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Dear Everyone!
Again, thank you for all the nice comments you send to me about this newsletter.
I met a lot of nice folks at the Folsom Chamber luncheon and I look forward to meeting more of the membership.
I only include two articles in this issue as each is a bit long. I hope you enjoy... and learn.
-Al
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| ROP |
You want to start an argument? Get two life agents in a room and ask them their opinion of ROP -- Return of Premium?
Most people know what term life is. You buy it for a specified number of years, you pay your premium each year and if you die your beneficiary gets the cash. If you don't die, you lose all the money. It is pure insurance. There is no cash or surrender value. You croak, you win (well... someone does.)
Term is a cash-cow for insurance companies. Why? Simple. The estimate is that 92% of all term policies never result in a claim. 92% of people cancel their policies before the term ends... or they live! That's right. The company wins 92% of the time. That's better than what the Vegas casinos get... way better. You're betting you will die and the company bets you will live. You lose by living!
The opposite of term insurance is called permanent insurance. Part of what you pay is for insurance and part goes into a cash account. It has no expiration date... you pay until you either die or surrender the policy for cash. Most often the company is going to have to pay something to someone.
Sounds like a better deal? Gee, you think? Of course it is. But there is a catch. Perm insurance is like three times more expensive than term. It beats the hell out of term... but it has a price and lots of people can't afford it (or to be far more precise, they don't WANT to afford it... they would rather have a new BMW or a $5,000 plasma TV! Don't get me started!)
The "word" got out that "Hey, maybe I'm a idiot for buying term." This is not the kind of thinking any self-respecting insurance company wants you to be doing! But the fact is that while term is cheap, you are just "renting" insurance and for the vast majority of people, it is money down the drain.
Do you want to rent your house... or own your house? It's the same principle.
The insurance industry recognized this and several years go came up with a twist on term where you pay a few dollars more and at the end of the term you get it ALL BACK. That's right. It is called ROP -- return of premium. At the end of your ten or twenty or thirty year term... you get a monster check from the insurance company. (Let's party!)
Assume that a 40 year old male can buy a $100,000.00 20 year term plan for $24.59 a month. In the event that he does not die he will have paid $5,901.60 for 20 years worth of protection. That is money that is gone forever. However, he can purchase the same policy with ROP (Return Of Premium) for an extra $17.95 a month, and get a tax-free check for $9,722.60 at the end of 20 years, if he has not passed. He would have to earn an annual effective rate of 7.52% on his $17.95 a month in order to have a return of $9,722.60 in 20 years.
Now you decide if you think it is worth it to pay an extra $17.95 a month for a return of $9,722.60, or not. Can you think of another way to invest the money for a guaranteed rate of 7.52%? If you can, tell me as I want to make YOU my investment advisor!
Let's look at another example. A 45 year old female preferred non-nicotine, can purchase a 151,000.00 30 year level term, for $40.26 a month. She can purchase that same policy with ROP for an extra $8.05 a month. She would have to get annual effective rate of 9.95% in order to have a return of $16,565.40 at the end of 30 years.
So what's the problem? Well... a lot of agents argue that ROP is a sucker's bet. Most people do not keep their term policy... to term. They drop it... or convert it. Now say you had the 30 year deal... and decided to drop it after 15 years? Would you get half your money? No way, Jose! The insurance company has this slot machine rigged so that you don't get close to the true percentage you paid in until close to the end of the term. After 15 years you might get 30% of your money, not 50%.
A lot of agents think ROP is just a way to get people to pay more for term with the "carrot" of getting it back.
Well, I disagree. First of all I don't like to sell term insurance. I do sell it... but only when I can't talk the client into a more prudent plan... or if the client simply can't afford to. I think term is a poor choice given the huge advantages of permanent universal life plans (which is another story for another time.) However, many people can't afford perm insurance and term is far better than nothing. (Ask any widow with young children who lost her husband in a car accident whether or not he had enough life insurance!)
Second, I think ROP is a good "middle ground" between term and universal life.
Third, I think getting something back with ROP beats hell out of getting zippo back with a plain old term policy.
I don't like to give money away. I want it back... with interest if possible. ROP makes that possible for a slight extra cost. I believe that if you can't have permanent insurance, the ROP is the next best option... but you have to plan to keep your policy. If you think you might drop it later on, especially sooner than later, ROP is not your best bet and you are better off with straight term.
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| A Quick Look At Indexed Life (vs. Annuities) |
Tax time-bombs are annuities for seniors that are accumulating years of tax-deferred earnings. Eventually, those earnings will be taxed as income. Yet, we know from experience that many annuity purchasers never actually receive those earnings as income - they are taxed to the beneficiaries receiving the annuity death benefits.
There is an old saying. "You don't want to die with an annuity." That was said back in the days when you put your money into an annuity and got paid a monthly income... until you went paws-up and the insurance company kept the rest. It was a gamble. It was the reverse of life insurance. You were betting you would live and the company was praying you would assume room-temp as soon as possible after pay-outs started.
Of course a lot has changed in the annuity market with all sorts of guarantees. However one thing that is certain besides death... is taxes. Whoever gets the proceeds from your annuity will have a tax issue... and not a nice one!
Over the past decade, consumers have invested more than $1 trillion in annuities... the typical senior looks for yield, safety, and liquidity for some portion of their rainy-day savings. The fixed indexed annuity came along in the 1990s, and it was the ideal vehicle to handle these objectives.
For the senior, the advantages of tax deferred growth, combined with the potential for higher returns and the ability, if needed, to annuitize or take a lifetime of income was very attractive. But what if he or she is one of the majority of annuity owners who never take income? Are they aware of the tax consequences they may leave behind - namely, taxes to their heirs at ordinary income rates?
Let's focus on those folks who have a CD or an annuity that, barring an emergency, they do not plan to use for income in the foreseeable future. Is there a better approach for them?
Lots of smart agents think so. What if there was a product that allows you to enjoy potentially higher-than-typical returns, plus tax deferred buildup of the cash value, while also creating a tax free benefit payable at death? Or better yet, a product that delivers all that, and makes the tax-free benefit available, while you are still living, to help pay expenses for emergencies, opportunities, or other monthly expenses of any kind.
There is such a product - a fixed indexed single-premium life plan. Lets say a female non-smoker, age 65, pays a single premium of $100,000 into one of these plans.
Click here and take a look at this chart.
With many of these fixed indexed plans the client instantly receives a 10% cash bonus, thus having the effect of paying in $110,000. That's not a bad deal! This buys her an immediate death benefit of $238,000. Like many life plans, it also makes available a monthly chronic illness living benefit triggered by the client's inability to perform two or more of six activities of daily living. Confinement in a care facility is not required to trigger the benefit. This "accelerated" payout can be up to 3% of the death benefit per month, for up to 33 months.
At the client's death, the unaccelerated death benefit paid to the beneficiaries can be well above the original face amount, as you can see in the chart - almost six times as much at age 95. And it is free of income taxes. If the client uses accelerated benefits for long-term care expenses, a net death benefit can still be available. Note also that the client doesn't sacrifice current liquidity, either, because from day one, the cash surrender value never drops below $100,000 (the amount she invested.)
This product represents the new generation of life products that give clients options for future planning, without the devastating consequences of a future income tax time-bomb. For clients who don't have definite plans to use assets for generating an income stream in retirement, this single premium life plan is a tremendous alternative for tax-preferred asset growth and future planning options. When used as a single-premium, the plan can be processed in as little as 48 hours, without a paramedical exam or blood.
There are some agents who don't like indexed life plans. Why? They claim that a variable universal life plan will give a better return. (A VUL is a plan where some of the premium is invested in mutual funds.) This is true, IF the market does well. Do YOU want to be in the market now? I don't.
Indexed life plans are an example of what the entire financial industry is creeping toward... a one-coverage-for-all-things. What boomers what is SIMPLICITY. They want to buy one policy that insures them if they die too soon, takes care of them if they live too long, has provisions to pay for long-term care, and allows them to build a tax-free legacy should they decide to pass it on to their heirs. The Swiss Army knife of insurance is the holy grail right now. It's not here yet but it will be in four or five years.
Until then, these indexed life plans are worth looking into. They have a lot of moving parts, lots of ways to configure them, but with a good agent you can do a lot better than just putting your money into an plain old annuity or CD and letting your kids lose a pile of it to the government.
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Well, that's a wrap for this issue. I hope you've found some of the info above useful and interesting. If you have questions about life or health coverage, safe-money annuities, or employer group benefits just give me a call or send email.
Sincerely,
Alan N Canton
InsuranceSolutions123 Agency
InsuranceSolutions123.com
916-962-9296
CA License # 0F31110
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Al Canton, Owner
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I'm Al Canton, owner of the Insurance Solutions Agency.
Everyone promises the best service, etc. So I won't bore you with that message.
Bottom line, I know health insurance, work-supplements, medicare, life, and annuities.
Most importantly, I'm honest. I will not put you in a product just for the money. I've been here 25 years and I've built my business reputation on integrity and honor.
It's that simple.
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