

Permanent insurance isn’t a rental.  This is a purchase on a sort-of installment plan.   Examples are whole life, universal life, and many other iterations that are now available.   In most policies, premiums do not increase and your protection doesn’t go away unless you fail to maintain the policy.  These policies have cash value and that brings us back to our topic.

Cash Value has Value!

Someone will end-up with the policy holder’s cash value:

A)The policy holder

B)The policy holder’s beneficiaries

C)The insurance company

If the policy holder dies before accessing cash value, the answer is C!  The insurance company pays out the death benefit but will keep the cash value.

What can you do to make sure you make the most of your cash value?  Here are some simple strategies you might consider:

  1. Use your cash value to make premium payments

    Why not use your cash value for premium payments to keep ‘paid-up’? You’ll not only save money each year, but maintains your death benefit protection.
  2. Increase your death benefitUse your cash value to purchase a larger death benefit! Life insurance death benefits generally go to beneficiaries income tax-free!   If you have a $500,000 insurance policy with $250,000 in cash value, you might want to take your cash value to zero and increase your heirs death benefit  to $750,000.   Better that than your heirs getting $500,000 and the insurance company taking $250,000 (which means they had only $250,000 ‘at risk’).
  3. Take a loanYou can borrow against your policy’s cash value at rates lower than your typical bank loan. In some cases, the net loan interest rate might be close to zero (the cost of the loan could be close or equal to the policy’s interest crediting rate).   Here’s the good part:  You’re not obligated to pay back the loan since, in effect, you’re borrowing your own money (you should know that any amount you borrow, plus interest, will be deducted from the death benefit when you die).   Here’s a smart strategy many people use:   They borrow money from policy cash values to pay cash for their new car, the make ‘car payments’ back to the policy.  The money they borrow is tax free.  And, in many policies, the money they took out to buy the car is still ‘on the books’ in their policy for interest crediting.  Every five years or so, they buy a new car almost interest free.
  4. Withdraw the moneyYou can withdraw your cash value—which could reduce or eliminate your death benefit. Don’t do this without checking with your agent.  Calculations may not be dollar-for-dollar.
  5. Surrender the policyNo more death protection, however.
  6. Supplement retirement incomeThis is a 10-15 year strategy that can provide excellent benefits and protections. Talk to your advisor—preferably someone who is independent of the companies and a CFP® professional.  Now, if we only knew where we could find one…..

 

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Here’s Your Important Document Checklist!

Jim Lorenzen, CFP®, AIF®

 

A fiduciary advisor is good to have; but, YOU are a kind of fiduciary, too!

Your family depends on you, which means you have the responsibilities a fiduciary would have.   Step one, of course,  is knowing where your important documents are.

Here’s a checklist to help you get your ducks lined up.

Hope you find this helpful.

If you would like help, of course, we can always visit by phone.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Beware of Mortgage Loan Scams

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Jim Lorenzen, CFP®, AIF®

First I want to point out that this post is really courtesy of Senior Deputy Becky Purnell of the Moorpark Police who provided this information in the City of Moorpark Guide; but, I thought it was so worthwhile I wanted to relay the information here.

According to Deputy Purnell, you should be aware that scammers are targeting email accounts of realtors and escrow and title companies in order to steal your money!

So, if you are buying a home or refinancing, you should be alert to what could be happening and how to protect yourself.

  • The scammer hacks into the email account of a real estate agent or escrow officer and monitors correspondence between that person and the home buyer.   The scammer then creates an email that is nearly identical to the agent or officer’s email, including their writing style, logos, and signatures.
  • About the time the home buyer would expect to receive instructions on how to wire the money, the scammer sends instructions to wire the money to a specified account which goes to the scammer.  The agent or escrow officer is unaware this is happening

This scam targets people who are in the refinancing process and any other transactions that include the wiring of money.  Here are some ways Deputy Purnell recommends for protecting yourself:

  • Before you wire money, speak with the realtor/escrow officer by phone or in person to get wiring instructions and confirm the account number is legitimate.
  • Do not email financial information.  It isn’t secure.  Many financial firms do what I do:  they provide secure vault access to their clients so that documents never go through an email system.
  • Look for web addresses that begin with https (the s stands for secure).   Don’t click on email links that come in emails – it’s always safer to look up the website’s real URL and type in the address yourself.
  • Be cautious about opening email attachments.  Those files could contain malware.
  • Be sure your browser and software are up to date.

Especially if you’re getting emails from someone you don’t know, never click on the link.   Even when I get a link from my own bank, I never click on it.  I always enter the correct URL manually to gain access.

You can set-up a spreadsheet with columns for website names, URL, ID, Username, Passwords, and security questions and answers; but, make sure you spreadsheet is password protected and not accessible to others (you may want to store the data on an external drive, or example).

Hope this helps!   If you’d like to learn more about IFG, we can always visit by phone.   You can click on that link (if you feel confident), or you can simply go to the IFG website and contact me through the site.  www.indfin.com.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Old-Age Financial Security: Silence is NOT Golden, yet Some aren’t talking!

Jim Lorenzen, CFP®, AIF®

Generational planning didn’t seem important  for old age financial security in my grandparent’s day.   They were living at  a time when Social Security was passed and designed to last for a lifetime beginning at age 65.  Of course, life expectancy back then was around age 68!  Who needed to worry about generational issues?  Longevity wasn’t a risk.

My generation—the baby boomerss—became the first  to experience the ‘sandwich’ effect:  Taking care of aging parents and children at the same time.   And, as that was unfolding, people were beginning to realize they were living longer, too!

The cultural quicksand began to materialize, but few have recognized it.  It’s like glaucoma:  You don’t see it coming; but, all of a sudden, it’s there.   It’s silence.  In a recent online survey (cited below), over half of GenX respondents and 60% of baby boomers indicated they’ve never had a conversation about planning for retirement or financial security in their old age, yet their fears were the same.

The reasons tend to tell is why.  They’re repeating the same mistakes their parents made.

Why do we study history?  Because we know human nature doesn’t change—it hasn’t changed for thousands of years.  Studying history allows us to learn the mistakes human nature, unencumbered by knowledge, tends to make.  But, knowledge helps us prevent a repetition!

When parents and children don’t talk about finances, guess what…

Why do they feel they’re not making enough money?  Why do they have too many other expenses and are paying off debt?  The answer is simple.

They’re  repeating mistakes.  But, the GenX group seems to be making more of them.  Are the boomers not talking to their kids?   Are their kids not involved in their parent’s own planning?   Maybe they should be.

As parents are living longer—longevity risk– they run a very real risk of needing long-term care.  If ever there was a threat to old age financial security, this may be it; yet,  relatively few address that issue usually because of cost or for fear of losing all that money paid in premiums if they don’t use it.   However if they do need it, and the kids end up having to pay some or all of the ultimate cost for that and their parents’ support, it also could eat-up their inheritance!

What we don’t know can cause financial hurt.  Perhaps they don’t know  that a professionally-designed life insurance policy might provide tax-free money that could be used to cover long-term care if needed and yet preserves cash if it isn’t—and still maintain the children’s inheritance!   It’s a financial ‘Swiss Army Knife”  type tool that can solve a lot of issues at once.

Unfortunately, few people take the time to have a generational financial planning session either on their own or  – maybe better—facilitated with a  family financial advisor acting as a guide and facilitator.   Some advance planning can make a big difference.  Here’s an example:

Real Life Case History (Names changed)

Fred and Wilma never discussed their finances with Pebbles or Bam Bam.  As Fred and Wilma grew into their 90s, it became evident they could no longer live on their own.  Fred was diagnosed with a terminal disease and Wilma, at  90, was diagnosed with Alzheimer’s.  They could no longer function and it was now Pebbles’ and Bam Bam’s turn to take care of their parents.  Fred lived for eight more months, but Wilma continued living for nine more years.  Despite the fact they did have some retirement savings, it was no where near enough to cover the more than $600,000 in costs that were incurred  by Pebbles and Bam Bam during that 9-year period. 

Had Fred and Wilma taken the right steps sooner, those costs threatening the old age financial security of Pebbles and Bam Bam might have been covered, or—at the very least—Pebbles and Bam Bam would have been reimbursed, protecting their inheritance … and all of the money might have been provided tax-free!   Unfortunately, their attitudes about various financial solutions available to them were colored by what they’ve heard from parents, friends, and even entertainment media, including television gurus selling DVDs.   Not surprising.  Some people even get their medical advice that way.

Old strategies simply don’t address today’s longevity and ageing issues.  Different strategies are required.   How can it be possible to make sure the parents have a lifetime of inflation-adjusted income and still provide an inheritance for the kids?

Rising Inflation ScreenYou might enjoy viewing this educational 20-minute video that shows one strategy that likely makes sense for many people.  While the tools used to implement it might vary, it’s still worth a view.  So, grab some coffee and see for yourself.

If you haven’t had a generational meeting with your family financial advisor, maybe it’s time you did.  Like Mark Cuban’s dad once told him:  This is as young as you’re ever going to be.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Caring for a Loved One at Home? Here are some tips!

Sunday Brunch at home.

Sunday Brunch at home.

Jim Lorenzen, CFP®, AIF®

Taking care of family does present its challenges; but, it can extremely rewarding – and a lot of fun!

If you’re one of those who’s embarking on this journey, there are a lot of resources available to you; but, there’s also a lot you’ll want to know.

My wife and I cared for my mom for nine years, and we’re now caring for her mom.  As I said, there are challenges, but it can be a time you’ll never, or want to, forget.

The button below will get you to some tips you might find helpful, as well as some personal experiences that you may find worth knowing.

Enjoy!
Home Care Resources and Tips You Can Use!

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Tips for Managing an Inheritance

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Receiving an inheritance? 

Not sure how to manage it?

Before you make decision, it’s good to do your homework.  You might find our report on managing inheritance money helpful.  You can access it below.

Get Your Inheritance LifeGuide here!

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Visit the IFG Website!

Arrange a brief 15-minute introductory phone call with Jim Lorenzen, CFP®, AIF® here.

 

Follow Jim on Twitter: @jimlorenzen

and also Jim’s MoneyBlog

Jim on LinkedIn

IFG on Facebook

Become an IFG client!  Schedule your 15-minute introductory phone call here!

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice.

The Independent Financial Group is a fee-only registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659.

Interested in becoming an IFG client?  Why play phone-tag?  You can easily schedule your 15-minute introductory phone call!

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

The Insurance Illustration Landscape is changing

Should You Believe Insurance Company Illustrations?

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Jim Lorenzen, CFP®, AIF®

Just in case you haven’t heard, Genworth has decided to suspend life insurance and annuity sales.   This decision will leave many agents and their client with questions on where to turn and how to get protected.

Insurance companies seldom discontinue a business segment when it’s either profitable or if they haven’t overextended themselves.  Remember Executive Life?

Before Executive Life of New York went under, they had over 50% of their portfolio invested in less than investment grade ‘junk’ bonds, despite the fact that in June 1987, the New York legislature had mandated that insurance companies licensed to business in that state were to limit their general portfolios to no more than a 20% allocation to such bonds.  Remember, there are no guarantees; there are only guarantors. [Source:  The New Insurance Investment Advisor, Ben G. Baldwin, McGraw-Hill 2002, p. 37.].

A qualified advisor would/should have looked “under the hood” at the company’s investment asset allocation and quickly realized it wouldn’t be used in a client’s portfolio; so, why would anyone use it to back their retirement or legacy planning?  Unfortunately, as all too often happens, insurance companies can take ill-advised risk in order to promote unrealistic return rates to pump-up sales.

Life insurance illustrations have had, for more years than I can count, a well-deserved reputation for less than transparent and amazingly inaccurate projections of what the policyholder could expect in future years.   The unfortunate result is that one of the most amazing financial products on earth – and life insurance does far more than most people even suspect – has suffered from a plethora of negative bias, both in and outside the media universe, and virtually all of it wrong.

A regulatory solution?

A recent regulatory change recently took affect that limits the growth rate an insurance company can use in its illustrations to a maximum that’s based on the company’s current ‘cap’ rate applied to an average rate history going back over 50 years.   The key is that the company can use its current cap – which actually can function as an incentive to keep the caps high, maybe even unrealistically.

This could mean – and what many unsuspecting consumers may not realize –  that it may also act as an incentive to take on additional risk in the company’s underlying general account investment portfolio.   Insurance company actuaries are good at manipulating numerous ‘moving parts’ that can make attractive caps look better than they really are.  Does a company offering a 13% cap on an indexed product really perform better than one offering only a 10% cap?   According to some extensive back-testing I’ve seen, it doesn’t seem  to be the case – expenses often play a more important role

One major problem for the typical insurance consumer is the inability to tell one company from another.  While many truly professional and credentialed independent agents do make an effort to represent only “investment-grade” companies, there are those who will represent the highest commission, which can often lead to selling substandard products for companies that appear to be substantial.  An agent who is also an investment advisor can be a benefit for the buyer.

6a017c332c5ecb970b017c384ba1fa970b-320wiWhat many don’t know

Most of the well-known rating agencies you may be familiar with are actually paid by the insurance companies they rate!   Little wonder many insurance companies that failed actually had good ratings when they went under.

Have you noticed that virtually all insurance companies tout ratings from the same rating agencies in their promotional materials?  Few, if any, however, tout their rating from Weiss, maybe because Weiss doesn’t get paid by the companies they rate – their revenues come solely from subscriber revenue (kind of like Consumer Reports).

For example, according to the September 2002 Insurance Forum, of 1221 life and health companies rated by Weiss, only 3.9% of companies made it into the ‘A’ category.  Compare that with the 54.9% rated ‘A’ by Standard and Poor’s.  At Moody’s, 90% of their list made it to ‘A’ that year.  A.M. Best gave ‘A’ to 56.3% of the companies they rated.  [Source:  The New Insurance Investment Advisor, Ben G. Baldwin, McGraw-Hill 2002, p. 405.].

By the way, Companies with ratings in the A or B brackets from Weiss are considered secure, while some of the other rating agencies will give B and even A bracket ratings to companies considered vulnerable.

Recently, indexed universal life (IUL) policies have become quite popular – both among agents and their clients.  The reasons are many, but two big attractions are (1) transparency – virtually no hidden moving parts.  These products are easy to understand; and (2) low cost – insurance costs are basically like term policies.  Admin costs are also low and, as noted, everything, including costs, is transparent, including performance going forward.

Does that mean the illustrations can be believed?  No, but for different reasons.  To understand the reasons why illustrations can be misleading and how to know you’re comparing apples with apples, it’s important to know how these policies work.

First a caveat:  This is not an exhaustive text on IUL products and there’s a lot more to know than is being discussed here.  This is simply a quick overview highlighting the stand-out characteristics.

6a017c332c5ecb970b01901bb7b3ed970b-320wiIUL basics

IULs are often, but not always, designed as financial tools for maximum cash accumulation in a tax-advantaged vehicle.  In these cases, the death benefit is often a secondary consideration; however, it’s the life insurance that buys the tax benefits – and, for many, these benefits far outweigh the cost of insurance, which is typically priced like term insurance.

Unlike most insurance buyers who want the most insurance for the least amount of money, these buyers want to buy the minimum amount of insurance for the maximum amount of premium they can put in (yes, there’s a limit).  This is because after the minimum insurance is purchased and expenses are covered, the rest goes into a cash accumulation account; and in an IUL, it can be tied to an index with much higher caps than are usually available in an annuity.

The cash accumulation account accumulates tax-deferred, but can be accessed for retirement income later as tax-free loans.   How fast does the cash accumulate?   Interest is credited to the account based on the performance of an outside index.  While there are often many choices, most people tend to choose the S&P 500 index.

To keep this simple, I’ll just quickly cover the simplest approach:  Let’s suppose our policyholder purchased an IUL policy using the S&P 500 index as the crediting option.  The policy might offer 100% participation in the index’s upside moves up to a ‘cap’ during a crediting period, typically one year.  For example, if the index rises 8% by the  policy’s 1-year anniversary date, the policyholder participates 100% in that move and receives the full 8%, provided the ‘cap’ is higher.  If the index rose by 25% and the policy ‘cap’ was 11%, the policyholder would realize a credit of 11%.

So, on a 1-year, 100% participation with a 11% cap, a 25% rise in the index means the policyholder would receive 11%, i.e., 100% of the increase up to the cap.  That amount would be credited on the policy’s anniversary date

The next crediting would take place on the policyholder’s second anniversary.   Note:  It doesn’t matter what happens between anniversaries – only the value ON the anniversary date counts, nothing else.

The good news is that if the stock market index has a drop, the policy loses nothing.  The amount credited is 0.  No gain, but no loss, either.  Another nice thing is that, in our example above, after the 12% gain is achieved, it’s locked-in.  That’s the new floor and that money can’t be lost.

To understand how beneficial a ‘no-loss’ concept is, it’s worth remembering that while a drop from 100 to 80 represents a 20% loss, to get back to 100 from 80 requires a 25% gain (20 points up from 80 is 20/80 = 25%).

How can the insurance company, investing in a conservative bond portfolio do this?  It’s simple.  Again, I’ll oversimplify with rounded numbers just to make the concept easier.  Premium money received by the insurance company might be invested 95% in bonds, and 5% in stock options.  If the market goes down, the options expire; if the market goes up, they execute the options and, of course, the cap on the policy limits their exposure.  So, the pricing of options, as well as the length, impact costs.

Important:  The policyholder is not invested in the market or the options.  The index is only a ‘ruler’ to measure how much the insurance company will credit.  It’s the insurance company’s investment account that is doing the investing, not the policyholder.

Returns and Illustrations

Can  the policyholder really receive stock market-like returns?  Not likely.  The caps limit the upside, and while there is no downside, down years representing no gain will sometimes occur.  So, positioning IULs as a stock substitute is probably not the best strategy.  I would look for returns that are more bond-like – maybe a little better – which means, it’s the bond portion of your portfolio that you’re really dealing with.

And, here’s where illustrations can be a bit misleading.

If one company is offering a 12% cap and another company is offering an 11% cap, but both are showing you an illustration using a 7% crediting rate, saying that the S&P average over all their back-tested periods indicates that 7% is conservative, are you really seeing an apples-to-apples comparison?

Now that new regulations limit the cap that can be illustrated – remember, however, it’s based on  the ‘current’ cap rates for each company applied to historical data, placing an incentive for the company to keep current rates high – it’s probably better to simply ‘level the playing field’.

First, the company:  How have they treated policyholders in the past when they’ve reduced or increased their caps?  Did existing policyholders receive the same treatment as new policyholders?   Believe it or not, not all insurance companies treat their existing policyholders the way they treat their new ones.

Secondly, a decrease in a cap rate isn’t all bad.  Responsible insurers are custodians for client assets and need to act responsibly, rather than chase risky investments to meet caps they can’t pay.  However, a decrease in the cap also can affect your outcome.

Take a look at the chart below.  Notice a 7% illustrated rate for a 12% cap IUL has had a 79.5% chance historically of meeting its projections, based on a 20-year probability study of the S&P 500 at various cap and crediting rates.  If the cap is 11%, the probability is reduced to 60.7%.

IUL Crediting Rates_001

The new regulations stress average results; but, it provides little comfort to know that your own retirement results have a 50-50 chance of being better or worse.

This has less to do with the insurance company than it does with expectations.  It’s important to know, when you’re buying, what you can reasonably expect; and, often, it may not be what you’ve been promised with a rosy illustration.   High quality companies providing investment-grade products will tend to be conservative in their projections – and a good advisor will educate clients on realistic outcomes.

Key Point:  An illustration for a policy with an 11% cap but using only a 6% crediting rate may not look as rosy as the 7% illustration, but the odds of the company delivering on its promise rises to 95%.  This means, it’s virtually certain your policy will perform this well or better.  The 7% illustration will look so much better at the point of sale, but it also has almost a 40% probability of doing worse than promised.

So, when comparing companies, wouldn’t it make more sense to have them all illustrated at 6%?  By doing so, you could see how they perform on a level playing field with a higher success probability.   You can compare high probability outcomes and, more importantly, a basis for comparing costs, as long as the policies being compared have the same features, riders, etc.

The Real Benefits

If someone begins utilizing these benefits early, say in their 40s or 50s, the retirement benefits can be substantial.  As a matter of fact,  it’s a retirement strategy being used by 85% of Fortune 500 CEOs and many members of Congress in order to create a tax-free retirement.  Other proponents of this strategy include retirement and IRA expert Ed Slott, who is also a CPA, and David M. Walker, former US Comptroller General [Source: The Power of Zero, David McKnight].

I’ve created a report on this concept.  You might find it interesting.  You’ll receive it free by going here.  If you’d rather take the time (about an hour) and view the webinar with all the slides, you can do that here.

Enjoy!.

Jim

HAVE YOU CALLED A FAMILY MEETING?

6a017c332c5ecb970b019aff2c523c970c-320wiNo?  You’re not alone.

Very few families ever sit down together and talk over important issues.   Too bad; it’s important.   It should be considered an integral component in “the business of living”.

According to an excellent article in the current issue of the Journal of Financial Planning, there are four key areas every family should discuss:

  1. Legal issues:  Who has the durable power?  Who will be executor for the wills?  Do they have trusts?
  2. Health care:  What happens if mom and dad get sick?  Who takes care of them?  Where are they going to live and how are they going to pay for their care?
  3. Financial:  Are the parents financially secure?  Will they need help from the children?  It’s a tough conversation to have, but children need to know this stuff in advance.
  4. Legacy:  More than who gets what; it’s about what you want your children and grandchildren to remember about you.

Ideally, the meeting should have a good facilitator.  Your financial advisor, if s/he’s been at the center of your financial planning – which should be the case – might be the perfect person.  The facilitator doesn’t control or direct; but, can provide an objective and worthwhile service.  In addition, you may want to include your family attorney in the meeting to address legal issues and  provide valuable input.  And, one of the adult children should be the note-taker to follow up on who is to do what and by when.

One meeting isn’t a magic pill, and it won’t correct all past problems; but it’s a start.  After all, it’s about helping parents when they’ll need it most.

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

WOMEN STILL FACE FINANCIAL CHALLENGES

iStock Images

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Even though women live longer than men, yet 80% take their Social Security at age 62 when it provides the least benefit!   That choice also reduces their cost-of-living increases because they started with a smaller income.  When you compound the lost income over a lifetime, it’s a bunch of bucks.

There’s a hidden whammy in there, too.  It’s often the woman that becomes the irreplaceable caregiver.  When they have children, many reduce their schedule and income resulting in fewer Social Security credits.  They’re also the ones who often leave the workforce to care for disabled or elderly parents.

According to a recent study, women were found to be short of retirement goals to a much greater degree than men.  The math indicates they need to save 26% more just to get even!

Maybe the question shouldn’t be whether you want to get rich.  Maybe it should be whether you’d rather have a guarantee that you’d never be poor!

Much retirement planning is flawed.  If you’d like to learn why, you might enjoy this webinar I created some time ago.

Jim

Big Changes in Social Security Claiming

Jim Lorenzen, CFP®, AIF®

Debt DespairThe Bipartisan Budget Act of 2015, passed by Congress and signed into law by President Obama on October 30, 2015, will dramatically impact two Social Security claiming strategies: restricted application benefits and voluntary suspension benefits.

Passed in order to eliminate unintended loopholes in Social Security verbiage, Section 831(a) and 831(b) of the Bipartisan Budget Act of 2015 effectively make dramatic changes to restricted application benefits and voluntary suspension benefits.  These benefits, partnered with file-and-suspend claims, allowed retirees to earn an additional $35,000 to $60,000 over the course of their retirement and can make a significant difference in retirees’ future retirement income.

Section 831(a): Restricted application

Up to now restricted applications allow those people who are full retirement age (FRA), to file a restricted application on their spouse’s record, allowing them to collect half of their spouse’s payment, while their own benefits continue to accumulate.  That was then.  No longer.

After April 30, when a retiree files, they will receive the highest benefit they are entitled to and will not have the flexibility of choosing between receiving benefits based upon their own record or their spouse’s record.   This means once a retiree reaches full retirement age (FRA), s/he will solely receive the highest benefit available to them.   So now, in order to receive delayed retirement credits, they will simply have to wait to file for benefits.  This is a concept is known as “deemed filing,” and was previously  applicable only for those who had not yet reached FRA, but will now apply to those reaching FRA and beyond.

There’s more.

Retirees can no longer elect to use a restricted application to draw upon spousal benefits while their benefits continue to grow.

The restricted application strategy for only spousal benefits, with ability to switch to their own benefits after they’ve accumulated further, will now be an option only for those people born January 1, 1954 or earlier. As long as a retiree is 62 by December 31, 2015, they can utilize restricted applications. However, if they don’t fall into this category, they will have to consider other options.

831(b): Voluntary suspension or “file and suspend”

Voluntary suspensions allow the lower-earning spouse, spouse A, to draw benefits based upon spouse B’s record while spouse B’s record is suspended. This allows spouse B’s benefits to grow by 8 percent until age 70.   No more.

Under the new law, spouse A will no longer be able to receive benefits on spouse B’s record while it is suspended, and conversely, if spouse A files for benefits and suspends, he/she will not be able to receive benefits on anyone else’s work record.   In short, if a retiree suspends their benefits, he or she cannot draw off of anyone else’s record and no one will be able to draw off of his or hers.

That’s not all.  The law effectively eliminates the ability of individuals to request a retroactive lump sum for all benefits between the date of filing and the date of suspension.   Up to now, retirees could “file and suspend”, and then elect for a lump sum of the benefits that would have been paid if the record had not been suspended until age 70 – an especially attractive feature for those people who have had poor health and would benefit from enjoying the present value of their money, rather than receiving it over the course of many years (in the form of the 8 percent higher valued payment).

Under the new law, people who have reached FRA and suspend benefits within the first 180 days of enactment of the new law will be able to take advantage of the old “file-and-suspend” rules.  Those filing more than 180 days after enactment of the bill will not, and will have to utilize alternative Social Security strategies.

Who do these changes affect?

These changes primarily affect married couples, but do in fact have some implications for those filing as single and divorced.

  • Single people will no longer be able to file-and-suspend at FRA, and then collect a retroactive lump sum. They will now have to take the highest benefit available to them at the time of filing.
  • Divorced persons will now be able to draw off their ex-spouse’s account only for “spousal benefits” if the ex-spouse has an active Social Security account. This means if their ex-spouse suspends their benefits, the divorcee filing will be left without that source of income until their ex-spouse chooses to make it active again.
  • Widows or widowers planning for retirement will not be affected and can continue to take advantage of restricted applications for survivor’s benefits.  Additionally, those who have already executed a file-and suspend strategy or a restricted application will continue to receive those benefits.

It’s important to remember Social Security optimization is different from ‘maximization’.  It’s not how much you receive; it’s how much you get to keep after taxes that counts.

If you’d like to get started on your planning, your first step can begin here!