Tuesday, September 3, 2013

Kryptonite for Retirement Anxiety

The financial world we live in today is very different than the one even 5 years ago. Death may be frightening, but to a majority of older Americans, the possibility of outliving their savings is even worse. In a new poll of people ages 44 to 75, more than three in five (61 percent) said they fear depleting their assets more than they fear dying. “One of the things in the study that was surprising to us was the level of fear” among respondents, says Katie Libbe, vice president of consumer marketing for Allianz Life Insurance Co. of North America, which conducted the poll of 3,257 people. “It was greater than we anticipated.” Additionally, 92% of respondents to Allianz Life’s study said they believe there is a retirement crisis in this country. WOW!!

Annuity sales crossed the 200 Billion mark in 2010 and 2011 sales continue to climb in double-digit leaps. This is a good time to be an annuity seller, and with the dramatic market fluctuations of late, it's a good time to be a annuity buyer. 50% of all pre-retirement boomers surveyed stated that they would put most of their assets in an investment that provides guaranteed income for life, even if it pays a low return, according to an Insured Retirement Institute (IRI) report."It's not return on my money I'm interested in, it's return of my money." The words of Mark Twain are more apropos than ever. Reaching out to the baby boomer generation( 79 million) who are marching towards retirement is an opportunity you should explore.

Changing Times

The dynamic has shifted in annuities. The spotlight has officially shifted from "how much can I accumulate" to retirement income strategies. Annuity historians may one day call this the all-about-income era. Hot buttons are "protected growth" and "lifetime income". It has only been 5 years since the debut of guaranteed lifetime withdrawal benefits (GLWB's) in the indexed annuity(IA) market. But since June 2006, we have seen carrier after carrier delve into this market. Why are people flocking to have guaranteed lifetime income, without the "handcuffs" of annuitization? Clearly, agents are selling the "income story", with historically low caps and participation rates. Second, carriers are adding "extra whip cream and cherries" for consumer appeal.

Let's take a quick refresher course. If you would like to know more about the mechanics of IA's, contact me at shawnbyerly@gmail.com

GLWB- A rider, endorsement or additional feature embedded in, or accompanying the IA that guarantees annual withdrawals at a specified level( depending on annuitants age), regardless if the account's value falls to zero.

Guaranteed withdrawal payments- the lifetime income payments that an annuitant receives under the GLWB of their annuity.

Benefit Base- The annuity's value, which the GLWB payments are based upon. This is a separate value from the account value and is only available by taking guaranteed withdrawal payments.

Accumulation Benefit, aka Rollup- A common feature on GLWB's that guarantee the benefit base will grow by a certain percentage( 4 to 14%) as long as the annuity contract is held in deferral and lifetime income payments are not taken. This percentage is not a bonus or a guaranteed annual return on the base contract. Many producers and clients get enamored by these large numbers. It can only be realized if the annuitant holds the policy in deferral and is usually limited to a certain number of years (typically 10).

Rollup Deferral Period- max number of years the rollup benefit will be credited. (10 or 20 years) Most contracts offer a "restart" after period has ended.

Remember, GLWB's of IA's are not comparable to GLWB's on Variable annuities. IA's are fixed products, and provide principal protection. Every rider on the market does have a cost. Usually around 75 bps. An important question to ask is, " Can this charge evade the principal of the contract? Surprisingly, some can. It's very important to know which contracts are the best. That's where we come in. Finally, don't get enamored with huge rollup numbers like 14%. This number doesn't mean much if the withdrawal rate is really low. The two numbers must work together.

How to Sell Annuities: Just Ask

The easiest way to start selling annuities, is to ASK your clients if they have any money in CD's or even a checking account. I've attached some great information on how to position an annuity verse a CD. Then ask this question verbatim. "If I could show you a way of getting a better return on your money while never risking your principal, deferring taxes and guaranteeing you an income for as long as you live, would you be interested in talking more?

One of our agents asked this exact question and found 400,000 dollars sitting in a checking account! His client didn't know what to do with the money and was uncertain what to invest in.That's the definition of fear.

The bottom line is this, you'll never know if you don't ask. If liquidity is a concern, we have one contract that comes with a ROP feature. The client can get their initial deposit back without paying a surrender charge. GUARANTEED! Reply to this email to the get the product guide.

There is no doubt that this is the time to educate boomers about the benefits of insured retirement strategies. Many of these strategies can help boomers grow their retirement nest egg without worry of stock market fluctuations as well as provide a guaranteed income for life.

Planning for Blended Families

 America has gone from "Leave it to Beaver" to "Modern Family." With the national divorce rate hovering around 48%, blended families are more common than ever. Blended families are typically defined as those in which one or both members of the couple have children from a previous relationship.

Let's discuss some of the unique planning issues that these families face and how life insurance can serve as an excellent tool in helping blended family clients accomplish one or more of their primary planning objectives- including treating loved ones fairly and minimizing family conflict.

Planning Needs

One of the primary objectives often heard is, "How do I treat my children from a previous relationship and my current family( spouse and children) fairly? Of course, fair is a subjective term, and will change with each individual.

Some clients may feel their children from a previous relationship do not have any claim on assets until those assets have been fully utilized by the current family. This attitude may be sowing seeds for family conflict between a stepparent and client's children and between blood-related siblings( half brother and sisters). One thing is for certain; asking open-ended questions that draw out the relationship dynamics between current and previous family members is crucial.

Use this, " Dear Mr/ Mrs. Client, have you decided how you are going to take care of your your previous and current family while minimizing conflict and taxes?"

Exploring Trust Options

There are a number of trust structures that can be used to assure the current family has access to the client's assets, and then the remaining assets can be available to all children, typically upon death of the first spouse. However, depending upon the age of the current spouse and children, it may be a long time before first relationship children have any access to assets, and there may be no assets left to use.

An example might help to explain the issue. Brent is 56 years old and has two children from a previous marriage who are in their late twenties. Brent is currently married to 35-year-old Patty and has two children with her, ages 13 and 10. Tom has separate property of approximately $5 million, and his attorney recommends that at Tom’s death his assets be transferred to a qualified terminable interest property trust (QTIP).

With a QTIP, the assets transferred at Brent’s death will qualify for the unlimited marital deduction and will not be subject to estate taxes. However, at Patty’s death, the assets inside the QTIP will be subject to estate tax—none of which can be sheltered by any of Patty’s estate tax exemptions, since she did not own the assets outright.

In addition, the QTIP is generally limited to providing Patty income only and cannot make distributions from trust assets unless Brent has given the trustee the option of distributing trust assets to Patty for her health, education, maintenance and support. While these are broad provisions, Patty would still have to make an appeal to the trustee for a distribution. This is probably not a good position for Patty.

Worse yet would be to have one of the children from the previous marriage as the trustee and be in charge of making this decision. Yet, having Patty serving as trustee could have both tax and emotional issues.

Brent’s children may not receive their share of the inheritance for 40 years or more, and during that time may have a strained relationship with their stepmother. Why? The children from the previous marriage and Patty each have different objectives when it comes to Brent’s assets, and Brent has almost assured a fight among the family members. Brent likely did this planning in part to have some form of control over how his assets would ultimately be distributed while also trying to be fair to Patty and his current children.

While not suggesting the QTIP structure wouldn’t work in all family situations, Brent might consider an easier solution that would allow him to achieve his primary objective of providing for his current family while treating all of his children fairly.

Life Insurance: No Conflict and Fair

Brent might consider leaving all his assets to Patty and replacing a portion of their value through a guaranteed universal life insurance policy. He might not feel that his adult children should share equally with his current spouse in his wealth at his death, so Brent's insurance planner must work closely with him to decide how much his older children would get at his death and how the benefit would be paid out.

Like a lot of clients, Brent’s two older children are very different. His daughter has an MBA and is settling well into her career, while his son is pursuing a career as an artist and struggles to pay his bills each month.

Brent could have the policy owned by a trust and the trustee could then decide when and how much would be paid to either child. However, Brent wants to keep it simple and does not want to have to pay a trustee or have other family members involved in managing the trust (remember, his goal is to minimize family conflict).

Brent could purchase a guaranteed universal life insurance policy and split the death benefit through the beneficiary designation so that his daughter would get a lump sum (50 percent of the insurance proceeds) and his son would get a payment every month from the insurance company for eight years to help him better manage the inheritance from his father. To learn more about the this no cost Income Provider Option from Transamerica, email me at shawnbyerly@gmail.com Brent likes the flexibility offered by the carrier: He can change the payout arrangement to his children before his death, but the payout selected becomes irrevocable at death.

Keep in mind that under this arrangement Brent would have the life insurance proceeds included in his estate for tax purposes. Even so, since he can now leave the bulk of his wealth to his current spouse and those assets qualify for the unlimited marital deduction, this arrangement may not result in any negative estate tax consequences using a portion or all of Brent’s available exemption.

Dealing with Family Estates

Many blended families may not be at the same level of wealth as Brent and may have the issues of fairness centered around one particular asset such as the family home. Again, the special circumstances unique to each family will dictate the actual planning, but often the children from the first marriage may show resentment at having the “family home” left to the stepparent at their father’s or mother’s death. Often the client feels similarly and would like to have the current spouse reside in the family home for the rest of his or her lifetime, but then have it transfer to the children upon the stepparent’s death.

Such life estates are fraught with financial and emotional issues. Do the children really want the family home, particularly if they might not get it for 20 or 30 years? If there are multiple children, who would reside in the home once it is transferred? Is it located where any of the children want to live? Who pays for house maintenance during the stepparent’s lifetime? Who pays the property taxes? Does it have a mortgage now, and who would be responsible for payments after the owner parent dies?

There are really two important questions when dealing with family real estate.

1. Does the current spouse want to live in the house after the death of the client?

2. If so, is there really any reason to preserve the actual house for the kids?

Most of the time family friction can be resolved through the payment of cash to the kids. The real estate goes to the second spouse without restrictions. Certainly, that spouse might sell the house or even leave it to his or her heirs at death. If so, the first family loses control over the real estate; yet if they are made whole with cash, does it really matter? It's been my experience, that this happens only when the piece of property has very high senitmental value.

In these situations, an insurance planner can often help the client understand that what the children might really want is the value of the home. The client has control in what the first family children get by determining the “fair” value, rather than the real estate market.

Once that question has been answered, a guaranteed universal life contract can be structured as previously discussed to replace the loss of the home for the children from previous relationships. Most people who have dealt with a blended family can attest that, upon the death of the parent, the fact that he or she provided cash to the children of the first family dramatically reduces family tension between current and previous family.

Life Insurance:Conflict Resolution Solution

One of the best tools to provide cash for completion of the “fairness” plan upon a triggering event like the death of a parent is life insurance. It can be seen as the conflict resolution solution. Using a guaranteed universal life policy means the client can fund it and not worry about product performance impacting the death benefit to be paid to the first family. Of course, that same client may need to leave a portion of the insurance for the current family in case they become financially compromised by his or her death.

Depending upon the blended family and the type of wealth involved, life insurance on a blended family parent for the first family may be the best option for keeping it “All in the Family.”