Sadly, history repeats itself today.  Our national debt is too high and will have to be repaid by either raising taxes, cutting benefits, or printing money. Current retirement plans are failing and not suitable for most individuals, and while market returns have proven themselves worthy in some past instances, they are dramatically lower for the majority of the American public. Now what?

THE SOLUTION

As planners, we often ask our clients to take out various types of insurance to protect against the possibility of a loss. We insure our cars and homes against hail, floods, accidents, and other unforeseeable disasters. We transfer the liability of a potential loss from ourselves to an insurance company by making routine payments. We take out liability and umbrella coverage to protect against the possibility of a law suite due to an unforeseen accident that may occur on our property. Some of this is required by law; however, most people have neglected to insure the most critical part of their lives: their retirement.

The life insurance industry has made tremendous strides to meet the needs of consumers, and the plans that are available today offer more benefits than any other retirement vehicle. The benefits of these uniquely designed policies significantly outweigh the traditional plans (such as 401(k)s) where most people have lost as much or more than 50% in the past 12 months. These substantial new plans are called equity indexed universal life (EIUL) which have the ability to provide consumers with the upside potential of the market with no downside risk. They allow consumers to lock in gains (generally up to 13.5%) while minimizing potential losses due to a guaranteed interest rate of 2% (for most products). The people that lost 50% last year would actually be up 2% (or 52% ahead of where they are now) had they chosen an EIUL.

The brilliance of these plans lies in their simplicity. Your money is not linked to the stock market.  Instead it is tied to an index such as the S&P 500 or Dow Jones then credited a rate of return within a specific pre-determined period.  This actually reflects a true 8% rate of return as your money grows tax free and is distributed income tax free.  To compare, if you were to profit 8% in a mutual fund, after paying taxes and fees, you may be looking at a 5-6% rate of return.

Example 1: A 45 year old male in a 28% tax bracket would like to withdraw $100,000 from his 401(k). First, he would pay a 10% penalty or $10,000 for early withdrawal. The remaining $90,000 is subject to his federal income tax rate of 28% ($25,200) with a final balance of $64,800.

Example 2: Now, using the previous criteria, let’s look at the results if he were to pull the money from his equity indexed universal life plan. There is not a penalty for withdrawing money from the account nor are any federal income taxes due. You leave with the full $100,000 completely income tax free.

The main difference between these two examples is the tax treatment of the plans. Any qualified account such as a 401(k) where you are making contributions and allowed a tax deduction for the current tax year would follow Example 1. In Example 2, you pay taxes on the total amount you contribute to the plan; however, everything accumulates tax free and is distributed income tax free. Why would anyone want to defer paying taxes today on small periodic contributions compared to the taxes you would pay on the total accumulated amount at retirement when you will be in a higher tax bracket?

If you were selling Picasso paintings, would you rather pay taxes on the paint he used or the finished work? Would a farmer rather pay taxes on the seeds or the harvest? Would James Cameron rather pay taxes on having the Avatar script prepared or final ticket sales? Get the idea?  Why continue to defer taxes and assume a larger tax liability?!

In addition to the tax benefits and flexibility of an equity indexed universal life plan, the policy includes a death benefit that self-completes in the event that income is lost in case the owner passes away before reaping the living benefits. In traditional IRAs and 401(k) plans, the beneficiary only receives the amount in the plan at that moment, minus any fees and taxes. With a properly structured EIUL plan, it can accomplish several goals you will have over the course of your lifetime.

Learn how to take advantage of full comprehensive planning at a truly affordable cost and address the following areas of your financial well-being.

• Tax Free Savings
• Tax Free Retirement Income
• Disability Protection
• Emergency Funds
• Mortgage Protection
• Income Replacement
• Life Insurance Benefit

If you are interested in seeing how this plan would work for you, please contact us and request a client questionnaire by sending an email to kyle@carltonfinancialgroup.com. 

To your financial prosperity,

The Carlton Financial Group

The National Debt

With the debt at $12.3 trillion and climbing, it is no secret that we are in the middle of an economic catastrophe. As taxpayers, the government has requisitioned us to support the baby boomers' social security, Medicare, and various other government assistance programs. The current administration has spent more in one year than the previous administration did in eight. We do not have the luxury of borrowing our way out of debt, and our country may establish a plan to repay the debt by raising taxes, cutting our benefits, or printing more money (therefore increasing inflation).  

When I hear any financial advisor recommend deferring current taxes until you start to withdraw from your IRA or 401(k) so that you will be in a lower tax bracket, it makes me cringe. First of all, why would you want to be in a lower tax bracket?  That means you are making less money! Second, who do we think is going to pay the national debt along with our parents' and grandparents' social security benefits?  Hello, Generation Y! At some point, we are all going to have to pay up!

I think you can now see this is your National Debt.

Current Retirement Plans Are a Failure

2009 marked the 30th birthday of the 401(k), and the baby boomers are the only generation that has had the time to follow this type of plan thus far.  Regardless of what the government’s intentions were when they set up the plan, this plan is not performing as needed because of the golden handcuffs and minimal market returns. Here are the hard facts for workers approaching retirement:

• 52% of workers have savings (not including home equity) of less than $25,000
• 75% of workers with no retirement savings have less than $10,000 in savings
• 35% of people over age 55 have less than $10,000
• 65% of recipients rely on social security for at least 50% of their income; 33% rely on it for 90% of their income! In 2005 the average benefit was $1,002. For a couple it was $1,501.
• Workers age 55-64, will only be able to replace an average of 9% of their income with 401k and IRA retirement savings alone.

People never plan to fail; they simply fail to plan. Saving for retirement is a must if you want financial security; however, the available options must become more transparent. Who wants to lock away their hard-earned dollars in plans that will only allow you to access your money while charging a 10% penalty?! The long list of red-tape, rules and penalties simply outweigh the decision to put a plan into action, so people fail to act.  If you spent a weekend in Vegas, how much money are you willing to gamble if you really do not understand the rules? Not much, right?

Market Returns

Brett A. Anderson, author of Last Chance Retirement, noted, “Over the last 61 years the average return in the S&P 500 index is 7.14% (before fees), and the story is worse for mutual funds. A report released in 2006 by Morningstar and the Harvard Business School revealed the performance of 4,000 mutual funds between 1996 and 2002 (pre- and post-crash of 2001) earned a 2.924% return for clients working with financial advisors.

In a 2001 study, Dalbar Inc. reported that for a 17 year period leading up to December of 2000, the S&P returned an average of 16.29% while the typical investor received a 5.32% return or 1/3 as much. It is rare for a typical investor to beat the index or even come close."

So, if most investors can not beat the index, why not bet the index?

Expert investor Bernard Baruch (1870-1965) once said, "Don't try to buy at the bottom and sell at the top. It can't be done except by liars."

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The mainstream financial influences, including newspapers, magazines, reputable internet sources, and even your next-door neighbor, recite these all-too-convenient financial misconceptions of 401(k)s, IRAs, and mutual funds.  These advisories have led you to follow a never-ending mirage of financial insecurity while counting on the retirement oasis to suddenly appear as a reward for having stuck to the popular investing methodology. The baby boomers have seen their 401(k)s become 201(k)s and many of them do not have the time to recoup their losses and achieve their financial goals.

Now, I agree with the financial institutions wishing for increased currency circulation along with proper planning planning, however; why give it back to the institutions that put you in the middle of this crisis? Did you receive a call from the brokerage firms where your money was invested before the market crashed? Did you receive a plan of action from the broker that was receiving commission payments and assets under management fees on your money?

Your friendly broker more than likely suggested some of the following:
“Don’t worry, the market will recover.”
“Now is the time to invest to obtain the greatest returns.”
“More millionaires were created out of the great depression than any other time in history.”
“Invest more today, and your dollar cost average will improve.”

Garrett Gunderson, author of "Killing Sacred Cows" comments on these financial myths saying, "Compound interest. Dollar cost averaging. Show me one person that is truly wealthy because they have that or because they followed that. Typically they did something and that is where they stored it." Meaning, the IRA or 401(k) is only a container to store what they have accumulated and no one is truly wealthy just because they followed the conventional advice.

Most people took a hard lesson as brokers' actions are exactly what their title implies; they leave you "broker" for having known them. They advised you to enter into plans with high management cost, countless limitations and no exit strategy. You were advised to enter into these plans because they were familiar and it was the plan everyone was told to follow. Most likely you were only given one option/strategy and never shown the other plans available to you.

The good news is that you get one free pass to say, “I didn’t know; it is not my fault. I was not aware of any other financial concepts to help me obtain my goals!”  Why do you get this pass? Because everyone was getting bullied by these financial firms to invest hard-earned dollars into plans that were not suitable to help you accomplish your financial goals. This moment marks the end of financial ignorance and the beginning of your new financial future: one that you control.

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LifeHappens.org summed it up best as to why we utilize an entire month to spread the word.  "These are unsettling times. Over the past year, almost every pillar of our financial security has been shaken, one by one. The bursting of the real estate bubble, the precipitous decline in the stock market, a rapid spike in job losses. Now more than ever, Americans are searching for ways to maintain basic financial security. One source of financial security still stands strong, however, and that’s life insurance. It continues to do what it was designed to do – serve as the foundation of your family’s financial security."

In my hometown of Franklin, TN we have experienced several tragedies over the past three weeks. You hate to hear about anyone passing away, but when the situation entails young lives, we should take a moment to reflect on our own mortality. I purchased a cancer plan last year simply because of Lance Armstrong's story. (If he can get cancer, anyone can)!

However, unlike cancer insurance, life insurance is the one only insurance policy that you are guaranteed to need at some point. As I watch people provide the best vacations for their families, send their kids to prestigious schools, attend the best restaurants, purchase the most expensive clothes, and drive luxury cars, it is easy to see that everyone wants the best for their families. So, why gamble with your families’ financial security? Life insurance is a safety net to provide an income for your family in case you are no longer able.  You can guarantee your children will have their college education paid in full, eliminate any outstanding debt for the surviving spouse, and provide guaranteed income income for the remainder of their life. There are several other benefits that life insurance offers however the main benefit is that with life insurance, you give your family options while leaving your legacy.

We want to hear from you! Please send us your story about how life insurance has helped you or someone your know. Your story may just help someone notice their need for life insurance.

1. Ownership: who owns the policy?

If you own the life insurance policy, you may face a federal estate tax. Your estate is a compilation of: your investment and retirement accounts, property you own, inherited assets, life insurance, etc. If your estate already exceeds the federal estate tax exclusion (currently set at $3.5 million and $1 million in 2011) then this information is especially pertinent.

The easiest solution is to have your policy owned by a trust or another adult beneficiary. In cases when we work with income replacement policies for married couples, we usually structure it to where each spouse if the owner of each others policy. This is only a short term fix with the disclaimer that we will need to set up a trust in the near future to meet your long-term needs.

2. Naming your estate as the beneficiary

If the life insurance proceeds are named to your estate, you have most likely and unintentionally created the following issues:

• Incurring an estate tax. Most people think that life insurance is a tax free benefit, which is only half true. Life insurance is income tax-free but not exempt from the estate tax.

• Proceeds from the life insurance policy are probated and then distributed, which is another reason why we recommend a trust!

• Offers no protection from creditors

All of the previously noted issues wastes time and money, creates unnecessary aggravation, and immediately diminishes the value of what you pass on to your intended heirs.

3. Name contingent (back-up) beneficiaries

Most people list only one beneficiary which should be avoided. If something happens to the insured and their beneficiary (at the same time), the proceeds will be made payable to the insurer’s estate.  By naming contingent beneficiaries, the proceeds may then be made payable to a person who you would like to have inherited the estate if something happened to your primary beneficiary. However, these proceeds will cut out the estate tax while saving the beneficiary’s time and money fighting with probate courts. Only placing one beneficiary on your policy is virtually naming the IRS as the contingent or backup beneficiary.  This not only applies to life insurance, but to annuities, IRA's, 401(k)s, SEP', 403(b)s, mutual funds, bank accounts, etc. Please note that these backup beneficiary accounts may be referred to as “payable on death” or “transfer on death” (POD/TOD) accounts instead of “naming a beneficiary”.

4. Failure to review policies

Most people take out life insurance to take care of the people they love after they pass away; however, most people seldom review their coverage on a routine basis. Policies shall be reviewed as time elapses and lives evolve.  Initial drafts may or may not include the potential settings: ex-spouses, future children, deceased beneficiaries, dramatic health changes, and so on. Not reviewing your life insurance program can result in failing to meet the demands of your current needs.

Ensure you are getting sound advice for your specific situation. Life insurance is a product to help maintain the quality of life for which you are accustomed, preserve a successful business venture, replace a key employee, alleviate an estate tax burden, and/or preserve your legacy. Make sure it is working with you, not against you.

First, what is an Equity Indexed Annuity?

An equity indexed annuity earns interest based on the performance of the equity index it is linked to. The value of the index might be tied to a stock or other equity index, typically the S&P 500 (which is an equity index). The value of any index varies from day to day and is not predictable but insurance companies offer guarantees (usually 1-3%) regardless of how the market performs. When you buy an indexed annuity you own an insurance contract, you are not buying shares of any stock or index. The benefit of an EIA is that you have the upside potential of the market with zero downside risk.

An Overview of Rule 151A

"In June 2008 the SEC issued a new proposed rule (SEC Release No. 33-8933, File No. S7-14-08) that would classify certain indexed annuities as securities. The proposal would accomplish this by creating a new Rule 151A that would change the treatment of indexed annuities under the insurance products exemption found in Section 3(a)(8) of the Securities Act of 1933. If the proposed rule is adopted, the SEC and FINRA would have authority over indexed annuity sales, and someone who wishes to market/sell indexed annuities will need a series 6 or 7 securities license and be required to have sales supervised by a broker/dealer. An insurance producer license, by itself, would no longer be sufficient. There is also concern that the application of proposed Rule 151A would not be limited to indexed annuities, and that other annuity and insurance products that fit the criteria set forth in the rule could be brought within the scope of the rule.

On December 17, the SEC held a public Open Meeting to discuss proposed Rule 151A, and by a 4-1 vote, adopted the Rule.  In response to comments submitted by The National Association of Insurance and Financial Advisors (NAIFA) and others, the SEC did indicate it was revising the text of the Rule to clarify that the Rule only applies to indexed annuities and not to other types of fixed annuities or insurance products. Rule 151A will only apply to indexed annuities that are issued after the Rule’s effective date, which will be January 12, 2011." NAIFA Website

What Rule 151A means to YOU, the consumer...

Indexed annuities are great products and when they fall under the SEC's authority, the value they provide to you is likely to be diminished due to high fees and cost associated with security products. With the current state of our financial markets, it is absolutely insane for this product to fall under the "supervision" of the SEC and FINRA. It has been the investment advisors that have lost the majority of your money over the last few years. My guess is that very few people ever received a call from their  "supervised investment advisor" recommending it may be a good idea to reallocate funds to a more safe/guaranteed product, just until the financial waters clam down.

Now, if your money had been in an EIA, what would you have lost over the last few years? Absolutely nothing, you would not have lost one penny due to the solid guarantees that these products offer. By now most of you are wishing that this product was offered to you about three years ago, right? Well, EIA's are not considered assets under management so your broker or investment advisor can not build their commission structure the same way which is why you were sold stock, mutual funds, or variable products, ouch!

If you have a story of about how your personal advisor/agent has helped you through the last few years without taking on a loss, please, take the time to share your story with me.

A call to insurance agents...

Please adhere to all guidelines when selling and marketing our products. Take time and invest back into your business, if you are not a member of NAIFA, please join; this is our voice in Washington. CLICK HERE to begin the registration process and let your voice be heard, equity indexed universal life will be next.

Now, before I begin, you history buffs may be interested to learn about how the estate tax came to exist and how many times it has been reformed since its inception:

1797                 Estate tax enacted to pay for tensions with France
1802                 Repealed when the threat of war ended
1862                 Estate tax re-enacted to fund the Civil War
1870                 Estate tax repealed
1898                 Estate tax reinstated for Spanish-American War
1902                 Repealed when war was over
1916                 Estate tax back for World War I
1930                 Various changes; similar to today's estate tax structure
1976-1993       Nine major pieces of estate tax legislation introduced
1997                 Unified credit increases and new family business exclusion
2001                 Economic Growth and Tax Relief Reconciliation Act of 2001

Most people today are (unknowingly) using 2010 estate planning techniques which combined with current market conditions it is very similar to playing Russian roulette. Currently the estate tax exclusion is  $3,500,000 for 2009 and in 2010 the estate tax is repealed (gift tax remains) before reverting back to the 2002 limit of $1,000,000 in 2011. NOTE: the Obama administration is highly considering keeping the estate tax in 2010.

Below are just a few KEY benefits/reasons as to why you would need to have a up-to-date estate plan.

    •    makes sure children and dependents are cared for
    •    avoid probate which could immediately diminish 10% of your estates value
    •    reduce estate taxes and pass more on to your heirs
    •    provides complete privacy and peace of mind

To design an estate plan you will need to form your team which consist of an attorney, insurance professional, and your accountant/CPA. They should coordinate efforts to align the financials of the estate with the necessary documents (wills, various trust, business agreements, powers of attorney, beneficiary designations, etc) and provide the correct funding source (life insurance) to pay the appropriate taxes. Now, I hear a lot of clients say, "I have a Will, so everything is taken care of." The problem with only having a Will is that it can be contested by anyone (in most states). Some examples of inadequate estate planning would be Leona Helmsley, J. Howard Marshall and Anna Nicole Smith, Terri Schiavo, and Elvis Presley. Get this, the $10,165,434 Presley estate was diminished by $7,374,635 as a result of taxes and various other fees (which could have been prevented). Had they properly planned, we would not even have access to this information. The end result of a properly designed plan will enable you to control the distribution of your estate while minimizing taxes and doing so in complete privacy.

"Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do." Mark Twain

1. Safety

Without question, safety is the top priority for everyone when they are saving their money. But safety means different things to different people. To some people, safety means putting money with their bank while complying with FDIC limits. To others, it means having money diversified across a variety of stocks and mutual funds or even picking their own stocks after they have researched the underlying companies; and to others, it is entrusting their money with a financial professional. Regardless of your definition or safety, we can all agree that everyone expects to earn a nice rate of return while protecting principle.

Annuities offer three different levels of safety:

    •    By contract, a fixed annuity guarantees that your principal is protected and that you can get it back again. There may be a penalty for early withdrawal, but as the annuity owner, you can control your withdrawals. So, there is no circumstance that can cause you to lose money in a fixed annuity.

    •    Even if your insurance company fails, the value of your annuity (up to $100,000, or more in many states) is guaranteed by your state insurance guaranty fund. In other words, your annuity is backed by a government guarantee similar to those that protect your bank deposits.

    •    If you have a problem with the insurance company that issued your annuity and you want to get a regulator involved, the regulator is located in your home state no matter where that insurance company is located. Here, annuities even beat money in the bank. Since most banks are regulated at the federal level, your bank's regulator may be in Washington, D.C.

2. Growth

Once you are assured that your money is safe, the next objective is to have that money grow as quickly as possible. A fixed annuity will guarantee a specific rate of return, regardless of market fluctuations!

Fortunately, insurance companies are not ignorant of that fact. Many carriers offer annuities with very attractive interest rates or the option to purchase an equity index annuity which can provide the opportunity to earn a higher rate of return (I will cover indexed annuities in another post).

3. Tax advantages

Again, everyone want their money to grow as quickly as possible, and besides having a great return, why not maximize on your tax advantages in the mean time.  Annuities cannot claim to have the best tax advantage possible. However, neither can stocks, stock mutual funds, even 401(k)s and IRAs. Please consult with your CPA in regards how an the purchase of an annuity will effect you.

4. Liquidity

Most people recognize that liquidity, safety and growth do not co-exist very well. For example, with a checking account, you get excellent safety and total liquidity, but you lose growth. With the stock market and mutual funds, you get good liquidity and hopefully a good rate of growth, but you are sacrificing safety. So, if an annuity is going to give you bulletproof safety and a good rate of growth, there needs to be some sacrifice in liquidity, right? The good news is that most annuity products build in enough liquidity to make many customers comfortable. Even retirees who need to withdraw money every year to supplement their incomes can find annuities that allow them to take such withdrawals (based on the guidelines of the annuity contract).

Please feel free to leave any comments or contact me with any questions.

If you are looking to purchase life insurance for the first time or you have life insurance and need to review your coverage, you will want to follow these simple steps to better understand the process to have certainty and piece of mind you are properly insured, after all, is that not why you buy it in the first place?

1. Understand why you need life insurance

While most people may need life insurance at some point in their life, they do not buy a policy just because it sounds like a good idea. Life insurance is designed to provide families with financial security in the event of the death of a spouse or parent. Life insurance can help replace lost income, fund a college education, inhance retirement and is a key element in estate planning. If others depend on your income for support, you need life insurance!

2. Determine how much should you buy

There are several ways to calculate the amount of life insurance you should have. Most calculations seem like a they were designed by insurance companies to help increase the amount you need, in turn, increasing your premium. One concept that is commonly preached is to multiply your annual income by 7,8, or even 10 times and most people ask, why and don't buy (leaving their family unprotected). Below is a way that you can accurately calculate the amount of coverage you need for income replacement.

• Determine the annual income your family needs.
• Divide that number by .07, which is the interest rate you can expect to earn on your money (please feel free to adjust the interest rate to your comfort level).
• Account for immediate and future expenses (final expenses, misc debts, college tuition, etc)
• Subtract any savings, inheritance, current insurance, or other assets from the total amount

Now, you should not only have a more precise idea about the exact amount of life insurance you need, but have a better grasp on how to determine your need.

3. What type of policy should I buy?

Once you have an idea of how much insurance you will need, it's time to think about the type of policy that best fits your needs. There are two main types of plans (term or permanent) that are used for very specific situations. If you are protecting your home and you have 24 years left on the mortgage along with two young children you are planning to send to college in 12-13 years you can customize a policy to protect against all of those needs. Now, if you are looking to help fund your children's education or transfer your estate to your family instead of the government, you will want to consider a permanent plan.

I will have more information in the future regarding the different types of plans that are available to you. It is more important to have the correct amount over getting wrapped up in all the features (also called riders) you can add on to policies. In the mean time please visit our life solutions page for an overview on each product type.

4. Consult an agent

Agents do (or should) provide an amazing service. A qualified agent can help you determine your exact need by helping you identify easily overlooked "human" elements and provide the appropriate solution and product. Insurance companies are always releasing new and innovative products and an agent can make the appropriate recommendations based on your specific needs.

5. Check the companies ratings

The policy you purchase is only as good as the company that backs it. Some agents are required to sell for certain companies while others are independent. Regardless of the agency you work with, you will want to make sure the company has a strong financial rating and will be around to pay the claim. There are four leading agencies you can check with: A.M. Best, Standard and Poors, Moody's, and Fitch.

6. Become a student

This may seem like a ridiculous statement, however, I believe it is an extremely important point in regards to anything you purchase on a continual basis. The average person will purchase life insurance seven times throughout the course of their life due life events that change the need for coverage. You will want to make sure you understand the type of coverage you have, why you have it, and how the amount was calculated. This way when an another agent approaches you about reviewing your coverage you will know how to answer their questions and determine if you should review your options -- especially if you have not heard from your agent since you last handed them a check.

Any discussion of insurance will include words such as cash value, premium, beneficiary, owner, etc. To discuss life insurance knowledgeably, it will help to understand the terms. This site offers a glossary of terms to help you better understand some of the industry lingo.