Transcript Case Studies of Life Insurance for Middle America

The Road Ahead, Or Not Taken?
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The County “Poor Farm”
Case Studies of Life
Insurance for Middle
America
2005 NAIFAmn Roadshow
Presented by:
Robert J. Hanten, LUTCF, FIC
Some Background Assumptions:
The Middle Class in under financial
stress much of it due to increasing
government costs.
 The American middle class needs to
mature collectively and learn to take
care of itself and should no longer look
to government or their employers to act
as a parent.
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The middle class is underinsured for
both disability insurance and life
insurance and employee benefits can
no longer be seen as a reliable way to
provide long term insurance coverage
without contract portability.
 The middle class needs to meet with
financial advisors that specialize in
individual products.
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NAIFA members need to care
for and help the hoi polloi to
become self reliant.
hoi polloi (\hoi-puh-LOI\, noun:
The common people generally; the
masses.
I want to fist acknowledge the incredible effort of
Michael Hodges, a retired engineer who as a labor of
love created the Website he call Grandfather
Economic Reports. When you get home, you really
must Google it and spend some time there.
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His web address:
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http://mwhodges.home.att.net/hodges.htm
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There are hundreds of incredible charts and
graphs that allow visitors to get the big picture of
where the socialist path has taken us.
Given the above financial
information, shouldn’t one ask if tax
rates might perhaps be going UP in
retirement and so deferring taxes
may not be smart?
Jagadeesh Gokhale and Laurence J.
Kotlikoff in their book the
Coming Generation Storm think
so. They talk about a “menu of
pain”.
Their "menu of pain" is mind-boggling.
Entree A is raising federal income tax collections
(individual and corporate) by 69 percent.
Entree B is raising payroll tax collections by 95
percent.
Entree C is cutting Social Security and Medicare
benefits by 56 percent.
Entrée D is cutting federal discretionary spending
by more than 100 percent, which, of course, is
not feasible…
“digesting this medicine is going to be
plenty painful.”
Given that menu, can anyone with any
real certainty determine whether or not
deferring current income makes
economic sense?
Ignore the cocksure advisor who mocks
permanent life insurance and advises
“maxing out your 401(k)”
Is this depressing?
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Yes it is. I find it hard to look at my clients
and fellow citizens and see them as
delusional or ignorant, but that that is how I
see many of them. It is impossible to
convey in a conversation how sad is the
situation.
Its not like you can say, by the way, do you
see the paradigm shift in the road just
ahead. My retired clients get mad when I
tell them the truth, they just deny and say
the rich should pay.
But what should we do while we wait?
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We need to do our jobs, now more than ever.
The middle class needs to meet with financial
advisors that specialize in individual products
that they own and control!
There is widespread underinsurance among
families with children, and only we can help them.
The Nanny State is broke.
Long Term disability through an employer is only
temporary in today’s world, and is inadequate to
protect the family. They need you to go over their
employee benefits and recommend disability
income insurance.
Google this study from the Cleveland
Federal Reserve Board:
“The Mismatch Between Life
Insurance Holdings and Financial
Vulnerabilities: Evidence from the
Survey of Consumer Finances”
by B. Douglas Bernheim, Lorenzo Forni,
Jagadeesh Gokhale and
Laurence J. Kotlikoff
Here are some quotes from the study:
“We have found that life insurance is essentially
uncorrelated with financial vulnerability at every
stage of the life cycle. This finding is consistent with
the hypothesis that life insurance bears little relation
to needs at the time of purchase; however, it tends to
refute the hypothesis that households purchase longterm contracts with initially appropriate insurance
coverage, but fail to adjust this coverage through
time as their circumstances change.”
This is shameful for our profession!
Tom Wolff, where are you?
“The impact of insurance among at-risk
households is modest, and substantial
uninsured vulnerabilities are widespread,
particularly among younger couples.
Nearly two-thirds of secondary earners
between the ages of 22 and 39 have
significant
financial
vulnerabilities
(projected reductions in living standards
exceeding 20 percent), and nearly onethird have severe vulnerabilities (projected
reductions exceeding 40 percent).”
“Moreover, only one in five of these atrisk households held sufficient life
insurance to avert significant or severe
financial consequences. Combining all
age groups, 56 percent of secondary
earners and 6 percent of primary earners
would have experienced significant or
severe declines in living standard upon
the death of a spouse in the absence of
life insurance.”
So what is the financial structure of
the middle class?
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Most middle class clients rely on employee
benefits for disability insurance and life
insurance, which for most people very
inadequate.
If they own a life insurance policy, they have
been coached by “experts” in the financial
press to by inexpensive level term.
For retirement, they almost exclusively rely
on their employer 401(k), 403(b) or perhaps
individual IRAs.
They have long term debt in
mortgages, and long term assets in
their homes and 401(k)s
 They have lots of short term debt in
auto loans, credit cards and installment
debt.
 The have almost no cash.
 When they need operating capital, they
have to borrow from banks.
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Advisors in the individual market cannot make
a living serving this kind of client without
changing client beliefs and behaviors.
For our good and that of our middle class
clients we need to change these beliefs and
behaviors.
Catering to the wealthy won’t save the tax
deferred status for cash value life insurance.
The life insurance industry must go back
out and serve the middle class as we did
in the past.
Great industrial policy companies such
as Metropolitan and Prudential covered
much of the middle class and the
fraternal benefit societies covered half of
all insured before the New Deal.
In order to sell life insurance we should ask:
Are IRA-401(k)s good for the Middle class?
Google this:
Does Participating in a 401(k) Raise Your
Lifetime Taxes?
By Jagadeesh Gokhale,
The Federal Reserve Bank of Cleveland
Laurence J. Kotlikoff,
Boston University and The National Bureau
of Economic Research and
Todd Neumann,
The Federal Reserve Bank of Cleveland
A few select quotes:
“Employers seeking to lower rather than raise the
lifetime tax payments of such workers might
consider abandoning their 401(k) plans in favor of
making direct contributions to Roth IRAs for their
workers. Alternatively, they might consider
reducing the contributions they make on their
workers’ behalf to their 401(k) plans and instead
contributing the same amounts to Roth IRAs or to
taxable saving vehicles established in their
employees’ names.” [How about life insurance?]
Another:
“To conclude, the federal government has
spent over a quarter of a century
encouraging workers of all strips to save in
tax-deferred retirement accounts. In
promoting participation in such plans, the
government has encouraged workers to
believe they would be saving taxes on a
lifetime, rather than simply a short-term,
basis.
For those at the upper end of the
nation’s income distribution, taxdeferred saving does, indeed, convey
significant lifetime tax benefits. But for
those at the lower end, 401(k)
participation may represent more of a
tax trap than a tax shelter.”
End of quote
Who are those who benefit most
from tax deferral?
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According the the study:
Under the current tax brackets, those individuals
and couples with AGI over $326,450 are in the
top 35% tax bracket.
Those with incomes above that threshold
receive the greatest lifetime tax reduction from
the 401(k)tax deferral.
Many of the rest of us actually may actually pay
MORE in taxes by deferring income in qualified
plans according to this study.
According to a study by the
Congressional Budget Office, “Effective
Tax Rates: 1979-2001”, in Table 2C:
Married households with children
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In 2001, the top 10% of these households
had an average pretax income of $355,700
That leaves more than a few prospects for
people who may not benefit from 401(k) tax
deferral and who would be candidates for
permanent life insurance!
Another question:
Is this a capitalist economy?
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If it is, why do so many advisors advise
clients to put money into an IRA, where the
only person who can’t use the capital is the
person whose name is on the account?
Has there ever been a study done of the cost
to the middle class who have paid a penalty
tax because they needed money and had no
other savings?
Did you know 401(k) loans must be paid off
immediately when you leave a job?
What is the correct cash position
for a household? Let’s examine
the “quick ratio” for a business
What is your Client’s Quick Ratio?
From the Wall Street Journal On-line:
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current ratio definition:
An indication of a company's ability to meet shortterm debt obligations; the higher the ratio, the
more liquid the company is. Current ratio is equal
to current assets divided by current liabilities. If
the current assets of a company are more than
twice the current liabilities, then that company is
generally considered to have good short-term
financial strength. If current liabilities exceed
current assets, then the company may have
problems meeting its short-term obligations.
What are current liabilities?
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According to Investopedia.com:
Usually appearing on a company's
balance sheet, it [current liabilities]
represents the amount owed for
interest, accounts payable, short-term
loans, expenses incurred but unpaid,
and other debts due within one year.
What are current assets?
Again, according to Investopedia.com:
 Appearing on a company's balance
sheet, it [current assets] represents
cash, accounts receivable, inventory,
marketable securities, prepaid
expenses, and other assets that can be
converted to cash within one year.
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If a company needs two years worth
of essentially cash to cover the
current years bills payable or due,
why do we tell the public they only
need 3-6 months income as a cash
reserve for their household?
That is not enough for real
emergencies or opportunities.
We leave our clients cash strapped
and over reliant on equities within
qualified plans, and when the rainy
day comes upon them, the must cash
in equities in a down market and pay
taxes plus a 10% penalty to get at any
real money. I see it all the time.
We need to stop doing that.
An aged permanent life insurance
policy is simply the best place for
household cash assets that can
provide operating capital for the
on going large capital expenses
that all families experience.
Reasons for Life Insurance
Superiority:
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Other cash type assets have a lower interest rate
They create on going income taxes or capital gains
if they are sold.
Roth IRAs are tax deferred, but you cannot be
used it as collateral and once you take the money
out, you can’t put it all back in (a major shortfall).
They do not provide life insurance
They have no waiver of premium
Ignore the cocksure advisor who mocks
permanent life insurance and advises
“maxing out your 401(k)”
Do right by your clients and fight to
protect cash value life insurance from
predatory taxation. The middle class
needs this product.
In Conlusion:
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Financial advisors need to call on the middle
class and SELL them permanent life
insurance and disability income. They need
these products.
If the advisor can learn to help them budget
and structure their debts correctly, they can
help their clients buy these products
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The public needs our help to buy these products
because of all the charlatans out there who
denigrate permanent life insurance, this is partly
the reason they are so underinsured.
We can make a living selling these products to the
middle class. New advisors cannot stay in the
business selling mutual funds to the middle class.
It is the right thing to do for our country and our
fellow citizens.