Producers Guide To Asset Laddering

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Demonstrating accessibility of retirement funds on a staggered or laddered basis can provide the client with the comfort level needed to look the longer term that some insurance policies with investment benefits can provide but that carry with them the need for long term strategy because of the longer waiting periods for accessibility.

Providing your clients with a policy review and combining that with the illustration of the laddered maturity dates and asset/income availability on their existing investments or assets allows an exploration of not only how IUL can fit into the clients retirement plans comfortably and well but also allows for an exploration of where the client may benefit from additional annuity investment.

You will find that often clients think in terms of “date of retirement” plus “assets at retirement” or “amounts at retirement” and research shows that 62% of Americans are concerned about outliving their assets, but few have translated that into an actual income strategy by staggering their assets and their access, maturity or depletion.

It is a simple step by step process of A) Identifying by date and in number of years hence when a client intends to retire, B) list in order each asset and maturity or access date along with what income that asset provides, C) comparing how that fits with anticipated need and what the holes or deficiencies that can be filled with the benefits of IUL would be.

Producers Guide To Asset Laddering

“Laddering” is a term that applies to a maturity staggering of assets experiencing maturity like bonds, CD’s and even annuities – all of which are traditional investment vehicles for the favored prospect classes of insurance professionals. Bonds and CD’s along with qualified plans are also favored target funds for reinvestment in insurance or annuities – for many good reasons. Applying a laddering principle to all assets in working with a client on retirement goals is a valid way to demonstrate the value (or lack of) of each type of client asset.

Using CD’s as an investment example for laddering:

Clients choosing CD’s as investment vehicle would split up their total investment into a series of smaller CD’s with staggered maturity dates which then provides for availability of funds in that same staggered order as well. This practice reduces risks of not being able to take advantage of increases in available interest rates, plus provides for liquidity on a staggered basis as well. When CD’s actually provided a viable means of asset growth the laddering strategy allowed clients to take advantage of higher rates available on long term CD’s while ensuring that there was also availability of funds due to CD maturity to reinvest in CD’s with higher rates or to use as needed.

Translating this same theory into a long term retirement strategy opens the door to the use of insurance vehicles that can offer clients far greater advantages than any other retirement vehicle available today BUT where those insurance investments require a longer waiting period to access.

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An IUL provides clients with a unique combination of benefits that they cannot achieve in any other wealth accumulation vehicle.

1. Tax Free Accumulation

No taxes on annual gains

2. Tax Free Distribution

At retirement distributions are tax-free

3. Tax Free Transfer

No death or inheritance taxes if properly structured and under most circumstances

4. No Risk of Loss of Principle

Market volatility does not affect accumulated value

5. Provides Income Clients Can’t Outlive

Riders allow for guaranteed income for life

6. Provides the traditional benefit of an insurance policy

It is an ideal investment to show a client who is already committed to the concept of life insurance since it combines excellent wealthy accumulation and income benefits with a death benefit.

Ideal target assets are IRA’s, 401K’s, Pension Plans, CD’s and even some annuities.

IRA’s, 401K’s or Pensions - qualified plans provide the client an opportunity to save money now, tax deferred until retirement however market volatility demonstrated by 20 year history combined with future tax liability can be demonstrated and an IUL will clearly show more favorably when considering that it allows clients to avoid tax burdens at retirement, avoid down years in the market, avoid outliving money and allows money to grow tax free without risking principal.

An IUL by comparison to qualified plans is best summed up as “An IRS approved tax friendly asset vehicle that allows tax free growth accumulation, zero taxes when the asset is passed to heirs, security of principle and one that provides an income you can’t outlive!” An IUL’s value is about it combination of values: savings PLUS secure tax-free asset growth PLUS protection at passing.

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What is the downside?

Qualified plans provide a tax deferred vehicle, where clients can use pre-tax dollars and allow the funds to grow tax free until retirement at which point the existing tax rate for the individuals current tax bracket is imposed.

An IUL must be funded with after tax dollars. Contribute $6,000 each year – the client pays an extra $2,000 in taxes in that year. The advantage to present to clients is that they are paying relatively small amounts of taxes now during earning years or based on principle not taxes based on accumulated growth after compound interest in later non-earning years.

One of the surest ways to demonstrate the potential advantages even when considering the necessity to invest after tax dollars is in the volatility that qualified plans have experienced over time versus the security of the IUL. The IRA has no floor or protection against loss and the last 20 years have not seen stable secure gains – not something that is hard to demonstrate or convince anyone of.

An IUL when restructured properly have a floor return of 0%. If the market tanks the worse that happens is there are no gains. Whereas the gains are generally set with a cap as well it is, again if structured properly usually somewhere between 12% - 15%. While some could consider a gain cap a downside, when viewing against the S&P 500 and its average gains, a client can quickly see they lose nothing and gain tremendously since there were very few years that the S&P outstripped the cap and many years when a floor protection could have prevented losses no doubt many of them experienced.

Annual Returns S&P 500*

1988 16.61%

1989 31.69%

1990 -3.10%

1991 30.47%

1992 7.62%

1993 10.08%

1994 1.32%

1995 37.58%

1996 22.96%

1997 33.36%

1998 28.58%

1999 21.04%

2000 -9.10%

2001 -11.89%

2002 -22.10%

2003 28.69%

2004 10.88%

2005 4.91%

2006 15.79%

2007 5.49%

2008 -37.00%

2009 26.46%

2010 15.06%

*Source Wikipedia: S&P 500

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Given the peaks and valleys of the market and history the only way a qualified plan would have surpassed the performance of an IUL is if the S&P gains were unfettered and without any significant volatility for many years in a row, given historical performance that is not tremendously likely. While past performance is not guarantee of future performance – it is noteworthy for establishing the security a floor provides and the lack of downside a generous cap provides. When considering the security of performance combined with life insurance benefits, tax advantages and guaranteed income – IUL becomes an extremely attractive alternative.

For the client who is already committed to the security of his or her family through the purchase of insurance the IUL is an investment that makes a tremendous amount more sense than almost any other because summed up, it provides:

Tax Advantages

Safety

Growth Potential

Liquidity

Flexibility

Plus it works like any other life insurance policy in that the client makes monthly or annual contributions, the contributions grow tax free, unlike a qualified plan the money is accessible and when the client passes away the asset is passed tax free.

CPS Integrated Marketing is committed to the Life Producer and will assist you from contact to compensation and every step in between – for assistance with illustrating an IUL and its value to your clients, contact us today.