Ml ilipp+indexed ul_and_ruleof100xx

Copyright 2013, 2015 - All Rights Reserved

Index UL &the Rule of 100

Volatility Control Plus Tax Free Compounding

Sponsored by MarketLinking.comPublished by Capital Strategies Press

http://marketlinking.com/

Bonds are Not the Only Source of Stability• Company A – 8.1%• Company B – 7.9%• Company C – 8.3%

• Company D – 8.0%• Company E – 8.2%• Company F – 8.1%

The above returns are from Indexed Universal Life Insurance Policies. The indexing account uses excess bond interest to hedge a specified stock market index. When the stock index increases, the earnings are credited to the indexing account in addition to the base policy guarantees. When the stock market declines, only the minimum interest rate is credited and there is no market loss to the portfolio (only the failure to earn additional interest).

Indexing is a way to participate in stock market gains, without the risk of stock market losses. In an indexed account the saver is completely protected from market losses, but does participate in a portion of the market growth. Indexed savers are essentially trading some of the top of the market gains, in exchange for total protection from all market losses.

If indexing policies can provide yields in excess of bonds, plus complete protection from market crashes, why not use it as an alternative in our Rule of 100 planning?


Dividends are not included in the S&P500 calculations, the collection of which would reduce the markets volatility and increase its return.

The graph below shows the performance of an indexed account versus the S&P500 Stock Index covering the period from Jan 1970 to Nov 2011. The indexed account avoids all market losses, but gives up some of the higher market returns. The net result is a more stable return, with no market risk.


Balancing with Bonds versus Indexed Policies

Age% in Stocks

/ OtherPortfolio Yield

(Stocks 10% / Bonds 6%)Portfolio Yield

(Stocks 10% / Indexed UL 7%)

30 70% 8.82% 9.10%

35 65% 8.62% 8.95%

40 60% 8.42% 8.80%

45 55% 8.22% 8.65%

50 50% 8.03% 8.50%

55 45% 7.83% 8.35%

60 40% 7.63% 8.20%

The indexed policy not only provides a higher balanced portfolio yield, it offers better protection against portfolio volatility. In the balanced stock/bond mix, both the bond and stock portions could incur market losses. In the stock/indexed combination, only the stock portion has market risk. In addition, interest on the indexed UL cash values grow tax free and the policy death benefit elements can be used to guarantee retirement plan completion or other family protection functions.


Life insurance policies are granted a number of special tax provisions and these advantages extend to universal life policies. Interest earnings on cash value are credited tax free, but these earnings are diluted by annual mortality costs. In a universal life policy, the mortality rates increase annually and are essentially identical to an internal annual renewable term policy.

Example: Earnings on $100,000 cash value at 8% = $800, less $123 for mortality = $677 net revenue, which is 6.77% on the $100,000 cash account.

Therefore, in order to get the full yield that is earned by the indexing account inside the universal life policy, the annual cost of mortality must be added to the annual premiums. This will offset the mortality charge and allow the policy cash value to compound tax free at the full return earned during any given year.

Since the mortality expense is based on the net risk of the policy (death benefit minus cash value) the mortality expense can be minimized by contributing enough cash to keep the net risk just below the level required to retain the policy tax advantages. The higher the cash value, the lower the mortality cost.

As the age of the insured increases, the required death benefit per cash value is reduced. This effect is especially pronounced at older ages when the annual mortality rates increase rapidly.

The Little Matter of Mortality Costs


Principal at Risk

At age 60 (five to seven years before normal retirement) the Rule of 100 has the portfolio at 40% stocks. A major stock market decline will wipe out 12% to 18% of your assets on the eve of retirement. An event that would require substantial adjustments to your lifestyle.

Even with only 20% of your assets in stocks, there is still a chance of loosing a big chunk of wealth. Professional financial planning dictates that we explore all risk/return alternatives and whenever possible, select the ones that provide the best protection for our principal.

The rule of 100 and 110 and balanced portfolios and the more sophisticated techniques of portfolio selection are all approaches to manage risk and minimize uncertainty. However, none of them will protect against the potential loss of principal.


Target Returns

Assume that I am age 45, have $10,000 in my fledgling retirement fund and are saving $2,400 a year. I have been advised that at age 67, I will need a personal retirement nest egg of $250,000 to meet my lifestyle goals. Therefore I need to compound my retirement account at an average of 9.51% a year. It does not matter that the rule of 100 dictates that I should earn 8.22% in a portfolio consisting of 55% common stocks and 45% bonds. At an 8.22% annual return, I would need to save $3,132 a year. That does not seem like much of a stretch, but it will cost one of my kids their college education.

The numbers are the numbers. I have three choices: Save more! Retire on less! Or increase the percentage of my portfolio in the stock market, which, of course, increases my risk of loss.

Retirement planning is not a shoot from the hip endeavor. It requires careful planning and precise calculation. A situation that is further complicated by the nature of market returns, because they fluctuate widely for any given year and are only predictable over a span of years. However, all retirement planning should be Target Planning. Annual contributions and rate of return targets should be based on a careful analysis of your financial needs and where with all and a projection of the effects of compounding interest on your retirement assets.

The Rule of 100 is a general principal, a rough guide created to manage risk. It does not take into account the target return needed to accomplish a financial goal. It just blindly allocates money between stocks and bonds and hopes for the best. However, professional retirement planning requires a goal!


The Golden Rule of Risk Management

This is the Prime Dictate of financial planning. Assume, for example that you calculate that you need an 8% return to meet your long term retirement goals.

Portfolio A: Expected Return 8.5%; Chance of loss 30%Portfolio B: Expected Return 8.0%; Chance of loss zero

All you require to meet your needs is 8% and based on historical performance, both portfolios A and B can accomplish the required return. Why would anyone needlessly place their assets at risk, when a risk-free alternative was at hand. If both portfolios A and B, have an expected return of at least 8%, it would be foolish to accept higher risk for the a return you don’t need.

Make this rule part of your financial psyche – It will minimize any future

losses!

“Never Accept More Risk than Absolutely Necessary to Get Your Target Return”


Copyright 2015 - All Rights Reserved

Cross-Over Point

Indexed accounts offer a risk free alternative with historical returns in the high 7% to low 8% range. Therefore - The Golden Rule of Risk Management dictates the following:

For target returns from 7% to 10%, a balanced portfolio of stocks and market linked accounts offers the needed return at the lowest risk

For target returns of less than 7%, an index life account offers the same historical yield as a balanced portfolio, without any stock market risk.

We have seen that the long term return in the stock market is around 10% and chasing that return can expose your assets to substantial market risk. This risk and return has been confirmed by numerous studies by independent investigators. On the other hand, the long term average of high quality commercial bonds is around 6%. To target returns in between, it is common to run mixed portfolios that lower the risk as well as the return.


Indexed Life Insurance Private Pension (ILLIP)

• Yields competitive with balance portfolios & Complete protection from market losses• Tax free interest compounding & Tax free distributions at retirement• Time diversification (automatically averages fluctuations in annual yield)• Optional plan completion if disabled & Built-in chronic and critical illness protection• Built-in retirement plan completion for spouse in event of death• Tax free wealth transfer options to next generation• Unlike other personal retirement plans, the annual interest from an ILIPP will not push

your income taxes into higher and higher brackets while you accumulate your retirement nest egg (see our white paper on the Isolation Principal)

• Unlike other retirement income options, ILIPP retirement distributions will not trigger taxes on your social security at retirement

• Use an ILIPP to offset the effects of inflation on static dollar retirement income sources• Use an ILIPP to offset taxes on qualified plan retirement distributions• Use an ILIPP as a guarantor of spousal retirement income, thereby allowing you to elect

higher single life payouts from other retirement sources

No other Retirement Tool is as Flexible or as Tax Friendly as an ILIPP

Using an Indexed Life Insurance Policy

Let's See How an ILIPP Can Energize Your Retirement Planning

Do you have a retirement plan?

What are you retirement assets?

How much do you save each month for retirement?

What are your retirement goals?


For additional information on this financial concept please visit MarketLinking.com

**Life insurance policies are purchased through licensed insurance agents. The purchaser must receive a NAIC compliant illustration on any and all policies considered. Not all agents are familiar with this concept. For best results choose your insurance agent wisely. - Please see the important notices on the following pages.


Links to Impartial Providers of Historical Asset Class Performance


Federal Reserve Board posts returns from a variety of fixed income asset classes, some of which extend as far back as the early 1900’s. Please visit: http://www.federalreserve.gov/releases/h15/data.htm

Ibbotson, owned by Morningstar, compiles an extensive list of asset returns and focuses on stock market based asset returns. http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1414.xml

Capital Strategies Press publishes an annual summary of indexed performance. Their numbers are independent of the projections made by the insurance carriers. http://CapitalStrategiesPress.com

Yahoo financial database: http://finance.yahoo.com/market-overview/

MarketLinking.com offers a public access database on a variety of market linked and indexed returns. Visit http://MarketLinking.com

http://www.federalreserve.gov/releases/h15/data.htm

http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1414.xml

http://capitalstrategiespress.com/

http://finance.yahoo.com/market-overview/


Important Notes and Disclaimers (Please Read)


The performance comparisons used in this presentation make assumptions about future rates of return. These assumptions may or may not be valid. No one knows the future. Our only guide is the past and the future returns from various asset classes may not reflect their historical averages or ranges. The comparisons used herein are solely for the illustrative purposed.

Knowledge is power and when making financial decision knowledge is essential. Every consumer, whether making investment, savings or insurance decisions should carefully study the past performance of every asset class under consideration in order to make an informed decision about their expectations of the future performance of that asset class. There are a number of independent third party sources of asset returns. All consumers should consult one or more of these sources or other impartial third parties that maintain similar databases and/or analysis.

Meaningful financial planning requires unbiased information. Financial decisions about retirement funding, future retirement income, building a family nest egg, and purchasing insurance to provide financial protection for life’s unexpected events all require making assumptions about future performance. Unless these assumptions are based on expectations that have a reasonable probability of being close to future results, you are not planning, you are guessing.

Please discuss asset class returns with a competent financial professional before making a final decision about how to allocate your financial resources. This should be more than a cursory discussion. If the financial professional you have chosen to trust seems uniformed in any way on the subject of asset class performances, you should seriously consider replacing them and finding a more knowledgeable professional.

Please, please, please take the time to build your personal knowledge of the various financial products and the performance and liquidity characteristics of the asset classes available to you.

Important Notes and Disclaimers (continued)


The National Association of Insurance Commissioners (NAIC) has formulated guidelines for illustrations that must be presented to each potential purchaser of cash value life insurance. These multi-page illustrations are carrier, product and insured specific and contain substantial disclaimers, warnings and clarifications. The summary presented herein is taken from one set of annual yield assumptions and premium inputs. Alternate assumptions can produce radically different policy performance, including early lapse of the policy. The age and health status of the insured is likewise a key assumption that when changed, can lead to policy performance much less favorable to the policy owner. These types of life insurance policies can only be purchased through the services of a life insurance agent licensed in your state of residence. If you are interested in learning more about the retirement cash flow features of cash value life insurance, please confer with a licensed agent and have her/him prepare NAIC compliant illustrations using reasonable assumptions. We strongly advise that consumers never rely on the carrier’s highest historical return. A lower return assumption will make the outcome more likely. We also strongly advise that the interest rate spread assumed on any variable loan be reasonable in light of historical performance data. The spread is the difference between the assumed policy crediting rate and the rate charged on policy loans. Example: the policy yields an annual return of 8.3% and a loan charge of 5.5%, then the spread is 2.8%. A 2.8% spread is unreasonable and will create an internal compounding during the loan period that will inflate the available retirement funds substantially. Since a 2.8% spread has never been sustained during any past economic period, the results illustrated will be an illusion and will never occur. The variable loan rate of an indexed policy is tied to the commercial bond rate. Universal life insurance carriers invest policy cash values funds in the commercial bond market. If the insurance carrier charges the policy holder less than its bond earnings, the carrier will lose money. A history of commercial bond rates are published by the Federal Reserve and can be found on the Internet The spread is a critical element of all indexed universal life illustrations that employ the universal loan. If your agent glosses over the importance of the spread or seems fuzzy on its criticality, get a new agent, because you are not working with a true professional.

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Ml ilipp+indexed ul_and_ruleof100xx