All About Life Insurance and Annuities
Plus Advanced Strategies
- Term insurance is a low premium life insurance policy. Owners most often apply the death benefit to final expenses, or mortgage payments, or mortgage payoff, and/or a legacy for children. This depends on the face value of the policy.
- Whole life insurance builds up cash value. It act like a bond in that the policy owner has a real asset.
- Guaranteed Universal Life (GUL) is like a money market fund
- Index universal life (IUL) is like an equity investment with brakes. The cash value earns interest and compounds based on a market correlation, say the S&P market average. The index here however, stops loss of the current value of the cash in the policy. And the owner retains the full death benefit.
- Life insurance is paid over time. Premiums are paid monthly, quarterly, semi-annually, or annually. Except for term insurance, the faster the funds enter the account the greater the compounding—and the higher the accumulated cash value. So, an annual payment made at the beginning of the cycle or year would earn the maximum amount. The payment periods typically run 10 or 15 years. This cash is also the collateral cash value for the (larger) death benefit.
- The owner is permitted to borrow from the cash value of an IUL or a whole life insurance policy without any penalty or tax.
- IULs and many whole life policies often include additional and low-cost optional riders which create customized coverage at a very low additional monthly price.
- TrustedAdvisory Advanced Strategy advises on qualifying individually, and on strategic design of life insurance as a business asset. The index universal life (IUL) life policy, for example, is unleashed when it is designed and customized to specific purposes for a specific business. The IUL can be tailored to achieve multiple objectives. For example, the cash value of the premiums compound. The compounding funds may be borrowed by the policy owner without penalty or cost. All the while this IUL has become a new and tax advantaged asset for the business. And not only for exit strategy plans. The policy can be designed to fund owner and partner retirement and key employee-stay incentives, it can enhance the terms of a buyout or sale, and/or finance the sale or transfer of the business. Properly-designed distributions are most often tax free. The success is in the collaboration. Drawing on the collective input of trust attorneys, CPA counsel, our valuation experts, our benefits expert, and others the plan simply makes financial sense.
- Our accounting/CPA group, understands that by rethinking a client's business and life you can open substantial tax savings. This is not magic and it's no Al Capone trick. The reduction (and your subsequent cash reallocation) simply apply the tax code. And the knowledge that comes from experience.
- Our Exit Consulting Group. These are exit strategy specialists who lead the busy business owner to see his business from various other points of view. These POVs include: The prospective buyer. The key employees. The spouse or partner. Investors. Children of the owner. Grandchildren of the owner. If the owner has been charitably intended—from the community point of view. Each of these is an opportunity for the owner who is selling, or transferring, or merging the business.
- Tax Solutions with engineering make finance very analytical] Cost segregation studies are not uncommon to reduce taxes. But what is uncommon, is having a study done properly and thoroughly. Add in a regular review for the IRS and you're beginning to see the difference between trust and winging it. A business that has made investment in property and equipment must know how its value and how to use it. Such conversations often move into filing for R&D Tax credits. Research and development (R&D) credits are substantial. They are useful to your CPA and your CFO because they become real cash assets. Start-ups, particularly, benefit from these credits. The cash boost can move a company from development to launch and profitability—faster.
- Other professional provider members available by request.
Advanced Strategies for Business Owners
Elsewhere I mentioned the team of teams. Because our effort is concentrated on working with our client's current
advisors—some of these services below are directed to business owners. (The is a partial list and it is confidential
at the vendors' request. Please contact me if you are interested in knowing more about any of these services for your business.)
- Where life insurance builds up value during the life of the policy, an annuity is established for the owner to draw down value over time.
- Literally hundreds of annuity products are available. We operate simply: Which carrier/annuity will perform best for the client and the need?
- Annuities are paid in lump sums. The whole account earns interest based on the terms of the policy. Those terms may track and index, bonds or stocks. A professional will help you match your objective to the correct strategy and annuity. For example, A SPIA is a single payment immediate annuity from which the owner will begin right away receiving payments while they also accrue interest—through to exhaustion of the money. Annuities are often used to limit taxes to the interest accrued. Most annuity providers encourage the capital to build up for a minimum of 2 or more years. This does a few things: It ensures grows the initial capital before drawdowns begin. In some annuities, the growth establishes the basis of the future income paid out for life.
- There are three core objectives for annuities: What do you want to happen? What are you looking for—? 1) Income? 2) Safe Growth? or 3) Maximize Your Legacy or Death Benefit? This decision focuses the search to the best annuities for you—right now. Annuities are held through the surrender date. At that time they can be rolled over, still tax deferred, into a new annuity or annuities.
Real Questions from Real PeopleWhere does an insurance company get the money to pay (everyones') claims?
Real Questions from Real People
It's a big question from Chris. Here are the basic economics of insurance and annuities...
Insurance companies invest the money paid in so that the pool of funds for your contract will always cover the claims. During the term there may or not be fees. Each insurance or annuity contract is different. Insurance companies can invest in almost anything. Real estate is favored by many companies. Another factor is the insurance industry's grasp of numbers. Wall Street markets using numbers, insurance companies live by numbers. Life insurance, for example, relies on actuarial projections.
It is said that the insurance industry can tell you how long you are likely to live, but it cannot tell you when you will die. These figures alongside large carefully constructed portfolios of investments—many in real estate and commercial loans—ensure the company's ability to cover claims.
Real Questions from Real People
I just bought an annuity a few months ago—why is there is a charge for "market value adjustment." I thought I had no market risk!
Annuities pay a defined benefit and are likely to invest conservatively—in bonds and indexes. In a volatile economies tend to balance each other. The intentional balancing helps keep fluctuations in the annuity value contained. Remember, most (but not all) annuities are designed to grow the compounded total annuity value for several years before any client withdrawals are taken. Over time reductions tend to correct.
In your annuity statement, the Market Value Adjustment is the measure of your small stake in the whole fund from which your annual interest is paid. The effect of changes in bond interest rates and bond prices (interest up/bond price down, and vice versa) and in index measurements. With a long view indexes look volatile and they are. The bond and index balance offsets wild swings in value.
Some individual annuity products—and this is the case for the woman asking the question—offer an up front interest bonus. In her case the up front bonus was 17%. Enough to offset short term bond volatility for several years. In any case, annuities versus direct stock investment are still less volatile and are giving you tax advantages that equities do not. bonus.
Real Questions from Real PeopleWhat is qualifying?
Real Questions from Real People
A lot of people resist simple questions. Not Karen. And she's absolutely right to ask about qualification for life insurance. Qualifying is important to understand, too.
The primary tool for insurers is built into quoting. Actuarial tables are based on millions of lives over time. These provide reliably useful data on life expectations. They are calculate based on simple inputs. The inputs include: Gender, age, smoking status, general health. This is enough information to generate reasonably accurate price of premium. The insurer however, will need more for to commit to a potentially big payout from them. This is where qualification comes in. It is inside the application process and it is just a deeper dive into your living risks.*
If something crops up in the review the carrier has a few options. 1) They may "rate" the insured. That is, they will insure but at a slightly higher premium. 2) They can also decline the applicant. This response can be very disappointing, but it is not the end.
Several companies will provide guaranteed issue life coverage. The policy is likely to cost more, but you will be covered by a respectable company.
samples. Larger policies usually require this. Simplified issue, what I outline here, uses a simple medical
Q&A with a HIPAA authorization. Guaranteed issue has no medical requirement to qualify.