One ancient source alluded to a basic agrarian principle to illustrate a point: Unless a grain of wheat falls into the earth and dies, it remains alone; but if it dies, it bears much fruit. Maybe financial advisors could take a lesson from it as well.
Most clients would rather do something with their money than put it in certificates of deposit as an income source, if only they could be shown an alternative strategy with a better guaranteed rate of return, a guaranteed protection, and preservation of principal.
If you have a relatively healthy investor you can do just that by killing the CD so that deposit can be used to bear much fruit.
Assume a healthy 70-year-old non-smoking male in a 30% income tax bracket (25% federal and 5% state) with a $500,000 CD earning 1.5% (a 5-year rate competitive as of the date of this article). Currently the CD is earning $7,500 each year, $5,250 after-tax. Not much to write home about, so let’s walk through an alternative strategy.
Step #1: Use the $500,000 to purchase a straight life SPIA (you can compare different annuity options to see if others are more appealing). A current competitive annuity offering would make annual payments of $37,680, or $33,170 after taxation of the gain portion calculated under the annuity rule.
Step #2: Qualify for and purchase a $500,000 guaranteed premium UL policy. Even at Standard rates, one current offering has an annual cost of $20,119. This replaces the original principal from the surrendered CD used to buy the SPIA. Pay the premium each year out of the distribution from the SPIA.
Step #3: Stop and take note. The client has increased his after-tax income by almost 50% from $5,250 to $7,801. If the client is rated Preferred his annual after-tax income increases to $11,020. The insurance coverage preserves the original $500,000 for his heirs.
Step #4: What if the client is concerned about access to the funds to cover costs due to an extended illness? The premiums quoted above include an LTC rider on the policy, allowing for an income tax-free acceleration of the death benefit if needed for qualifying costs.
Step #5: What if the client is concerned he might need money in a non-medical pinch. Most SPIAs include a liquidity provision that allows for a lump sum distribution in return for a decrease in annual payments for a period of time.
Somewhere along the line the advisor should note, too, that two commissions are paid for assisting the client so well.
The Kansas Farm Bureau reports that proper seeding of an acre of ground requires about 70 pounds of wheat, or approximately two bushels. The average yield from that football-field-sized plot will be 40 bushels – or a 20:1 return – good for over 1500 loaves of bread.
We can’t promise similar results, but call concerning clients with under producing assets like CDs and we’ll give you figures to get you get your client to a better place – contact us today.