Insurance as income replacement? and funding???

Jan 16, 2007

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  1. James
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    James Guru

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    Insurance is just for Income Replacement just for the working years?

    Okay letÂ’s examine some of the latest hat tricks, here it goes. One poster post this tidbit of advice: You want a comfortable retirement? Try 2 mill in investments after 35 years. That's $80,000 a year income and in today's dollars about $40,000. Now at least you can have some type of life. Oh, you'd need to put $500 a month into investments at 10%. The same poster, posted this just a day or two later: And here's a little "stock 101" for ya - a lot of the baby boomers with large stock portfolios will be quite happy with dividend income and won't touch their stock - like my parents. Now this is going against every study out there that suggest people are living beyond their means. Just how many people are saving 2 million in their retirement nest egg? It is suggested that the average 401 has around 46 grand not 2 mill. So letÂ’s get off the oleÂ’ crapper and deal with reality.

    Today the average household is bringing in an estimated adjusted income of around 45 grand (if you want to differ google it and offer up what you find). The average qualified plan thru work is around 46 grand at age 55. Now obviously this is not a rosy picture by any means and it isn’t base on income deficiency! 10% of 45 grand is 45 hundred, if that amount was actually being saved the 46 grand average would be much higher, IMHO. Obviously this leaves us in a pickle of a situation, life doesn’t stop at 65 nor does the need to protect the income because as we see there simply isn’t enough investment there. All so obvious is that SS is going to change, in my opinion since privatization isn’t panning out, you’ll see three things happening. First is increasing the age of retirement, already done, it is now at 70 for younger people I believe. Second is a reduction of amount and third could be and I assume once the shit hits the fan “Means Testing” and/or “End of SS Top Out Taxation Rules” will apply. The old adage of children being a financial drain is incorrect, they have always been a financial asset and that hasn’t change as we now understand or should if you have any spark of intelligence.

    Now comes yet another wonderful idea from our “Big Brother” government and it is being touted as the cure all by Wall Street. That is to make qualified money 401 savings mandatory or at least the default. In other words a percentage of your check will be invested in the companies 401 program that has little options as to what it offers and many smaller companies don’t even offer. Instead of enrolling in a 401 you have to opt out if you don’t want to contribute. Now lets guess why Wall Street would like such a law, I believe it has passed or Pres. Bush and many in Congress are all for it. Obviously political conservatism has change this year? I transgress though, how good of an idea is this? If you compel someone into savings what happens when they switch jobs or experience a cash flow problem, you know its going to happen. You have three choices, roll it over, ignore it and let it ride or cash it out. I would think you Cash-Outs will increase as with other options, so this may help around the edges but it sure isn’t no cure all!

    So we now have the truth, people for the most part will not save enough or nearly enough for their retirement in the traditional method of qualified or non-qualified investment strategy. So once again we can clearly see that the need of insurance is present even in the retirement years. While itÂ’s feasible that two can work part-time jobs it wouldnÂ’t be as feasible as one working a full-time job for several reasons. I do believe most are content that work is going to be a constant and many believe that is the way it should be. While one should have the luxury of not working like they did at younger ages yet the need to produce and be active doesnÂ’t stop for most at some golden magical age. Even I find the notion of the mythical retirement idea that has gain favor in resent years boorish. My personal opinion is that man is meant to be a producer not a parasite. My idea of retirement is running my photography studio with an Art Gallery, yea sipping wine at noon hosting an art show for some aspiring artist.

    So we can clearly see that the need of protection goes beyond retirement age for the vast majority of people. Now letÂ’s throw in the idea of a Legacy. I run into people all the time that state they would like to leave their children, church or a host of other organizations monies at the time of their death. Now this is quite common to many, the desire to leave a legacy. Nothing wrong with the idea, I wouldnÂ’t place it at the top of list.

    Now we have the problem of funding this wonderful product of permanent insurance product that has CV at retirement that can greatly aid the need of income money. At least that is what I find, everyone likes that idea, and itÂ’s the premium they might balk against. So obviously that is where this is going, not defending insurance per say but understanding the various ways to fund it.
     
  2. Crabcake Johnny
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    Crabcake Johnny Guru

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    So let's run with your example of the dream scenario being they save 10% of 4,500 per year. Let's go with a 35 year old family man who has nothing now - no savings, insurance or retirement of any kind but he has a 401K available to him and has $375 a month max to spend - he need life and retirement with 30 years to save/invest. We'll remember that inflation runs at 3% so money loses half its value in 30 years. Let's also say to make this easy that he needs a $500,000 DB.

    My advice would be: $500,000 in 30 year term for around $50 per month

    He has $325 per month left:
    20% in 5% bonds
    80% allocated in DRIPS, ETFs, Index funds (all either low or zero fees) returning 10%
    Obviously max out the Roth
    That portfolio averages 9% growth - very attainable - very realistic - history backs me up. Almost no fees chewing into my returns. I'm also not figuring out the effect of re-invested dividends.

    $325 per month at 9% over 30 years = $631,187

    Now, what I didn't talk about was investing in his 401K since I'd need to see the options. Some 401k's quite frankly suck. They use under-performing mutual funds with very limited choices. However, you can't deny the power of a company match.

    Agents here also think I'm just a blind basher of life insurance products. I'm not and I'm not against permant life. But this is perfect scenario where the correct DB for perm life would chew up most of the money this guys need to invest for retirement.

    The stock market since inception has returned 10%. Life insurance averages 5% - which includes annuities. However, fees for life vehicles run about 2% making the net gain 3%. And guess what inflation runs?

    I'm not saying any type of investment doesn't have risks. I live in Maryland where Bethlehem Steel filed for BK and erases everyone's pension fund. Workers get crappy 401K choices and invest in mutual funds that LOSE money! Wow - what a great retirement!!!

    People buy mutual funds with sale loads, high fees with 12B-1 fees tacked on. So 4% is gone for the sales load, another 1.5% is management fees and .05% is advertising. So you put in $10,000 and 6% 1st year vaporizes. But there are also funds with no sales loads and no advertising fees.

    James brings out a great point about the market - when do you sell? And if you sell what do you buy? You can erase a gain by selling something that's up 50% and putting it into a dog. Imagine being in Vegas at the blackjack table - you start with $1,000 and you're up $5,000. So now you go to the crap table with your winnings and lose everything.

    Do I sell Assurant now? I'm up 100%. If I sell what do I buy? You do need to be a savvy investor to pull a lot of this off.

    But my point is still this: Any vehicle with 5% average gains and 2% in fees with inflation running at 3% has no net gain after 30 years. Just what he's saved. Is it safe? Yes. But that's all it is.
     
  3. James
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    Funding

    Now we have just entered where rubber meets that road, how do you fund it today when the savings rate for the average household is in negative territory? Of course to get specific would be impossible, the vast differences of people and their needs, desires are all over the map so letÂ’s not even try to get too detail. Yet though, there are certain obvious ways we can go an in one way or another yet this is what has to happen in most cases:

    1.Find the Money; this is budget related in the understanding that most people youÂ’ll sit down with do not live on a budget and for the most part donÂ’t know where their money is being spent in any great detail. In other words they are nickel and dimming themselves do death. Of course that takes several remedies, one obvious one is if they want to correct this situation is to place them on a strict recording of all monies spent for 30-60 days and then you initialize an envelope budget type of device. This alone if they implement it will basically change their lives as far as financial health.

    2.Reallocation of Assets; now this is where a lot of people have unfounded fears of. Yet though IÂ’m not here to convince the skeptics of the world that this is an acceptable and responsible way of balancing debt and savings. Yet though itÂ’s so simple most get it within no time at all. Yet I have found the idea goes into degrees on how aggressive people will go when implementing such a program. Loan money is cheaper than compounded interest savings account (note I did not mention an investment in any way), in other words I can achieve a positive result even if the interest rate on the savings account (such as a WL or UL contract) when compared to the cost of the loan. In other words itÂ’s a force savings account. Now this does not influence whatever so called investment (I use that term loosely) that they are participating in since IÂ’m using loan money that has been taken out of an asset that has been restructured, most likely yes that would be the home. Now the degree is does the client expect to live in the house long term or short term?

    Now in some cases this goes quickly but most if not the majority the people will take some time to implement such a strategy, so one has to have the mentality of selling a shorter term period (of course convertible) and implementation of the program over time. Or in other cases I use a Joint Contract with “First to Die” strategy lowering the cost of insuring two lives (with one DB) in the short time span replacing two short term contracts if they have the desire to place permanent coverage immediately.

    Now once you sit down with people they will be suspicious and weary on just how great the permanent coverage and of course the ability to pay for it using various methods. That is where the relationship has to built, sell term and convert over time isnÂ’t a fancy marketing strategy but simply a necessity!
     
  4. James
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    John,

    I wasn't even going to bother to respond but basically I will say this. It's never a either or situation, life is whatever you make it and most can handle a multi level retirement strategy. I stated it once and I'll state it again, permament coverage is basically a device that allows one to be a better and more aggressive risk taker in the market.
     
  5. Crabcake Johnny
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    And we're back to square one - client has only $300 a month to spare for all and any savings and currently has no life insurance at all. Everyone agrees that life insurance for him is a must, especially if he's the bread winner. Everyone agrees that without a correct DB then what's the point.

    Now - let me say this again louder for the people in the cheap seats: I'M NOT AGAINST PERM LIFE INSURANCE. What I AM against is a life agent sitting down with that client and recommending that all $300 of his disposable income go into a perm life vehicle.

    Take another client who has $1,000 a month to play with. Fine - agree that perm life should be a part of his portfolio and it would be a smart move. But how often do we REALLY run across that client with $1,000 a month to spare?

    More often than not we find under-insured clients with some crappy $50,000 life policy who's not currently participating in his company's 401K or fully funding an IRA - if he even has a IRA. That same person usually only has a few hundred to pay with.

    And I'm still waiting for what you'd tell that client. You're at his home and he says:

    "Ok James. I don't have any life insurance at all and also no savings of investments. But I only have $300 a month total right now to play with."

    Your advice is.................
     
  6. James
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    James Guru

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    The main problem I'm having here is your false reality! Since you decided to make this about a situation that likely doesn't exist I see no need to once again debate you. I wouldn't mind so much but since you take this personally and will as in the past result to less than respectful discourse I assume not to once again go down that road. I'll respond in another post presented differently than a response to your dogma attitude of the person that can only afford $300 dollars amonth for whatever reason. I find in most cases this simply isn't true but we generally get what we prospect for, and no I'm not suggesting going after the HWC.
     
  7. Crabcake Johnny
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    Sometimes a question can be answered without actually answering it. In this case you actually answered my question. Thank you.
     
  8. James
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    Market and Prospecting

    How and in what manner should we prospect and understand the people that we will talk to in the daily activities of selling insurance? Okay, so I prospect to people that earn 45-125 grand a year household income. Now understanding that there is a lot more 45 grand households than say 125 grand households obviously weÂ’ll be sitting down with people that are in the 45 grand levels give or take 10 grand. Now if they are in the 35 grand level and one income producer than some alterations will have to be considered. Yet though since the average earner is making around 32 grand a year and the average household is making in the 45 grand level than we have to assume your majority cases will consist of two income producers not one. Now do get me to the 125 grand level more often then some is I gear my marketing and prospecting toward medical workers such as Nurses, Resp. techÂ’s, physical therapist and so on, no I donÂ’t bother with DrÂ’s and the likes, theyÂ’re basically genius specific idiots I simply donÂ’t like dealing with them in such an environment.

    Now obviously youÂ’ll run into all kinds, makes life interesting and it will cause you to misread buying signals, god only knows I done enough misreads that cost me more than one sale in more than one area of sales. Yet the principle of understanding that people hate being sold and love buying is very true! Yet you have to play your cards correctly and not get too aggressive with ones product push. LetÂ’s take two various type of buyer, one is 40 and works for a company that offers a generous retirement package with lots of choices and yet he or she doesnÂ’t take advantage of these vehicles has no insurance in place except what the company provides. This person is sure they know what they are doing and proceeds to tell me itÂ’s no way they can afford to spend more than $300 dollars a month. Yet they live in a house that seems to beyond what they should be in, drive nice new cars and likely has expensive toys, obviously this person is living beyond their means. Now IÂ’m not going to handle this sale the same way IÂ’m going to handle others.

    LetÂ’s take the guy that is 40 years old and works for a small company that doesnÂ’t offer any retirement vehicles much or less offer matches to ones savings. This person is puzzle and suggests that they donÂ’t understand how some do it and he or she feels they can only afford $300 dollars a month. They may also live beyond their means but you see the difference? They may work for a company that offers generous compensation package that they participate in and since its tax saving account they still have the $300 to spend on insurance and some savings.

    Obviously you canÂ’t handle everyone the same way; itÂ’s up to the Insurance Agent to understand how to handle the client. Not all are the same, nor is the idea of what is correct or incorrect; you have no real way of changing someoneÂ’s way of life if they choose not too change! Or better put, you sell to the client and their desires, not yours and in that you can close more deals but you have to use some intelligence and be able to apply it.
     
  9. Crabcake Johnny
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    Crabcake Johnny Guru

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    How exactly are you prospecting? I actually get a lot of calls and email from life agents asking what method of marketing are effective for life - postcards? Telemarketing? Interenet leads? A lot of new people on this board need solid marketing ideas.
     
  10. James
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    James Guru

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    Well obviously you have B2B, but I think you're seeking a more difinitive answer.

    Okay, I'll answer to make things move on but this isn't what I had in mind but its a good thing to go into. I am a strong believer in "Center of Influence" or old school method of marketing. Yet to understand that isn't as simple nor does it mean what many have made it out to be here and other areas of discussions. So for new agents I highly suggest reading up and understanding how to use ones "Center of Influence". It has obviously directed me to prospect to medical professionals such as nurses and the like. My wife is a case manager, mother in law is a nurse and good perecentage of my friends and associates work in the medical field. Of course ones specific center of influence will differ and that makes for differing markets.
     
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