EIUL Admin

IUL as a Roth Alternative

IUL as a Roth Alternative–Webinar Feb. 25th

                Join us Thursday, February 25 at 1 p.m. Est. for a WEBINAR where we will break down the math of using IUL vs. Roth 401(k) plans and help attendees learn how to properly illustrate the comparison between the two.

https://attendee.gotowebinar.com/register/79940365079113218?source=email2

                We are sure many of you have been watching the markets absolutely tank thus far in 2016. We know many Americans have watched with horror how the values in their 401ks/IRAs have taken a hit.

Those advisors who have used Indexed Universal Life (IUL) insurance as a wealth-building tool have done well by their clients and have helped them avoid not only the recent turbulent times, but also those to come.

Math Doesn’t Lie

Market pullbacks are the perfect time to have a discussion about using IUL as a tax-favorable wealth-building tool. Why? The math doesn’t lie.

Unfortunately, many planners and money managers (and by extension, their clients) don’t understand the math around market pullbacks and rebounds. It all centers around the difference between the geometric mean and the arithmetic mean. The arithmetic mean is easy to understand. It is what most are accustomed to when thinking about averages. You add up numbers and then divide them by the amount of numbers you added up. You come up with one number that represents that average of those added. Helpful if you were trying to determine your grade in school. Not helpful if you are trying to figure out your average rate of return on your portfolio.

Once you introduce money into the equation the arithmetic mean doesn’t work. Let’s explore that.

Plus 10% year 1, followed by a 20% loss in year 2, and then followed by a 30% return in year 3. 20% /3 = 6.667%, right?

If you had a $500k account that means you would end up with $606,820 after 3 years with 6.67% growth. But is that how it really works??

$500,000 * 1.1 (10% return) = $550,000

$550,000 * .8 (20% loss) = $440,000

$440,000 * 1.3 (30% return) = $572,000

Over 3 years that is a 4.59% return. And THAT is the geometric mean…

If you could boil down the geometric mean to a single idea that every client should understand, it would be this: losing your money hurts you far more that gaining money helps you.

People love the idea of unlimited upside. Maybe it reminds them of playing the lottery. There is a chance they could absolutely strike it rich! But they don’t understand the basic principle we outlined above. What if you could absolutely eliminate losses? There would be a cost, or course. What if that cost took the form of limiting your upside to say 50% of the market performance? Our example above would look like this:

$500,000 * 1.05 (5% return) = $525,000

$550,000 * 1 (you eliminate the loss) = $525,000

$525,000 * 1.15 (15% return) = $603,750

By simply eliminating your losses in exchange for HALF the market upside your 3-year return soars to 6.49%.

A two percentage point increase over just a 3-year span for taking LESS RISK!

When properly explained, clients flock to this concept. You just need to know how to talk about it. So what do you call this concept?

IUL as a Roth Alternative

Again, the math doesn’t lie. When you look at the historic returns of the stock market, assume those returns are in a Roth IRA or Roth 401(k) and compare the after-tax income that can be taken from the Roth vs. what could be removed tax-free from an IUL, the IUL wins.

There is no mathematical debate about this if you use “real world” numbers.

There can be a debate as to whether a client wants to forego funding a Roth IRA or 401(k) to fund an IUL, but that debate can only take place after the advisor and the client understand the math.

That’s what we will be discussing on our webinar.

                Annual Reset! don’t forget the concept of an annual rest (annual policy gains being credited to the IUL and then ‘locked in’ never to be lost due to a market downturn). The annual reset is both simple and powerful. It’s what makes IUL unique in the market and why many clients choose to use them for tax-favorable/risk-resistant wealth-building tools.

An IUL is not an end all be all product. It isn’t for everyone. But for many clients, allocating X amount of dollars to an IUL will be a prudent thing to do.

The goal with our webinar will be to help advisors understand the math of comparing IUL to Roth IRAs/401(k)s so they can have a full disclosure discussion with clients about the best tools to use when planning for retirement.

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Pac Life Suspends Sales of 79 Plans

Did you read last week’s newsletter titled: DOL Regs. Make Insurance Agents and Series 7 Licensed Advisors Fiduciaries? If not, click on the following link: http://www.pomplanning.net/dol-regs.

Pac Life Suspends Sales of Section 79 Plans

I just confirmed that Pacific Life Insurance suspended all sales of their “Section 79 Plan.”

Why are sales being suspended? I don’t have a definitive or “on the record” reason, but I’ve been told that the reason is IRS related.

Section 79 Plans are not worth Implementing regardless of any current IRS issues.

I’ve been warning about Section 79 Plans for several years. From a pure financial standpoint, I do not believe these plans are worth implementing. In fact, I was so disgusted with how these plans are sold that I created a consumer protection web-site (see www.section79plans.net which discusses in detail why I don’t like these plans). Keep in mind there is more than one company that sells Section 79 Plans.

Too much greed-even though I’ve been warning about these plans for years, hundreds of agents continue to sell them. Why? Greed. Section 79 Plans pay some of the biggest commissions in the industry.

Clients are the losers–as is typically the case, if clients who have these plans get audited and if the IRS wins the audits or if most clients give in to avoid the costs and consequences of what could be a failed defense, they will lose.

Section 79 Plan EIUL policies are traditionally designed to not be very good from a cash accumulation standpoint. They are designed that way in order to “maximize the deduction.” I can’t imagine anyone buying a Section 79 EIUL policy unless they were getting a 30-40% deduction when buying it.

The consequence of negative audits is that clients are going to be stuck with not very good EIUL polices that essentially will have been funded with non-deductible dollars.

The moral of the story? Don’t sell programs that sound too good to be true. Don’t sell programs that are not in a client’s best interest. Finally, when I say I’ve researched a topic and that it is one I don’t recommend, consider taking my recommendation no matter how much money you could make.

Growing your sales–one reason advisors sell Section 79 Plans is because they sound unique and beneficial. It’s an attention grabber and can help them get new clients.

The one question I’ve been getting asked more lately is what’s the “best” marketing platform? I hate to say that it’s not any of the unique marketing tools I offer through www.strategicmp.net.

The best marketing platform in the industry can be found at www.pomplanning.net. The POM Planning platform will not only help you grow your business, but it will help keep you out of compliance troubles.

If you can’t pick up millions in AUM using a platform with the following metrics, you can’t sell.

Why POM Planning? It is a low drawdown risk/tactically managed platform made up of 13 terrific managers.

-The top three “conservative” strategies have an average Beta of .24* (the S&P has a Beta of 1.00). The average annual return for their top three “low-risk” managers going back seven years is 9.19%* net of fees (truly incredibly for “low-risk” strategies).

-The top three “moderate-risk” strategies have a Beta of .296.* The average annual return for their top three “moderate-risk” managers going back seven years is 15.29%* net of fees* (again truly incredible for “moderate-risk” strategies).

*Click on the following link to download a summary of the annual returns and risk metrics (like Beta) of POM Planning’s 13 tactically managed strategies: www.pomplanning.net/annual.numbers. Past performance is no guarantee of future results. Investing is risky and investors can and do lose money.

Copyright 2015

Webinar Thursday, May 21st  1 pm EST ”
College Funding-How to Utilize IUL as a College Savings Vehicle

https://attendee.gotowebinar.com/register/2480091776668644610?source=email2 

                For several years uneducated advisors have been listening to IMOs tout the virtue of using cash value life (IUL) as a college funding vehicle.  In the majority of fact patterns, using IUL to fund for college is a sure fire loser. In this webinar the speakers will explain why that is the case.

The webinar will also cover and explain the fact patterns where IUL can work as a legitimate college funding/retirement vehicle for clients. If you’ve been pitched the idea of using IUL as a college funding vehicle (or if you are actively selling IUL as a college funding vehicle), this is a webinar you’ll want to attend.

Why Become a Certified Medicaid Planner™ (CMP™)Webinar May 18th at 2:00 pm EST.

                There are only 10,000 people turning 65 every day in America. It would make only too much sense to learn a topic that can be used to help many of these potential clients. The CMP™ is the ONLY indepenantly accredited designation of its kind. To learn more, click on the following link to sign up for our informational webinar: https://attendee.gotowebinar.com/register/7292182483320660994.

The content of this newsletter is NOT for public use and should not be used without prior written consent of The Wealth Preservation Institute.

Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™
Founder, The Wealth Preservation Institute
144 Grand Blvd
Benton Harbor, MI 49022
269-216-9978
www.thewpi.org

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DOL Regs. Make Advisors Fiduciaries

Did you read last week’s article titled: NY Times Hammer Athene but A.M. Best Gives Upgrade? If not, click on the following link: http://eiultraining.com/ny-times-hammers-athene.

DOL Regs. Make Insurance Agents and Series 7 Licensed Advisors Fiduciaries

                Recently the DOL (Department of Labor) put out a set of new proposed regulations that cover advice given to clients who have money in qualified plans and IRAs. To read a summary of the new regs. (which include some stunning fee/commission disclosure language), click on the following link: http://www.pomplanning.net/new-dol-regs.

Best interest of the client—I find the fact that many advisors are all up in arms about these new regs somewhat comical. Who would argue that “ALL” advisors should “ALWAYS” be giving advice that’s in their client’s best interest? Apparently B/Ds and Series 7 licensed advisors would make such an argument and that argument will now fail.

ALL advisors are now “fiduciaries” (including insurance agents and Series 7 licensed advisors)

Under DOL’s proposed definition, ANY individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary.

The fiduciary can be a broker, registered investment advisor, insurance agent, or other type of advisor.

A game changer?—for three years now the writing has been on the wall when it comes to insurance agents having to obtain some kind of a securities license in order to avoid regulatory issues with the “source of funds” rule.

There are many in the industry who have advised insurance agents NOT to get a series 65 license because doing so would make them a “fiduciary” and would increase their liability. I’ve strongly stated that I think this opinion is dangerous, but now with the DOL regs. pertaining to assets in IRAs, my position that EVERY insurance agent should get a Series 65 license has been greatly strengthened.

Since the DOL’s new regs. state that ANY advisor giving advice to clients about money in their IRA is a “fiduciary,” insurance agents might as well become fiduciaries by obtaining their 65 licenses.

Best interest of the client

The new DOL regs. are trying to force advisors to truly give advice that’s in their client’s best interest. It’s a novel idea in an industry that rarely puts the client’s interest ahead of the B/D, IMO, or advisor’s interests. I can’t wait for the lawsuits against advisors who violate this rule. They hopefully will run many out of the business.

The “best” way to comply with these new regs. is to get a 65 license and incorporate the use of the www.pomplanning.net platform.

Think about it; if there was an AUM platform with the following statistics, arguably, wouldn’t such a platform have to be offered to clients in order to comply with the best interests of the client rule?

-The top three “conservative” strategies have an average Beta of .24* (the S&P has a Beta of 1.00). The average annual return for their top three “low-risk” managers going back seven years is 9.19%* net of fees (truly incredibly for “low-risk” strategies).

-The top three “moderate-risk” strategies have a Beta of .296.* The average annual return for their top five “moderate-risk” managers going back seven years is 15.29%* net of fees* (again truly incredible for “moderate-risk” strategies).

*Click on the following link to download a summary of the annual returns and risk metrics (like Beta) of POM Planning’s 13 tactically managed strategies: www.pomplanning.net/annual.numbers. Past performance is no guarantee of future results. Investing is risky and investors can and do lose money.

Summary

It’s a new day and Series 7 licensed advisors who are used to selling loaded mutual funds or insurance only licensed agents who are used to selling massive amounts of FIAs in IRAs is coming to a close.

One trick ponies (advisors who offer a limited amount of options to clients looking to protect and grow wealth in qualified plans/IRAs) are looking at lawsuits for violating the new DOL fiduciary standard regs.  Advisors who plan on continuing to go after the IRA market better wake up or the DOL may be coming to visit you.

For insurance agents, you better think seriously about getting a 65 license.

For Series 7 licensed, advisors, this is the excuse you need to go independent and get away from your B/D (I know the majority of Series 7 licensed would like to leave their B/D and go “independent).

The content of this newsletter is NOT for public use and should not be used without prior written consent of The Wealth Preservation Institute.

Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™
Founder, The Wealth Preservation Institute
269-216-9978
www.thewpi.org
www.cmpboard.org
Author of: The Doctor’s Wealth Preservation Guide; The Home Equity Management Guidebook; The Home Equity Acceleration Plan; Retiring Without Risk; Bad Advisors: How to Identify Them; How to Avoid Them; and Peace of Mind Planning: Losing Money is No Longer an Option.

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NY Times Hammers Athene

Did you read last week’s newsletter titled: Alert: Minnesota Life Suspends EIUL Sales? If not, click on the following link to read: http://eiultraining.com/alert-mn-life-suspends-eiul-sales.

Recently an advisor forwarded me an article in the NY Times that really blew me away. To read the entire article (which I highly recommend), click on the following link: http://eiultraining.com/ny-times-article. The article outlined how Athene (formerly Aviva which was formerly Amerus Life) ended up investing in Caesar’s casino at a time when everyone thought the casino would go bankrupt (see Debt-ridden Caesar’s Buried in Financial Woes).

Why would an insurance company who has policy holders to take care of invest in a casino that might be going bankrupt? That’s a question for Athene’s parent company Apollo to answer.

In addition to the Caesar’s investment, the NY Times article outlined a complicated shell game Athene has apparently been playing with reinsurance carriers in order to meet certain reserve requirements with the state. The article will send shivers up your spine if you’ve been selling Athene.

Then last week I got the announcement that A.M. Best upgraded Athene from B+ to A-.  If what the NY Times article says is accurate (and I’m sure if there were issues with the story there would already have been a lawsuit filed), it would seem to defy logic that Athene received an upgrade.

Most IMOs Have an Agenda

What’s somewhat pathetic in our industry is that instead of others in the industry (like IMOs) making insurance agents aware of the NY Times article, all I received were two e-newsletters from IMOs touting the fact that Athene received the upgrade.

Why? A logical guess would be that the IMOs touting the upgrade, but not making agents aware of the NY Times article, is because Athene is one of, if not, “the” major carrier the IMO pushes. That means the IMO’s year-end bonuses, etc. are determined by how much premium goes into Athene products. Because the A.M. Best upgrade will help agents feel better about selling Athene, it will then help the IMO be in the best position to reach its bonus levels.

This is the EXACT thing that’s wrong with our industry.  And you wonder why it was so easy for me to write my book Bad Advisors: How to Identify Them; How to Avoid Them (www.badadvisors.com).

Risky Moves in the Game of Life Insurance

The above is the title of the NY Times article (which is quite long and somewhat complicated). As I stated, in addition to the risky investment in Caesar’s casino, the article mostly focused on the use of “captive reinsurance” as a way to increase reserves on paper but apparently not in reality.

The article gives the history of Aviva (now Athene) and how it was doing very well financially back in 2006. However, in 2012 Aviva’s international owner decided to sell to Apollo for $1.5 billion. The article states that Apollo actually paid $2.2 billion for Aviva but that it only paid $400 million of its own funds for the sale (the remainder came from an “extraordinary dividend” paid by the target company).

Then things get really complicated. I’ll simply quote from the NY Times article which does a great job explaining the shell game:

Apollo wanted only Aviva USA’s annuities business, which it could reinsure through an affiliate in Bermuda. A spokesman said Athene provided $2 billion to the affiliate “to support the new risks it assumed.” In addition, Apollo brought a second company into the acquisition, Accordia Life and Annuity. Accordia was a new insurer created by Global Atlantic, a Bermuda company controlled by Goldman Sachs. As soon as the acquisition closed, in October 2013, Apollo transferred the life insurance business to Accordia.

If Accordia followed the N.A.I.C. rule book, it would need about $7 billion in high-grade assets to secure the obligations. But it didn’t have that much.

So instead, Accordia set up six subsidiaries to reinsure part of the business for less. Iowa granted a “permitted practice” exception, allowing i.o.u.s to back the obligations instead of the solid assets, like bonds, that the N.A.I.C. requires.

Public financial documents in Iowa show that Accordia followed a pattern set by Aviva. The company and its parent declined to confirm the details in those records or comment on the record.

Four subsidiaries, in Iowa and Vermont, were to serve as Accordia’s reinsurers. Accordia sent them some bonds, but nowhere near enough to secure the $3.3 billion worth of obligations that they were to reinsure.

There is much more in the NY Times article and I’m not going to take up more space in this newsletter to try and tell you what the NY Times does such a great job of explaining in their article (again, I recommend everyone read the NY Times article).

My Point

My point with this newsletter is trust is something that needs to be earned, not given out blindly in our industry.

The NY Times article coupled with the lack of disclosure by IMOs pushing Athene products proves again that you can’t trust our own industry.

I certainly wouldn’t trust IMOs that push Athene if they didn’t also disclose the NY Times article. Don’t you think potential buyers of Athene products should be aware of these issues before deciding to buy? Of course they should.

I’ll leave it up to readers to determine if they should be selling Athene.  For me, my answer is no thanks.  If Athene ended up having the “best” product mathematically for a particular client, I would recommend disclosing that to the client, but then telling the client of the issue in the NY Times article. If the client still wants to buy the product, that’s their choice, but at least it then becomes a fully informed purchase that can’t come back on the agent if Athene can’t meet their financial obligations to the client.

The content of this newsletter is NOT for public use and should not be used without prior written consent of The Wealth Preservation Institute.

Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™
Founder, The Wealth Preservation Institute
269-216-9978
www.thewpi.org
www.cmpboard.org
Author of: The Doctor’s Wealth Preservation Guide; The Home Equity Management Guidebook; The Home Equity Acceleration Plan; Retiring Without Risk; Bad Advisors: How to Identify Them; How to Avoid Them; and Peace of Mind Planning: Losing Money is No Longer an Option.

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Alert: MN Life Suspends EIUL Sales

Before I get started, if you didn’t get a chance to attend last week’s webinar on why every advisor should obtain a Series 65 license, you can now watch it on recording by clicking on the following link: www.pomplanning.net/why-get-a-65-license.

I also wanted to remind everyone of this week’s webinar on Thursday the 23rd at 1:00 pm Eastern. The webinar is a VERY IMPORTANT one where we will be explaining in plain English the new/restrictive EIUL illustration regulations that are set to take effect in September.  If you sell or are thinking of selling EIUL policies, you really need to attend this webinar.

To sign up for this webinar, click on the following link: http://eiultraining.com/new-regs-webinar

Minnesota Life Suspends EIUL sales–I raised an eyebrow this week when I saw the following announcement:

Suspending Captive Insurance Sales Practices

As of Today, Friday April 17th, Minnesota Life and Securian Life are suspending the sale of life insurance policies where the sale involves the use of Captive Insurance Companies. The suspension of business will remain in effect while we review the practice.”

Why did this announcement raise an eyebrow? Because most agents/IMOs that peddle what I consider unsuitable IRA rescue sales (if you don’t know what these are, go to www.stopirarescue.com) use MN Life when making such sales. I’ve been asking MN Life to put a stop to these sales; but my requests, to date, seem to have fallen on deaf ears.

This recent announcement was a pleasant surprise. It’s nice to see MN Life (or any insurance company for that matter) turn away large life insurance sales. Usually this happens when lawsuits have been filed on a sales concept and/or when the IRS turns its eyes to what it sees as an abusive life insurance sales concept that revolves around a “tax-deductible” way to buy life insurance (remember the old days of 419 Plans?).

Captive Insurance Companies (CICs)

Many advisors are not familiar with CICs.  I’ve been writing about them for well over a decade, and I recommend their use when appropriate. They are actually one of my favorite “advanced” planning tools for affluent business owners to mitigate risk and grow wealth in a tax-favorable manner.

If you would like to sign up for an educational webinar on CICs, click on the following link: http://ows.strategicmp.net/page/life/affordablecics

In a nutshell, CICs are real insurance companies formed to receive premiums typically from closely held businesses. A CIC is typically owned by the business owner(s) or a trust for the benefit of the heirs of the owners.

With a good claims history, money accumulated in a CIC can come out at the long-term capital gains tax rate which makes it an attractive tool for profitable business owners (their companies get a deduction when paying the premium).

CIC Abuses

What I’ve seen in the market and what I hear the IRS is now focusing on are CIC that use life insurance as an investment (some put as much as 90% of the CIC premium into an EIUL policy).

Technically, the use of Cash Value Life (CVL) insurance in a CIC is not prohibited. Actually, the investments of assets inside a CIC really are none of the IRS’s business. The IRS should be focusing on whether the insurance issued was real (was it underwritten correctly or was bogus underwriting used to inflate the deduction).

As was the case with 419 plans and other insurance sales topics, some CIC administrators are promoting the use of CVL inside CICs and allowing what industry experts think is excessive when it comes to the use of CVL as an investment for the reserves.

Again, because there are no industry guidelines for CICs, administrators are free to allow what they think is best when it comes to using life insurance as an investment inside a CIC.

The following is the restriction of the CIC administrator I work with:

Today, any funds placed into a life insurance contract, of any sort, is not considered part of the solvency tests run by the actuaries (meaning those funds are not available to pay claims) and thus, if too much is used, the IRS potentially could consider it a sham transaction and go back and apply taxes, penalties and potential fraud. Yes, there are captive companies that do this and the IRS is currently investigating a number of them! Point is we do not want to create unintended consequences. Now with this said, we do allow a portion of the reserve funds to be used for life insurance subject to approval by the actuaries but definitely not the first year; when and how much are predicated by certain “facts”. We will take whatever amount you or the client might propose in subsequent years as the premium and submit this to the actuaries and they will tell us the amount that would be allowable at that time; typically this comes from what is considered “surplus” within the reserve account.

I don’t fully agree with the above because, if you use a high cash value policy in a CIC (one that is 90% liquid from day one), it is available to be used to pay claims; but this administrator is trying to be over- the-top conservative considering they know the IRS is looking at this as a reason to disallow the deductibility of the business owner’s deduction of the CIC premium.

Summary

The saying ….“pigs get fat and hogs slaughtered” is certainly applicable when dealing with CICs and CVL insurance.

There are too many hogs out there right now putting far too much money in CICs into CVL insurance. They have brought unwanted/unneeded attention to the CIC industry, and that may have negative effects on the industry as a whole. Only time will tell. If you are working with a CIC administrator who allows more then 30-40% of the reserves to go into CVL and if this is allowed within the first 15 months of paying the first year’s premium into a CIC, then, in my opinion, you are not working with a CIC administrator who understands the current environment and issues with the IRS (in other words, you need to find a new administrator).

Did you see my newsletter from a few weeks ago? IL Court Holds that FIAs ARE Securities and NAFA is Freaking out! To read, click on the following link: www.pomplanning.net/il-deems-fias-securities

The content of this newsletter is NOT for public use and should not be used without prior written consent of The Wealth Preservation Institute.

Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™
Founder, The Wealth Preservation Institute
269-216-9978
www.thewpi.org
www.cmpboard.org

Author of: The Doctor’s Wealth Preservation Guide; The Home Equity Management Guidebook; The Home Equity Acceleration Plan; Retiring Without Risk; Bad Advisors: How to Identify Them; How to Avoid Them; and Peace of Mind Planning: Losing Money is No Longer an Option.

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