Life Insurance Selling - December 2011

THE INVESTMENT EDGE
By Richard Hoe, ChFC, CLU, AEP
Here’s the secret to
tax-efficient asset transfer. . .

Baltimore Life’s Single Premium Whole Life and Generation Legacy products.

• Reallocation of a portion of
invested cash assets, such as CDs
and money markets, that are not
needed for daily living; or
• Clients can pass on non-qualified
annuities and other qualified funds
to heirs in an easy, tax-efficient
manner.

Products include Accelerated Death Benefit Riders that can provide a portion of the death benefit to clients while living for: • Terminal Illness, • Qualified Nursing Facility Care, or • Extended Care

What’s more? Both products offer:
• Simplified, point-of-sale
underwriting decision process
• Highest available agent
compensation
Visit www.baltlife.com to learn more
or call Independent Sales at
(800) 745-5433, ext. 6637 or 6655.

Secure Solutions® Single Premium Whole Life (SPWL) and Generation Legacy TM are issued and underwritten by The Baltimore Life Insurance Company in Owings Mills, Maryland. Benefits under riders may be taxable to the client and affect eligibility for Medicaid or other government benefits. SPWL Policy Form 7982 and Generation Legacy TM Policy Form 8243 or state variations where applicable. Policies and riders not available in all states.

year value of $41,205.88, which is lots lower than the amounts shown.

So, the cost of the joint income benefit rider, if it stays at its current rate, is the difference between $55,627.01 and $69,961.25, or $14,334.24. But, if the maximum cost is charged for the joint rider, the cost for the income benefit is the difference between the no-annuity result (from any financial calculator or spreadsheet program) of $69,961.25 measured against the 20th year cash value of $41,205.88. Over 20 years, the difference is $28,755.37, an amount that one might have if there was no annuity and, say, a C-share mutual fund was used instead. (As to mutual funds, J. Alex Tar-quinio, in the July Smart Money, points out that the average expense factor is about 1.5% yearly.) That extra annuity charge is a heck of a lot of money to hedge your bet, more than 69% of the 20th year cash value. At maximum rates, the insurance company wins big time.

Before you, gentle reader, become weirded out, whacked over and made generally crazy by all this, please let me write again that the

5.28% rate used in the example is a net rate, after regular M&E expenses and sub-account charges (but not before income benefit riders and other charges). In other words, the company develops the 5.28% rate from a gross rate of 7.73%, and the net rate is after M&E and sub-account expenses have been subtracted. Neither the gross or net rates include the charge for the income benefit.

Please don’t imagine that the C-share mutual fund has higher expenses. It doesn’t. In fact, probably no investment program or fund — other than hedge funds, which often subtract as much as

20% to 25% of profits — charges higher amounts than investment annuities.

Where’s the beef?

Here’s the deal: as Jack Bogle, the founder of Vanguard’s low-cost funds and indexes, has been saying for decades, those little 1% charges can add up. The insurance companies say net rate, but they mean something different. (If this seems repetitive, it is. But there’s a point to make, and it’s going to take some discussion to get to it.) Whether it’s an investment (variable) annuity or an indexed one, the net rates do not include the rider charges for the lifetime income benefits in some illustrations. The net rates only subtract M&E and fund expense charges. However, if you apply lifetime income, you’ll find that the customer winds up with between $10,000 and $20,000 less, and all from that 1.2% joint rider charge (which often may be increased). The discrepancy will be greater if you add death benefits.

So, if a customer averages 5.28% in his or her own brokerage account with

TD Ameritrade, where the individual is making all the trading decisions, there should be nearly $69,000 in value at the end of the 20th year, ignoring the $9.99 trading charges. On the other hand, if the same customer averages 5.28% with me, or with you, in an advisory account, the gain is the 5.28% yearly average, less the 1.12% I may charge for managing the investments and making decisions. Of course, I’m a professional and am supposed to do better than a non-pro-fessional, but we’ll leave that idea aside and assume that we are exactly equal in skill. (And, of course, the numbers won’t dovetail perfectly in these ex-