The Road Ahead, Or Not The Road Ahead, Or Not Taken?Taken?

The County “Poor Farm”The County “Poor Farm”

Case Studies of Life Case Studies of Life Insurance for Middle Insurance for Middle

AmericaAmerica2005 NAIFAmn Roadshow2005 NAIFAmn Roadshow

Presented by:Presented by:Robert J. Hanten, LUTCF, FICRobert J. Hanten, LUTCF, FIC

Some Background Some Background AssumptionsAssumptions::

The Middle Class in under The Middle Class in under financial stress much of it due financial stress much of it due to increasing government costs.to increasing government costs.

The American middle class The American middle class needs to mature collectively and needs to mature collectively and learn to take care of itself and learn to take care of itself and should no longer look to should no longer look to government or their employers government or their employers to act as a parent.to act as a parent.

The middle class is The middle class is underinsured for both disability underinsured for both disability insurance and life insurance insurance and life insurance and employee benefits can no and employee benefits can no longer be seen as a reliable way longer be seen as a reliable way to provide long term insurance to provide long term insurance coverage without contract coverage without contract portability.portability.

The middle class needs to meet The middle class needs to meet with financial advisors that with financial advisors that specialize in individual specialize in individual products.products.

NAIFA members need to NAIFA members need to care for and help the hoi care for and help the hoi

polloi to become self polloi to become self reliant. reliant.

hoi polloihoi polloi (\hoi-puh-LOI\, (\hoi-puh-LOI\, nounnoun::

The common people generally; The common people generally; the masses.the masses.

I want to fist acknowledge the I want to fist acknowledge the incredible effort of Michael Hodges, a incredible effort of Michael Hodges, a retired engineer who as a labor of love retired engineer who as a labor of love

created the Website he call Grandfather created the Website he call Grandfather Economic Reports. When you get Economic Reports. When you get

home, you really must Google it and home, you really must Google it and spend some time there.spend some time there. His web address:His web address:

http://http://mwhodges.home.att.net/hodges.htmmwhodges.home.att.net/hodges.htm There are hundreds of incredible There are hundreds of incredible

charts and graphs that allow visitors charts and graphs that allow visitors to get the big picture of where the to get the big picture of where the socialist path has taken us.socialist path has taken us.

Given the above financial Given the above financial information, shouldn’t one information, shouldn’t one

ask if tax rates might ask if tax rates might perhaps be going UP in perhaps be going UP in

retirement and so deferring retirement and so deferring taxes may not be smart?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 Given that menu, can anyone with any real certainty with any real certainty determine whether or not determine whether or not deferring current income deferring current income makes economic sense?makes economic sense?

Ignore the cocksure advisor Ignore the cocksure advisor who mocks permanent life who mocks permanent life insurance and advises insurance and advises “maxing out your 401(k)” “maxing out your 401(k)”

Is this depressing?Is this depressing? Yes it is. I find it hard to look at my Yes it is. I find it hard to look at my

clients and fellow citizens and see clients and fellow citizens and see them as delusional or ignorant, but them as delusional or ignorant, but that that is how I see many of them. that that is how I see many of them. It is impossible to convey in a It is impossible to convey in a conversation how sad is the situation.conversation how sad is the situation.

Its not like you can say, by the way, Its not like you can say, by the way, do you see the paradigm shift in the do you see the paradigm shift in the road just ahead. My retired clients road just ahead. My retired clients get mad when I tell them the truth, get mad when I tell them the truth, they just deny and say the rich should they just deny and say the rich should pay.pay.

But what should we do while we wait?But what should we do while we wait?

We need to do our jobs, now more than We need to do our jobs, now more than ever.ever.

The middle class needs to meet with The middle class needs to meet with financial advisors that specialize in financial advisors that specialize in individual products that they own and individual products that they own and control!control!

There is widespread underinsurance among There is widespread underinsurance among families with children, and only we can help families with children, and only we can help them. The Nanny State is broke.them. The Nanny State is broke.

Long Term disability through an employer Long Term disability through an employer is only temporary in today’s world, and is is only temporary in today’s world, and is inadequate to protect the family. They need inadequate to protect the family. They need you to go over their employee benefits and you to go over their employee benefits and recommend disability income insurance.recommend disability income insurance.

Google this study from the Google this study from the Cleveland Federal Reserve Cleveland Federal Reserve

Board:Board:“The Mismatch Between LifeInsurance Holdings and FinancialVulnerabilities: Evidence from theSurvey of Consumer Finances”

by B. Douglas Bernheim, Lorenzo Forni,Jagadeesh Gokhale andLaurence J. Kotlikoff

Here are some quotes from the Here are some quotes from the study: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 long-term 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 one-third have severe vulnerabilities (projected reductions exceeding 40 percent).”

“Moreover, only one in five of these at-risk 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 So what is the financial structure of the middle structure of the middle

class?class? Most middle class clients rely on Most middle class clients rely on

employee benefits for disability employee benefits for disability insurance and life insurance, which insurance and life insurance, which for most people very inadequate.for most people very inadequate.

If they own a life insurance policy, If they own a life insurance policy, they have been coached by “experts” they have been coached by “experts” in the financial press to by in the financial press to by inexpensive level term.inexpensive level term.

For retirement, they almost For retirement, they almost exclusively rely on their employer exclusively rely on their employer 401(k), 403(b) or perhaps individual 401(k), 403(b) or perhaps individual IRAs.IRAs.

They have long term debt in They have long term debt in mortgages, and long term mortgages, and long term assets in their homes and assets in their homes and 401(k)s401(k)s

They have lots of short term They have lots of short term debt in auto loans, credit cards debt in auto loans, credit cards and installment debt.and installment debt.

The have almost no cash.The have almost no cash. When they need operating When they need operating

capital, they have to borrow capital, they have to borrow from banks.from banks.

Advisors in the individual market Advisors in the individual market cannot make a living serving this cannot make a living serving this kind of client without changing kind of client without changing client beliefs and behaviors.client beliefs and behaviors.

For our good and that of our For our good and that of our middle class clients we need to middle class clients we need to change these beliefs and change these beliefs and behaviors. behaviors.

Catering to the wealthy won’t save Catering to the wealthy won’t save the tax deferred status for cash the tax deferred status for cash value life insurance.value life insurance.

The life insurance industry The life insurance industry must go back out and serve the must go back out and serve the middle class as we did in the middle class as we did in the past. past.

Great industrial policy Great industrial policy companies such as companies such as Metropolitan and Prudential Metropolitan and Prudential covered much of the middle covered much of the middle class and the fraternal benefit class and the fraternal benefit societies covered half of all societies covered half of all insured before the New Deal.insured before the New Deal.

In order to sell life insurance we In order to sell life insurance we should ask:should ask:

Are IRA-401(k)s good for the Are IRA-401(k)s good for the Middle class?Middle class?Google this:

Does Participating in a 401(k) Raise Your Lifetime Taxes?

By Jagadeesh Gokhale,The Federal Reserve Bank of ClevelandLaurence J. Kotlikoff,Boston University and The National

Bureau of Economic Research andTodd Neumann,The Federal Reserve Bank of Cleveland

A few select quotes: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: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, tax-deferred 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 Who are those who benefit most from tax deferral?most from tax deferral?

According the the study:According the the study: Under the current tax brackets, those Under the current tax brackets, those

individuals individuals andand couples with AGI over couples with AGI over $326,450 are in the top 35% tax bracket.$326,450 are in the top 35% tax bracket.

Those with incomes above that threshold Those with incomes above that threshold receive the greatest lifetime tax receive the greatest lifetime tax reduction from the 401(k)tax deferral.reduction from the 401(k)tax deferral.

Many of the rest of us actually may Many of the rest of us actually may actually pay MORE in taxes by deferring actually pay MORE in taxes by deferring income in qualified plans according to income in qualified plans according to this study.this study.

According to a study by the According to a study by the Congressional Budget Office, Congressional Budget Office, “Effective Tax Rates: 1979-“Effective Tax Rates: 1979-2001”, in Table 2C: Married 2001”, in Table 2C: Married

households with childrenhouseholds with children In 2001, In 2001, the top 10%the top 10% of these of these

households had an average pretax households had an average pretax income of $355,700 income of $355,700

That leaves more than a few prospects That leaves more than a few prospects for people who may for people who may notnot benefit from benefit from 401(k) tax deferral and who would be 401(k) tax deferral and who would be candidates for permanent life insurance!candidates for permanent life insurance!

Another question:Another question:Is this a capitalist Is this a capitalist

economy?economy? If it is, why do so many advisors advise If it is, why do so many advisors advise

clients to put money into an IRA, clients to put money into an IRA, where the only person who can’t use where the only person who can’t use the capital is the person whose name is the capital is the person whose name is on the account?on the account?

Has there ever been a study done of Has there ever been a study done of the cost to the middle class who have the cost to the middle class who have paid a penalty tax because they needed paid a penalty tax because they needed money and had no other savings?money and had no other savings?

Did you know 401(k) loans must be Did you know 401(k) loans must be paid off immediately when you leave a paid off immediately when you leave a job?job?

What is the correct cash What is the correct cash position for a household? position for a household? Let’s examine the “quick Let’s examine the “quick

ratio” for a businessratio” for a business

What is your Client’s Quick What is your Client’s Quick Ratio?Ratio?

From the Wall Street From the Wall Street Journal On-line:Journal On-line: current ratio definition:current ratio definition:

An indication of a company's ability to meet An indication of a company's ability to meet short-term debt obligations; the higher the short-term debt obligations; the higher the ratio, the more liquid the company is. ratio, the more liquid the company is. Current ratio is equal to current assets Current ratio is equal to current assets divided by current liabilities. If the current divided by current liabilities. If the current assets of a company are more than twice assets of a company are more than twice the current liabilities, then that company is the current liabilities, then that company is generally considered to have good short-generally considered to have good short-term financial strength. If current term financial strength. If current liabilities exceed current assets, then the liabilities exceed current assets, then the company may have problems meeting its company may have problems meeting its short-term obligations.short-term obligations.

What are current What are current liabilities?liabilities?

According to Investopedia.com:According to Investopedia.com:

Usually appearing on a Usually appearing on a company's company's balance sheetbalance sheet, it , it [current liabilities] represents [current liabilities] represents the amount owed for interest, the amount owed for interest, accounts payable, short-term accounts payable, short-term loans, expenses incurred but loans, expenses incurred but unpaid, and unpaid, and other debts due other debts due within one year. within one year.

What are current assets?What are current assets?

Again, according to Again, according to Investopedia.com: Investopedia.com:

Appearing on a company's Appearing on a company's balance sheetbalance sheet, it [current assets] , it [current assets] represents represents cashcash, , accounts accounts receivablereceivable, inventory, marketable , inventory, marketable securities, prepaid expenses, and securities, prepaid expenses, and other assets that can be other assets that can be converted to cash within one year. converted to cash within one year.

If a company needs two If a company needs two years worth of essentially years worth of essentially cash to cover the current cash to cover the current years bills payable or due, years bills payable or due, why do we tell the public why do we tell the public

they only need 3-6 months they only need 3-6 months income as a cash reserve for income as a cash reserve for

their household?their household?

That is not enough for real That is not enough for real emergencies or emergencies or opportunities. opportunities.

We leave our clients cash We leave our clients cash strapped and over reliant strapped and over reliant

on equities within qualified on equities within qualified plans, and when the rainy plans, and when the rainy day comes upon them, the day comes upon them, the must cash in equities in a must cash in equities in a

down market and pay taxes down market and pay taxes plus a 10% penalty to get at plus a 10% penalty to get at any real money. I see it all any real money. I see it all

the time.the time.

We need to stop doing that.We need to stop doing that.

An aged permanent life An aged permanent life insurance policy is insurance policy is

simply the best place for simply the best place for household cash assets household cash assets

that can provide that can provide operating capital for the operating capital for the

on going large capital on going large capital expenses that all families expenses that all families

experience.experience.

Reasons for Life Insurance Reasons for Life Insurance Superiority:Superiority:

Other cash type assets have a lower Other cash type assets have a lower interest rateinterest rate

They create on going income taxes or They create on going income taxes or capital gains if they are sold.capital gains if they are sold.

Roth IRAs are tax deferred, but you Roth IRAs are tax deferred, but you cannot be used it as collateral and once cannot be used it as collateral and once you take the money out, you can’t put it you take the money out, you can’t put it all back in (a major shortfall).all back in (a major shortfall).

They do not provide life insuranceThey do not provide life insurance They have no waiver of premiumThey have no waiver of premium

Ignore the cocksure advisor Ignore the cocksure advisor who mocks permanent life who mocks permanent life

insurance and advises “maxing insurance and advises “maxing out your 401(k)” out your 401(k)”

Do right by your clients and Do right by your clients and fight to protect cash value life fight to protect cash value life

insurance from predatory insurance from predatory taxation. The middle class taxation. The middle class

needs this product.needs this product.

In Conlusion:In Conlusion: Financial advisors need to call on Financial advisors need to call on

the middle class and the middle class and SELLSELL them them permanent life insurance and permanent life insurance and disability income. They need disability income. They need these products.these products.

If the advisor can learn to help If the advisor can learn to help them budget and structure their them budget and structure their debts correctly, they can help debts correctly, they can help their clients buy these productstheir clients buy these products

The public needs our help to buy these The public needs our help to buy these products because of all the charlatans out products because of all the charlatans out there who denigrate permanent life there who denigrate permanent life insurance, this is partly the reason they insurance, this is partly the reason they are so underinsured.are so underinsured.

We can make a living selling these We can make a living selling these products to the middle class. New products to the middle class. New advisors cannot stay in the business advisors cannot stay in the business selling mutual funds to the middle class.selling mutual funds to the middle class.

It is the right thing to do for our country It is the right thing to do for our country and our fellow citizens.and our fellow citizens.