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Impending Increase in Life Insurance Premiums with Tom Hall, CLU, ChFC
James Lange, CPA/Attorney
Special Guest: Tom Hall, CLU, ChFC, Founder and President of Pittsburgh Brokerage Services
Please note: Some of the events referenced in our audio archives have already passed. Please check www.retiresecure.com for an updated event schedule.
|Click to hear MP3 of this show|
- Introduction of Special Guest –Tom Hall, CLU, ChFC
- Lock in Tax-free Rates of Return Before Year End
- Understanding Life Insurance with Long-Term Care Rider
- Understanding Whole Life Insurance
- Young Families Should Have Adequate Insurance Coverage
- Significant Increase Premiums for Guaranteed Universal Life Policies
- Am I Insurable?
- Consider Utilizing the Annuity in a Different Fashion
David Bear: Hello, and welcome to this edition of the Lange Money Hour, Where Smart Money Talks. I’m David Bear, here in the studio with James Lange, CPA/Attorney and author of two best-selling books, Retire Secure! and The Roth Revolution: Pay Taxes Once and Never Again. The topic of this week’s show is life insurance. If you’re thinking about purchasing permanent, not term contract guaranteed coverage, you should take action before year end. The National Association of Insurance Commissioners has changed the rules for how life insurance companies finance and carry reserves on their policy, resulting in substantial price increases from 8% to 15% for applications taken after January 1st, 2013. Some companies have already increased their prices on these and other policies. In the studio to help explain the situation is Tom Hall, founder and president of Pittsburgh Brokerage Services, a firm that provides underwriting and technical assistance to financial professionals. With 35 years of experience in the industry, Tom is a member of both the Pittsburgh Estate Planning Council and the Pittsburgh Life Underwriter’s Association. He is a full-service insurance broker who works closely with the Lange Financial Group and a previous guest on this show. Listeners, since our show is live, Jim and Tom are available to answer your questions. To join the conversation, call KQV Studios at (412) 333-9385. So stay tuned for an interesting and informative conversation, and with that, I’ll say hello, Jim and welcome, Tom.
Jim Lange: Thank you. This is a time-sensitive show, and with Barack Obama winning the presidency for the next four years, and this is not going to be a political show, but I think one thing that’s relatively clear is that tax rates are not going to go down, they’re likely to go up. And when I say taxes, I’m actually talking about two types of taxes: one is income tax, and the other is estate tax, and I have long felt that the two best tax shelters in the country that are available are Roth IRA conversions and permanent life insurance. So, I am trying to do the best I can to inform listeners and readers and my own clients about both methods of reducing taxes. So, for example, this coming Saturday, we are actually having a workshop on Roth IRA conversions, something I haven’t done, usually. But right now, I think it’s very timely and I want to do it while the tax rates are still lower and before the special Medicare surtax comes in. The other thing that I think is likely is that our current exemption amount for estate taxes is $5.2 million, and with even portability of $10.4 million is scheduled to go down to $1 million at the beginning of the year. And with President Obama, I don’t think that we’re going to see the $5.2 million with portability again. So now, estate taxes becomes much more part of the equation than it was even just a couple of days ago when we really didn’t know. So, I thought what I would do is bring on somebody who I consider one of the most knowledgeable life insurance experts in the industry. His name is Tom Hall. I have worked with him for probably over ten years. He is both my personal life insurance expert, and I use him for life insurance for my clients, and I will also tell you that I am personally going ahead…in fact, when I found that out, I applied for a million dollars of permanent life insurance for myself and a million dollars of permanent life insurance for my wife Cindy, and I did it through Tom’s company who I completely trust. So, anyway, Tom, welcome to the program.
Tom Hall: Thank you, Jim.
Jim Lange: All right, so Tom, first of all, why is life insurance going to be going up so much so quickly and with such an impending, almost immediate deadline? What’s going on there?
Tom Hall: It applies only really to one product, and that product has become the most popular life insurance product for people, I would say, over age 50 who are looking for coverage that will last their lifetime.
Jim Lange: All right, so that’s what you mean by ‘permanent?’
Tom Hall: That is one type of permanent life insurance, and it’s a pure death benefit plan.
David Bear: Is that sort of what they used to call ‘whole life?’
Tom Hall: No. It’s called ‘Universal Life No Lapse Guarantee,’ and it’s a product that if you pay the premium, it’s like term to 121, if you pay the premium and you contractually pay that premium every year, it’s guaranteed, and the death benefit is guaranteed no matter what. The only thing that could go wrong is the solvency of the insurance carrier and not honoring those guarantees, and that’s very unlikely and it has never happened that a carrier, even if they were insolvent, has not honored their contractual guarantees. So, what has happened is it’s a two-edged sword. Number one, interest rates are historically at their lowest point ever, and a lot of these policies are funded through long-term bonds. Now, long-term bonds, they were assuming 6% interest. Now you cannot assume 6% interest. So, when they return equity to their shareholders, these insurance companies, they really can’t sustain…they lose money. So, they’re raising their rates because long-term bonds are going down. Second to that is the national insurance commissioners have come up with the actuarial guideline 38, nobody needs to know that, I know that’s really boring, but the bottom line is they’re requiring insurance carriers to reserve more money to honor these contractual guarantees. It’s a solvency issue, and they want to make sure that they’re going to be there for the policy holders. And so, with that, rates are going up the first of the year, and it varies by the carrier, 8% to 12%, and what we’ve been seeing lately because of what Jim pointed out is single people who are making large gifts because they feel the $5 million threshold’s going down to a lower point. Are you using life insurance on a single premium basis? Those rates are going up 20% to 25% on the no lapse guaranteed products, and most of them already have gone up. So, there’s an opportunity in the next three months to save a substantial amount of money and lock in very attractive tax-free rates of return with the life insurance.
Jim Lange: Well, that’s actually the real reason why I’m having you on, Tom, because I actually see this as one of those opportunities that if anybody is interested in permanent life insurance, and we’ll get much more into the details, that they should do this before year-end, and you’re saying actually some of these policies are already going up?
Tom Hall: Right. I mean, there are certain carriers, if the policy isn’t approved and paid for by 12/31, you’re out of luck, and there are other carriers that have said they’ll do it sometime in the beginning of next year. So, it will vary. Our job, I have a large brokerage agency, and we have every general agency contract insurance companies out there, so it’s our job. We find the best product and match it to the client.
David Bear: The individual situation.
Tom Hall: Yes.
Jim Lange: Yeah, and I thought I would mention to the listeners because I know Tom doesn’t like to toot his own horn, but when he says he’s a brokerage, that means that he can get insurance from virtually any life insurance company, and what he will do is if somebody wants life insurance, rather than being a captive agent and you have to go to Prudential or John Hancock or wherever you happen to work, he can go to maybe a hundred different companies, see which one is the best and the least expensive for you, and then would recommend the one that is the most favorable. So, I almost always, well, not almost, I always recommend getting life insurance through a broker rather than going to a captive agent. The other thing that I like about Tom, I’ve been doing business with him a long time, is that he will always look out for the best interests of the client, not himself, and actually takes great pride in a) getting the best deal for the client, and the other thing that he does that I can’t understand how he does it, but he gets people who have certain health problems approved that even standard, or even sometimes preferred. But anyway, Tom, you mentioned permanent life insurance and you started with universal life, and that, as I understand it, is kind of a simple product. You pay so much money per year every year, and then, when the policy matures, as some of you life insurance folks like to say, when people die, the money comes to the beneficiary income tax-free, and assuming it was set up properly, legally estate tax-free. So, that is on, let’s say, one person. Is a second-to-die life insurance policy also part of this definition of permanent life insurance that is going to go up in price?
Tom Hall: Yes, and second-to-die is a policy that covers usually a husband and wife, and the policy pays a death benefit at the second death. And it’s designed to come in and usually pay estate taxes, and it’s a way to lock in 6% to 7% if you’re a standard risk, tax-free rate of return at average mortality, and you simply do not see 7% guaranteed tax-free rate of return. Now, that’s income tax-free, and the way you design it is that you make it estate tax-free, and after the election last night, the estate taxes most likely are going to come into play for many more individuals in the future.
Jim Lange: Well, second-to-die happens to be one of my favorite policies, and I don’t even know if you know this, Tom, but back in 1986, I was actually giving a workshop for insurance agents on the benefits of combining second-to-die life insurance with flexible estate planning, and the theory was that if we created a pool of after-tax, income tax, estate tax-free money with second-to-die life insurance, that that would give a lot more options for the IRA and the retirement plan, and these days, for Roth IRAs. By the way, you mentioned 6% or 7%. The numbers that I got when I did my analysis, that might even be conservative on what the, in effect, guaranteed rate of return would be on these policies, and the way I see it is if you actually die earlier, I don’t want to say it’s a great deal, but then it works out really well for the family.
Tom Hall: You don’t want that deal.
Jim Lange: No, you don’t want that deal. But I guess the point is that for it to be much less than, say, 6% or 7%, people have to live almost into their nineties with some of the quotes that I would see.
Tom Hall: I’m using a 88 to 92 life expectancy, because people are living longer and longer, and you’re right. And we all know, as we get older, and we go to the funeral homes and we see our friends and we’re in our fifties and sixties, and you look and you go, “Oh, my goodness,” and you value every day you have.
Jim Lange: Well, you do, and by the way, I get it and I’m doing it myself, and I’m doing it a) for a death benefit, and b) for a good investment, and c) to save income taxes and estate taxes.
David Bear: Do these kinds of policies have any value in terms of an asset that you could leverage in some way?
Tom Hall: Well, that’s a complicated question, but the answer is yes, usually. A lot of the policies that we have do have some cash value that is accessible. Some of them have cash value on if you liquidate them and terminate them or surrender them, and others. If you’re in your seventies, eighties, nineties, and I’ll get back to another issue that Jim and I discuss a lot, you can do what you call life settlements, and if your life expectancy is less than normal, there are people out there who’ll come in and buy the policy, and that’s called a life settlement viatical. But that’s kind of rare. People do not want to do that, and I don’t encourage that, and I don’t necessarily agree with it, because I would say do whatever you can to keep what you have. But one of the policies that we have now, and I’ll encourage our listeners to consider this, take a look at it, is a life policy no-lapse guarantee that you can access the death benefit tax-free, part of the death benefit on a monthly basis to pay your long-term care expenses. So, if you can’t do two out of six activities of daily living, they will come in and pay 1% to 4% of the face amount of the policy on a monthly basis tax-free to help you through the nursing home expenses, and 70% of people over age of 65 will have, in their lifetime, a long-term care situation need, and I think we all sitting here realize that, and know with our moms, our fathers, our aunts and uncles, that that is a real problem. So, this is a way to get tax-free dollars as opposed to going into your IRA and paying tax to cover these expenses, and it makes the policy a multi-purpose policy. I mean, I cannot say enough how important this is, having two loved ones now in nursing homes.
Jim Lange: Well, the other thing is, this was actually several years ago, I thought so highly of this…it’s not really technically a combination long-term care and life insurance. Technically, it’s a life insurance with a rider. Is that correct?
Tom Hall: Umm-hmm.
Jim Lange: I thought so highly of that. I actually liked it better than traditional long-term care. So, we actually had a whole program on that, and if anybody is interested, they can both access the sound file of that program, and we actually have the transcript on our website. So, if you go to www.paytaxeslater.com and you click on ‘listen now,’ and then you scroll down to episode #9 with Tom Hall, there’s a full hour on that type of policy, which in the way I understand it, Tom, and correct me if I’m wrong, is let’s say you get a $500,000 policy, and you never get sick, and you never need nursing home care, and you die, then it pays the $500,000, right? All right, let’s say you get sick and you need care, and you need $100,000 worth of care. So, the insurance, you know, subject to the limitations, the insurance company would pay $100,000 worth of your care, and then if you die, then the death benefit becomes $400,000. Is that right?
Tom Lange: Correct.
Jim Lange: All right. Example #3 is let’s say you buy a $500,000 policy, you need $600,000 worth of care, the insurance company will pick up the first $500,000, and then you’re on the hook for the last $100,000.
Tom Hall: The $500,000 policy does stay in force for minimum death benefit, usually $10,000, because you want it to stay in force until death.
David Bear: And that’s tax-free?
Tom Hall: And that’s tax-free. Tax-free, tax-free, tax-free. Can I say that enough?
Jim Lange: Meaning income tax-free, estate tax-free and PA inheritance tax-free?
Tom Hall: Yes.
Jim Lange: All right. Now, the other thing about this policy, if I remember right, and one of the reasons why we’re kind of stressing this now is because, as I understand it, the price on these policies are going up by January 1, 2013? Or maybe not exactly that date, but they’re rapidly going up?
Tom Hall: And you couple that with the estate tax situation, the $5 million going to $1 million, and you have people who want to make sizeable gifts, and it’s recognized, given the investment climate, that you’re not going to get a 5% or 6% tax-free rate guaranteed rate of return in any other vehicle, that right now, it’s kind of like, I mean, I don’t know, it’s kind of like almost a fire sale because people are clamoring, they’re taking closer and closer looks at this…
David Bear: Let’s call it a window of opportunity.
Jim Lange: And I will mention my role in this also, because it’s not totally random that Tom is on the show. I consider myself a trusted advisor, and I have a lot of tools at my disposal whether it be managed money, whether it would be Roth IRA conversion advice, estate planning advice, and what I like to do with clients is actually come up with an integrated retirement and estate plan, taking all of their financial attributes into account, and then developing recommendations in many different areas. One of those areas very often is life insurance, but I don’t think of myself as a life insurance guy that if you either buy life insurance or you don’t. I think of myself as a trusted advisor with one tool being life insurance, and when I see and recognize a life insurance need and opportunity, Tom is the person that I bring in because I trust him and I feel that clients will get a very fair shake with him.
David Bear: Well, I’ll tell you what. Right there, why don’t we take a quick break? When we return, Jim and Tom will continue the conversation. If you have a question or comment, call the KQV studios at (412) 333-9385.
David Bear: And welcome back to the Lange Money Hour. I’m David Bear, here with Jim Lange and Tom Hall. But before we continue the conversation, I want to invite listeners to participate in the Lange Money Hour. Our November 28th show will feature a special guest, John C. Bogle, founder and long-time CEO of the Vanguard Group, the world’s largest index and mutual fund company. Jim Lange invites you to have your investment or retirement questions answered by one of the best minds in the business. To submit a question, visit www.paytaxeslater.com and click on ‘Ask John Bogle.’ As a thank you, whether or not you actually submit a question, you’ll get a copy of the audio file and a transcript of the entire show. Now, Jim?
Jim Lange: Now, you and the audience don’t get the benefit of hearing the comments that we make to each other during the break, but I’ll take the liberty of telling Tom. He said, “Well, maybe a fire sale’s a little bit too much, but that’s what I really think it is!” So, I just thought that I would share that, and frankly, if you’re talking about an 8% to 15% break on some of the policies…
David Bear: And 25%, yeah.
Jim Lange: …and then 25% on, let’s say, the very significant policies…by the way, this is the situation that I have where that might very well be appropriate. Right now, the exemption amount, that is the amount that you’re allowed to die with without paying any federal transfer or estate taxes $5.2 million, and then if you’re married, it would be a total of $10.4 million. But on January 1, 2013, unless Congress acts, it’s going to go down to a million. One of the things that a lot of people are doing is they are making very significant gifts, gifts of even more than a million dollars, and it is our best thinking, and the thinking of the people that I follow, that those additional gifts will not come back in people’s estates. So, sometimes it is appropriate to make a very large gift, and then if you want to leverage the gift, that is, you want a guarantee that your beneficiary will receive much more than that, and you want it income tax-free and estate tax-free, that’s where the life insurance comes in. So, those are on the very large policies, but even just for the more, let’s call it, standard policies, saving between 8% and 15%, and this isn’t just a one-time policy. The policies that Tom usually advocates and the ones that I like tend to have the lowest premium and the highest death benefit. So, what you’re giving up there is the ability to get it paid up sooner, as in a whole life policy. So, Tom, you and I have talked about a whole life policy, and by the way, I actually sent out a letter to all the clients that I had that either purchased life insurance or who were interested, and I basically said, “Hey, if you either want more or a different type, or if you are on the fence and you just didn’t pull the trigger, but you’re still thinking about it, do it now before the price goes up.” But Tom, could we talk for a minute about whole life, because I got a comment from somebody that says, “Hey, I don’t like whole life.” Is this what you’re talking about? And what is whole life? And how is this different?
Tom Hall: Whole life is… I really like whole life, but I like whole life for people who are younger. It’s a good cash accumulation vehicle. In other words, when you put a dollar in every year for twenty years, you get a nice sustained 4% tax-deferred rate of return. And a lot of people over the last ten years who bought whole life are very, very happy people today, and they don’t have to worry about some of the fluctuations in the stock market. Now, am I saying put all of your money into whole life at younger ages? No, but I would say that it is an excellent vehicle. But when you talk about estate planning, and usually you talk about estate planning when you’re fifty, sixty, seventy years old, those are the times when you’re looking for the lowest cost guaranteed coverage you can buy. You really don’t care about cash value, usually. Sometimes you do, but usually you don’t. And those are the policies that have been affected by this rate increase.
Jim Lange: All right. And by the way, I’ll go on record as saying that those are the type, that is these permanent policies and not whole life that are the favorites that I use almost routinely in planning. Although sometimes, aren’t there situations for younger people that would maybe buy several term policies and maybe a small permanent policy?
Tom Hall: I agree with that. I think the most important thing you can do when you have a couple of kids, you’re young, your family’s getting…you know, they’re teenagers, they’re five, six years old, whatever, is to have adequate coverage that’s affordable. And you only need it for a certain period of years because you have other assets that are growing. Your needs are strongest then. You want to take care of your family. Then you buy what’s affordable, but you buy enough, and that’s where term insurance, I think, is a critical thing that all young couples starting out, and even in mid-life, need to look at. Make sure you have adequate coverage. It doesn’t cost that much. It’s less than your homeowner’s policy, and chances are you probably have a greater probability of dying than having your home burn down. I mean, I’m a strong believer in it. I’ve seen it happen. I encourage people to really take the time. Take the time and do it because it’s something you don’t really want to…
David Bear: Right.
Tom Hall: So those rates are very, very low.
Jim Lange: All right. So that the young slackers can slack off for a little longer, they don’t have a January 1st deadline.
Tom Hall: Right. They may want a bigger house and that’s more important!
Jim Lange: All right. So, the deadlines, let’s do a quick review of what is going up. The permanent universal life insurance policy, which might be on one person of a couple if they’re married, or just one person, maybe a single father or a single mom, or perhaps somebody where their spouse is uninsurable. Is that right? That would be one example of the type of policy universal life that would have a significant increase in the premium on January 1st.
Tom Hall: They have what they call a secondary guarantee, which states that if you pay this premium, we guarantee the death benefit contractually by the assets of our company. Those are the ones that are going up because the commissioners are saying we want to make sure they’re reserved for. But I want to make one other very important note to the listeners: I’ve been around a long time, I’ve seen…
Jim Lange: Just 35 years!
Tom Hall: I’ve been around to see enough happen, and you do get older and it sneaks up on you, and you have to really pay close attention to your existing life insurance policies. You do not want to get to the point when you’re 83 years old that you look at it, and you see it’s falling apart. So, I would encourage people at this time to take a look at what they have. Have your agent run in-force ledgers to see if you pay the current premium level whether the death benefit is sustainable. And I do like contractual guarantees because things happen in the future that nobody…twenty years from now, it’ll be totally different than it is today, I guarantee it. And just make sure that if they offer the guarantee, take the guarantee. Right now, they don’t want to give the guarantee. They’re raising the price to give it to you.
Jim Lange: All right, and by the way, when we are offering a second opinion and an insurance review, that not only talks about new policies, but that also includes a review of existing policies.
Tom Hall: Very important.
Jim Lange: And by the way, I will also tell our listeners that Tom has been invaluable in that area. He knows most of what you’ll have off the top of his head, and he’ll even know the problems with it before he opens it. So, he has, frankly, saved the you-know-what of a whole bunch of our clients. All right, so that is one type of policy that is going up in price, which is a guaranteed universal life, and by the way, there’s another use for it that I have recommended, and in fact, I’m sometimes shocked when I see this situation, but I have. So, let’s say you have a husband and wife situation, and let’s even go the old-fashioned way when the husband was the wage earner, although I know that that’s changing for a lot of couples now, but let’s say the old style where the husband was the wage earner. He retired with a pension, and I see a lot of these guys taking a one-life pension, and then I say, “Well, what happens if something happens to you?” And he says, “Well, you know, my wife can live on less money.” And that scares the bejeevers out of me. So, in that situation, I have often recommended getting some type of life insurance for the person who is getting the pension to protect the other spouse. Would a permanent guaranteed universal life policy that you can get more cheaply or less expensively now, then after year-end, be appropriate for that situation?
Tom Hall: We do that often, and to explain the concept a little bit, if you’re retiring, and the life-only benefit is on the husband, and he has the choice of $2,500 a month on his life only, which means that if he passes away three weeks later, it’s gone, and the surviving spouse has nothing, or they could go with a $2,200 life and 100% survivorship benefit. And so, it’s less money, but they know if you die, your wife is taken care of. But what we see people doing, and it makes a lot of sense, is you take the difference, that $200, and you’re able to buy a, maybe, $200,000 or $300,000 death benefit. So, if the husband is life-only, he dies in five years, the wife has a $300,000 death benefit, and then she takes income off of that death benefit to live her life. Why is that a really nice thing? Well, it creates an asset for the kids with their pension benefit, which they wouldn’t otherwise be able to have. It would all go away at the second death. So, it creates an asset, it gives you something more, but you have to be insurable, and we have to do the analysis and make sure it makes sense because it doesn’t make sense for everybody. It depends on what the rates are that you’re offered.
David Bear: What are some of the factors of insurability?
Tom Hall: Well, that’s a good question. I mean, people often think, “Well, I have high blood pressure. I take medication. I have high cholesterol and I take medication.” You’re fine. “I had a stent put in three years ago.” Guess what? We can get you standard insurance as long as your heart is okay. If you take care of yourself, we’re happy that the blood’s flowing. In other words, it’s not sneaking up on you. It’s something that we know you have. Diabetes, we can cover. Like Jim was saying before, it’s pretty amazing. Insurance carriers have actuarial statistics on these things now. They know that often times, you can get standard insurance.
Jim Lange: And the other thing that I’ve noticed is when you use that multiple companies so you can look at different companies, I’m thinking of one situation where a whole bunch of companies thought that this guy had a heart problem, and they rated him and it came back very expensively, but one company thought he was fine. So, we went with the one company that thought he was fine.
Tom Hall: Well, what we do is we informally show medical evidence to two or three or four different carriers, and some of the underwriting directors have a different opinion on that ailment, and they feel, “Well, our experience is that…”
David Bear: Different tables.
Tom Hall: Different tables. That’s why you do that.
Jim Lange: So, you’re not really negotiating the price. You’re actually bringing additional information that would cause them to have a more favorable rating, which, in turn, would reduce the price. But I guess, sometimes people, particularly young people who think they can go to the internet and get the best deal, and that’s just not really the case with life insurance, and particularly, for life insurance for people who are, let’s say, fifty and older. Is that fair?
Tom Hall: Not to discredit that, and they’re very nice people, but I think dealing with somebody locally, and somebody that knows your needs, somebody that’s willing to go the extra mile, somebody you look in the eyes and you get to know, I think, to me, that’s invaluable. You have to find the right person, and there are a lot of good people out there.
Jim Lange: Yeah, and what I actually like the idea of is going to somebody, and this might sound a little bit self-serving, but going to somebody who has other means of being compensated than selling you life insurance. In other words, if all you are is a life insurance retail agent, you know, you’re kind of like a hammer and everybody’s a nail, and there are a lot of situations that I work with and you might not like this…actually, you would because you’re an ethical guy, where life insurance isn’t part of the equation because it’s just not appropriate, given where people are. I have a lot of clients who have, let’s say, a depression-era mentality or they’re relatively thrifty, and they don’t like to spend a lot of money, and they spend relatively little compared to what they own total, and they are interested in providing for their kids and their grandkids, but let’s say that they’re older, and they’re in their, maybe, late sixties, seventies, or even sometimes eighties. Isn’t it too late for them to get life insurance, or are they still in the game?
Tom Hall: They are definitely in the game. Eighties today is 65 fifteen years ago. May I say that? I think that’s true.
Jim Lange: You’re making a lot of people happy!
Tom Hall: And people are living longer and longer, so you know, you’re eighty…
Jim Lange: Including the producer, by the way. He’s sitting there with a big grin!
David Bear: He’s only 35.
Tom Hall: If you’re a healthy 80-year old, you have a good chance for 92, you know? And I know that’s hard to believe maybe for us older guys who’ve seen our parents, but we are living healthier today.
Jim Lange: Well, how do the insurance companies react when they get an application for somebody who is in, let’s say, their seventies or their eighties? And are you doing a lot of these deals, or is this just a non-starter?
Tom Hall: Well, obviously, the older you are, the more ailments you have and the more conditions that you may have. So, it’s a work in progress sometimes to get people insured, but for the most part, we’ve been very successful in doing it, even if one person is uninsurable and the other person’s insurable, and you still get an incredibly good rate of return on the policy. I mean, one thing, and we’ve talked about Social Security perhaps going away, and we’ve been doing a lot of this where we have people who are 65, they have a nice pension, they say, “Well, I’d better apply for Social Security,” and they get their Social Security check and they go, “What am I going to do with this?” Some people, believe it or not…and they say, “Well, my kid’s never gonna get this,” and he’s kind of paying for it, right? Aren’t the kids paying for Social Security now for their parents? Isn’t that the way it’s working? And so, I have two 65-year olds, a 64 and a 65-year old now, they get $24,000 a year in their Social Security, how much life insurance could they buy with $24,000 to put it in trust for their kids and for their grandkids, knowing that when they die, their kids are gonna be 55, 60. They may not be getting it, but there’s $2,000,000. Twenty hour thousand a year will buy a $2,000,000 second-to-die death benefit in trust for your children and grandchildren, and you think about that because you worry about the future, you know, of our Social Security, Medicare, all that stuff. It’s a wonderful thing if you want to take part of the Social Security check and you get a guaranteed benefit for your kids. What a wonderful thing. And people who are worried about those entitlements are seriously doing these things. It’s kind of interesting.
David Bear: It’s kind of another death benefit there. But at any rate, let’s take time for one final break, and when we return, Jim and Tom will continue the conversation.
David Bear: And I also want to mention that if anyone is interested in an estate plan with a life insurance component, or one of the reviews that Tom was talking about, call Lange Financial at 521-2732 and ask for Alice, and I’ll say welcome back, Jim and Tom.
Jim Lange: Thank you. We are here literally the day after President Obama secured a second term, and the impact of that is likely to be higher tax rates, or at least as high as they are now, both in terms of income taxes and estate taxes. So, the question is what should listeners and readers do? And I have long been an advocate of Roth IRA conversions, which is one of the reasons we’re actually having a Roth IRA conversion workshop actually this Saturday, and the other best, and probably even in some ways better than Roth IRA conversion, best estate and retirement income tax-free, estate free vehicle is life insurance. Since the life insurance permanent rates, the rates on permanent life insurance are going up anywhere from 8% to 15%, and, for some policies, 25%, on January 1, 2013. I thought I would have Tom Hall, who is a life insurance expert and is the owner of Pittsburgh Brokerage Services, come down and talk to us about life insurance. He’s given us a lot of great information already. And by the way, if you have missed some of it, you can catch it again this Sunday at 9:05, and we are also, because this is so timely, we are making a huge effort to get the sound file of this and the transcript of this show on our website, again www.paytaxeslater.com, so people can listen or read it before year-end, and hopefully, do something before year-end while you can still get the lower priced products, or life insurance policies. So, Tom, some of our clients and listeners have annuities that they might have purchased, whether it be a tax-deferred annuity or a commercial annuity, at some point in their lives. They might have bought a 5/10 or sometimes $100,000 or even $200,000 annuities, and I’ve never been an enormous fan of these types of products, partly because for estate planning, they’re kind of awkward because your heirs always have to pay the income tax on any growth, and it’s almost always included in the estate of the person to die. What would your advice be, Tom, for somebody who has this type of investment product, isn’t really tapping into it now, but then if they die with it, it’s going to be subject to income tax on the growth and it will be included in their estate. What would you tell somebody who has this type of product?
Tom Hall: The first thing I would say is if you feel you’re going to need that asset to support your lifestyle in some way and some fashion in the future, then maybe for a mindset, you may want to keep it and have it there as a safety valve. But in a lot of cases, and we review annuities all the time, that isn’t the case. A lot of times, people just let them build, and the main reason they do is they really do not want to tap into it and cause ordinary income. They take another asset that isn’t taxable. Or sometimes, they just let it build and they say, “Well, I’m leaving this for my kids,” but little do they know that it’s going to get hit by the income tax buzz saw. It’s gonna get cut off.
Jim Lange: And estate tax.
Tom Hall: And estate tax. So, what we often recommend is you take part of that annuity on an annual basis and you can creatively buy a life insurance policy, and the life insurance policy can be owned outside your estate so you can make it estate tax-free, and usually, at average life expectancy, and I know this is pretty amazing, you could double and oftentimes triple the amount of money that you end up leaving to your heirs by getting creative with utilizing the annuity in a different fashion. And I would encourage everybody to take a look at perhaps doing this now while you’re insurable and see if it makes any sense at all to take a portion of it and do something like this, and you can get really creative and buy a life policy with a long-term care rider so you can take care of your long-term care on a tax-free basis. You could get so creative with these things, and often times, you just don’t realize that those avenues are out there.
Jim Lange: Yeah, and sometimes, by the way, creative can also just be simple, which is taking a certain amount per year, using it to buy life insurance that is held by a life insurance trust, and you’re basically converting something that is growing taxable for both income tax purposes and estate tax purposes into something that is growing income tax-free and estate tax-free. I mean, it sounds creative, but it’s not like it’s a huge act of genius. It’s just kind of straightforward planning, and I don’t know why Uncle Sam is willing to subsidize life insurance in terms of not making you pay income taxes on the proceeds, not making you pay income taxes on the growth, and assuming it’s set up right outside of your estate, not making you pay either federal estate taxes, or for Pennsylvania taxes, and Governor Corbett probably wouldn’t be too happy about this, but have it be not subject to PA inheritance tax also.
Tom Hall: Correct.
Jim Lange: All right. So, you are seeing this a lot with some of these tax-deferred annuity products?
Tom Hall: We are. We do review the whole estate and take a look at all the assets and try to maximize and optimize their plan.
Jim Lange: All right. I should also mention that what I like to do as a trusted advisor is I like to combine many different opportunities. So, for example, one of the things that I almost always look for is whether it makes sense to do a Roth IRA conversion. Roth IRA conversions overly simplistically saying we’re going to pay tax on the money once and we’re never going to pay tax again. I also like life insurance because it’s also an income tax and estate tax-free investment, and I particularly like it before December 31, 2012 while we still have the favorable rates. I also like to do flexible estate planning, particularly for families that have the same kids, and I like to actually combine all of these modalities and all of these opportunities and see life insurance as one important opportunity. And David is…
David Bear: Flashing the finger!
Jim Lange: Flashing me the finger, and…
David Bear: Not that finger!
Jim Lange: So, I will just conclude by thanking you Tom, for being on the show and giving us some great information, and if anybody wants to listen to this again, it’s this Sunday, and you can go to our website, probably in a couple of days, and we will hopefully have this show up and the transcript of it done.
David Bear: Well, and thanks for listening to this edition of the Lange Money Hour, where smart money talks. Thanks also to our program coordinator, Amanda Cassidy-Schweinsberg, and Joe Finn, our in-studio producer. As always, as Jim mentioned, you can hear an encore broadcast of this show at 9:05 this Sunday morning here on KQV, and access the archive of past shows, including written transcripts, on the Lange Financial Group website, www.paytaxeslater.com. Please join us for the next edition of the Lange Money Hour in one week on Wednesday, November 14th, when our guest will be Bill Flanagan from the Allegheny Conference on Economic Development. Finally, I’ll repeat the invitation for our November 28th show with special guest John C. Bogle, founder of Vanguard Financial Group, the world’s largest index fund. If you have a question for Jim to ask Mr. Bogle, submit it to our website at www.paytaxeslater.com and click on ‘Ask John Bogle.’ And to thank you for registering, you get a copy of the audio file and a transcript of the entire show. Thanks for listening, and I’m David Bear.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.