In considering the answers to these questions, don’t overlook one of the safest and simplest tools, life insurance. Many people overlook life insurance because they are in good health and feel that they can invest the money elsewhere for larger returns. However, if the senior does not anticipate needing the money for a number of years, but wants to be able to easily access it should it become necessary, and safety and simplicity are their goals, then life insurance should definitely be considered. Life insurance looks even better if there is a strong likelihood that the senior will not use the money.

Mr. Singleton is 60 years old, a standard non-smoker and has a substantial sum to invest. Currently, he is in a 35% tax bracket. He has sought advice because he wants to hedge all of the current market fluctuations, but still have a good return. He hopes that he can leave it to his grandchildren.

He finds that he can use the lump sum available for investing as a single premium for a whole life policy. The life insurance^† would have a face amount of approximately two times the single premium for a whole life (permanent) life insurance contract.

Graph 1

In Graph 1, the blue line represents the death benefit of the new life insurance policy. The graph compares an alternative savings program ^‡ earning 5% before taxes every year. At life expectancy, 18.2 years for a male age 60, the life insurance death proceeds would be about 25% greater than that of the alternative savings plan. The breakeven point would be after 24 years – if death occurred prior to age 84, the life insurance would have the greater gains. If death occurs after age 84, the alternative savings would have the larger gain.

The life insurance values and gains are very attractive if death occurs in the next 24 years. But what if Mr. Singleton needs the money for an emergency, or whatever? Although some values could be obtained from the permanent life insurance, the values would be less than those of the alternate savings program, as seen in Graph 2.

Graph 2

Even though Mr. Singleton thinks he will hold this investment until death, he must consider the values available for an emergency.

Of course, the rate of return for the life insurance is very high if death occurs in an earlier year. The alternative savings has been assumed to earn 5% before taxes throughout.

Graph 3

Graph 3 shows the life insurance returns will be quite high if death occurs sooner than life expectancy, but only slightly lower if death occurs after life expectancy.

Life insurance that has almost no market fluctuations is a very good long-term asset, especially if it is anticipated that it will be held until death.

PlanLab News provides no investment advice nor does it offer any opinion with respect to the suitability of any transaction. Clients should consult their legal, tax, and/or financial advisor before taking actions based on this information.

^‡ The 5% return is hypothetical earnings for purposes of this illustration. It is assumed that 35% of the earnings each year are used to pay the taxes on the earnings.

It is easy to help those in the first group see the need for protection against the sudden loss of their salary due to an illness or accident. Often people in this first group are on such a tight budget, which in part causes them to be in this first group, that they have trouble adding disability income insurance premiums to already stretched budgets. For this group, selling the need is easy, while selling the cost is difficult. Often, this group contains workers whose occupations make it difficult to obtain coverage at desired rates or for desired coverage periods.

The second group, often professionals, executives, or business owners, have sufficient assets and other sources of income, that a loss of salaried income is seen more as an “inconvenience.” By inconvenience it means plenty of adjustments, giving up some luxuries and some desired discretionary expenditures, but it would not be the financial disaster similar to those of the first group. It is very difficult to convince this group of the need for disability income insurance with an urgency to take action. However, if this group were convinced of the need, allocating additional dollars for premiums would not be seen as a big obstacle. For this second group, selling the cost is easy, while selling the need is difficult.

Ironically, disability income insurance is often easier to obtain for the second group since their occupations are usually less hazardous with preferred occupational classes. It is much easier for this group to get the disability income coverage they desire. Since the second group generally has larger salaries, the amount of disability income needed is larger resulting in larger sales. Many times, the same sales presentations used to sell the needs for the first group are used, often unsuccessfully, with the second group.

PlanLab’s Financial Needs Analysis has the needs presentation pages to sell the need to the first group. But, it also has a unique sales presentation page designed to show the need of disability Income insurance to the second group. Since Financial Needs Analysis has true monthly cash flow calculations, the effects of various periods of disability can be calculated. By showing the effects of being disabled for just two years, five years, or from now until retirement, it is easy to see the “overall” effects of a loss of salaried income. The full impact of the lost salary is calculated including the missed 401(k) contributions. The cash flow calculations use the appropriate assets to pay ongoing expenses and illustrate the long-term effects of using those assets. To make it easy for the client to understand, the effects of various periods of disability are illustrated by the estimated net worth at retirement.

A sample of this unique presentation page shows that the client should have a net worth at retirement, age 65, of $5,321,674 if no periods of disability are assumed and everything goes as planned. However, just missing the next two years due to a disability, would reduce his net worth at retirement by 9.39% or almost half a million dollars. Missing the next five years would reduce the retirement net worth by 23.57% or approximately $1.25 million. If he were disabled from now until retirement, his retirement net worth would be reduced by two-thirds—about $3.5 million!

The emphasis of this page is to point out that the disability income insurance is not just providing funds to replace missed paychecks; it is maintaining his standard of living for the rest of his life and retirement. This page also shows the likelihood of a long-term disability for a person his age as compared to dying before retirement. In this example for a man age 50, he is almost three times (2.93) more likely to suffer a long-term disability than die before age 65.

The second group needs disability income insurance, just as much as the first group. By showing the long-term effects on retirement and long-term standard of living, with the likelihood of a disability occurring, you have the tool that makes selling the need of disability income easy. Now, you can sell disability income to the group that needs it and can get it.

Other than these unusual times, what could cause a credit crunch for businesses? Often, available credit is based on personal relationships between an employee and the creditor. The creditor may consider an employee to be responsible for the profits that will enable the business to repay any loans. Although this personal relationship is often with an owner or senior executive, it is sometimes based on others – a star salesperson, an organized and efficient office manager, an inspiring supervisor or foreman, or an employee who is a respected community worker. Various employees may provide that key relationship that reassure the creditors of a business.

When valuing key employees, employers sometimes take the employee’s contribution to business credit for granted. As today’s crisis is teaching everyone the necessity of good and available credit, the value of an employee to business credit lines must be considered. If a key employee suddenly died or became disabled, would the business’s creditors hesitate to continue credit? How much cash would be needed to bridge the difficult time following the employee’s loss to reassure creditors?

One of the first principles of financial planning for both individuals and businesses is to protect your existing assets and newly acquired assets. Credit relationships are a valuable asset. They are difficult to acquire, and when acquired, should be protected. Key person insurance can protect businesses from the loss of a key person. Businesses usually consider the effects of a key person on sales or profits, but often neglect to consider the key person’s loss on the business’s credit availability.

PlanLab has a Key Person module that helps to guide business owners through the process of considering the impact and value of a key person to the business. It helps the business owners consider all aspects of the employee’s effect on the business, including the relationship with creditors. 2008 has been a difficult year for businesses, and everyone needs to learn from the experience. One lesson is the value of available credit and the necessity to protect the business’s credit by considering a key person’s effect on the business’s credit.

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Advisors seldom overlook the most expensive planning needs. Great care is taken so that the estate minimizes transfer costs and taxes. Care is taken to be sure the intended heirs get what the client intends for them to get. Coordination between the Will and the ownership of the property controlled by the Will is examined. Arrangements and insurance are arranged in the event of long-term illnesses prior to death. A living will is offered to allow them to make any desired directives concerning final life supporting decisions.

Sometimes it is the small things that can cause big problems. For example, all the life insurance policies are in the safe deposit box. This can delay the filing of the death claims until the safety deposit box is inventoried by the executor. The lack of directives or instructions for the client’s funeral arrangements can cause a great deal of stress within the surviving family. These little things may add a great deal of stress to the family at a time that is already extremely stressful.

Now there is one other small item that may cause a great deal of stress – especially if the client is not married. This overlooked item is especially important to widows and widowers, as well as couples living together but who are not legally married. Although this is applicable to same sex couples, there are many couples living together. For many elderly people, they choose to live together without a legal marriage to protect each of their Social Security benefits or other financial arrangements. This overlooked item for non-married individuals is the client’s directive to receive the client’s medical information.

Why is a directive to receive medical information important? Often, prior to death, the client has a stroke, heart attack, fall or accident that leaves them unable, or not mentally competent to make legal decisions. Due to the HIPAA regulations (Health Insurance Portability and Accountability Act) and its “privacy protection,” the healthcare or medical team is reluctant to share medical information with someone other than a spouse unless there is a directive authorizing the release of the information. With massive lawsuits and large federal fines, the medical and healthcare community takes the HIPAA regulations very seriously. (It would have been nice if the federal government had exerted the same zeal in creating and enforcing regulations to protect our investments as they have to protect our privacy.)

As an advisor helping a client with planning for their estates, clients expect you to provide advice in all areas. A directive to receive medical information is a small item, but one they should discuss with their attorney. They may not know to ask about it, if you don’t suggest doing so. Having a loved one is a condition that they cannot authorize the release of their medical information to a loved one is stressful. For a loved one not to know what is happening can be even more stressful. Don’t let small things in your planning process cause big problems.

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But what if things you never anticipated happen? Retirement Test Drive lets you make those adjustments, and repeat your test drive. With the revised analysis, you can reconsider your retirement plans and make the necessary adjustments.

Retirement Test Drive: Case Study 1

Dr. Rusty Scalpel and his wife had just been working with their advisor on their retirement and estate planning. Much of the planning dealt with estate planning manners, as their retirements seem to be well funded. In fact, he had worked closely with the advisor to consider exactly when to retire. PlanLab’s Estate Tax Analysis was used to formulate an estate plan. Then Retirement Test Drive was used to see how it would work and the advantages and disadvantages of various retirement dates. The whole process was being finalized. Then the economic crisis of 2008 occurred.

Rusty and his wife became very concerned—would their plans still work? Should they take their losses and convert everything to cash? Did their plans allow time for the market to recover? Should they start over? It was time to take another Retirement Test Drive.

Their advisor modified their plan to reflect the current values of their investments and retirement plans. The results were favorable; the program showed that even after adjusting the values for the current market losses of almost 40% in the past year, their plan could still provide for the lifestyle spending they desired.

But October 2008 was a very scary time. Had the economy reach bottom? What would the new president and new Congress do? At what point would their plans not work?

The advisor, using alternative scenarios with their Retirement Test Drive analysis, made additional changes. The cost of living assumptions were adjusted upward in the event of increased inflation in the future. Values of investments and retirement plans were set to twenty-five percent (25%) of their 2007 values. Retirement Test Drive showed that their plans still could support their desired retirement lifestyle through year 2040, although their net worth would be significantly decreased and the net to heirs would be somewhat decreased. Rusty and his wife now felt confident that their plans did not need to be changed at this time.

Retirement Test Drive, with its scenario “what-if” planning features, can reassure clients when things change. Its graphics (Illustration 1) makes it simple to see the effects of changes. The second illustration (Illustration 2), using Monte Carlo Simulations, showed that the probability of success for the first ten years was about the same in both scenarios, but that continued success after that were less. The advisor was able to put some of their fears to rest—they did not need to make any immediate changes.

Retirement Test Drive: Case Study 2

Take the case of Robert and Andrea. Their planning had required considerably more adjustments in the initial planning. Using Retirement Test Drive last year, they were able to make a number of adjustments so that their retirement lifestyle could be met. They had not prepared for retirement to the degree of the Scalpels in the prior sample. However, they were able to make the adjustments that could meet expenditures for many years. Of course, in October 2008 their advisor received their panic phone call, “What should we do?”

By adjusting the values for the current market conditions, and using the revised scenario, they were able to retake their Retirement Test Drive. The results showed that for the next eight years (8), their plans would continue to work. However, unless the market recovered some of its recent losses, adjustments would have to be made. Again, a simple graph (Illustration 3) was used to show Robert and Andrea the effects of the current conditions on their plan. It showed when the shortfalls were likely to occur. By retaking their Retirement Test Drive from time to time, they would know when changes would be necessary.

Retirement Test Drive is not just a great tool for analyzing retirement plans, but it is a great tool for restoring a clients’ confidence in their retirement plans.  Retirement Test Drive can be used with any plan developed with one of PlanLab’s analysis tools. Retaking a Retirement Test Drive lets you see how your plans work in a world of changing conditions.

You need look no further than your child, or grandchild. Their sales skills come naturally. If you don’t believe this, think of the last time a child asked you for something and you tried to say no. What happened? Did it go something like this?

They made sure they got your attention, before they asked. They pulled on your pants’ leg, grabbed your leg, or sat on your lap. They then looked you straight in the eye and asked. The expression on their face indicated they expected a “yes.” When you first said no, without flinching, blinking, or looking away, they asked, “Why not?” If that didn’t work, you probably heard, “Please!” If that still didn’t work, you probably heard the question again, but this time it may have been framed or phrased slightly differently. Although the request may have been phrased differently, it was probably still followed by the “Why not?” and the “Please!”

Next came their explanation as to why the answer should have been yes. Perhaps you learned that “everyone else was doing it, or had one.” This additional information was followed by another attempt at the request. If all such efforts failed, then one of two things happened: permission was sought from someone else–Mom if Dad said no, or Dad if Mom said no, or another attempt was made after they gathered more reasons or thought the climate had changed. All avenues to secure the request would be made. Sound familiar?

What lessons can we learn from these persistent children?

1. They make sure they have your attention.
2. No close is ever effective unless you have the buyer’s attention.
3. They ask for the “sale” with the expectation of being successful.

Do our expressions or posture indicate that we anticipate a positive response? Do we look the prospect in the eye whenever we ask a closing question? I once knew an associate who tracked what he called, “white-eye closes.” Those were closes made while being able to see the whites of the prospect’s eyes while he or she could see the whites of your eyes. His explanation was simple–no sale was ever made until he looked the person in the eyes and asked for the sale. Children do this naturally.

Next, a child seldom accepts the first negative response. They first want to know why. And if the why is not satisfactory, they ask again. They assume that you must not have understood, so they re-phrase the request, and ask again. Children never hesitate to respond the reason. And, after answering the objection, they try again. Seldom do they accept the first objection.

One reason children don’t hesitate to respond to the objection and re-ask the question, is that they do not take the objection personally. Too many times adults assume that it is them that is being rejected, instead of their request being rejected. A child knows that the parent loves them regardless of how many “nos” they get to a request. Therefore, they don’t see it as rejection, they see it as an objection to be answered.

Children are persistent salespersons from whom we can learn. Next time you want to emulate a really good salesperson, try being as natural as a child. Get their attention, look them in the eye, ask the question expecting a “yes,’ ask for reasons and answer those objections, and re-ask the question. Remember that an objection is just a response to your last question–it is not a personal rejection. With the children leading, you can use your natural sales skills.

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