The Road Ahead, Or Not Taken?

1. The Road Ahead, Or Not Taken? • The County “Poor Farm”

2. Case Studies of Life Insurance for Middle America 2005 NAIFAmn Roadshow Presented by: Robert J. Hanten, LUTCF, FIC

3. Some Background Assumptions: • The Middle Class in under financial stress much of it due to increasing government costs. • The American middle class needs to mature collectively and learn to take care of itself and should no longer look to government or their employers to act as a parent.

4. The middle class is underinsured for both disability insurance and life insurance and employee benefits can no longer be seen as a reliable way to provide long term insurance coverage without contract portability. • The middle class needs to meet with financial advisors that specialize in individual products.

5. NAIFA members need to care for and help the hoi polloi to become self reliant. hoi polloi (\hoi-puh-LOI\, noun:The common people generally; the masses.

6. I want to fist acknowledge the incredible effort of Michael Hodges, a retired engineer who as a labor of love created the Website he call Grandfather Economic Reports. When you get home, you really must Google it and spend some time there. • His web address: • http://mwhodges.home.att.net/hodges.htm • There are hundreds of incredible charts and graphs that allow visitors to get the big picture of where the socialist path has taken us.

21. Given the above financial information, shouldn’t one ask if tax rates might perhaps be going UP in retirement and so deferring taxes may not be smart? Jagadeesh Gokhale and Laurence J. Kotlikoff in their book the Coming Generation Storm think so. They talk about a “menu of pain”.

22. Their "menu of pain" is mind-boggling. Entree A is raising federal income tax collections (individual and corporate) by 69 percent. Entree B is raising payroll tax collections by 95 percent. Entree C is cutting Social Security and Medicare benefits by 56 percent. Entrée D is cutting federal discretionary spending by more than 100 percent, which, of course, is not feasible… “digesting this medicine is going to be plenty painful.”

23. Given that menu, can anyone with any real certainty determine whether or not deferring current income makes economic sense? Ignore the cocksure advisor who mocks permanent life insurance and advises “maxing out your 401(k)”

24. Is this depressing? • Yes it is. I find it hard to look at my clients and fellow citizens and see them as delusional or ignorant, but that that is how I see many of them. It is impossible to convey in a conversation how sad is the situation. • Its not like you can say, by the way, do you see the paradigm shift in the road just ahead. My retired clients get mad when I tell them the truth, they just deny and say the rich should pay. • But what should we do while we wait?

25. We need to do our jobs, now more than ever. • The middle class needs to meet with financial advisors that specialize in individual products that they own and control! • There is widespread underinsurance among families with children, and only we can help them. The Nanny State is broke. • Long Term disability through an employer is only temporary in today’s world, and is inadequate to protect the family. They need you to go over their employee benefits and recommend disability income insurance.

26. Google this study from the Cleveland Federal Reserve Board: “The Mismatch Between Life Insurance Holdings and Financial Vulnerabilities: Evidence from the Survey of Consumer Finances” by B. Douglas Bernheim, Lorenzo Forni, Jagadeesh Gokhale and Laurence J. Kotlikoff

27. Here are some quotes from the study: “We have found that life insurance is essentially uncorrelated with financial vulnerability at every stage of the life cycle. This finding is consistent with the hypothesis that life insurance bears little relation to needs at the time of purchase; however, it tends to refute the hypothesis that households purchase long-term contracts with initially appropriate insurance coverage, but fail to adjust this coverage through time as their circumstances change.” This is shameful for our profession! Tom Wolff, where are you?

28. “The impact of insurance among at-risk households is modest, and substantial uninsured vulnerabilities are widespread, particularly among younger couples. Nearly two-thirds of secondary earners between the ages of 22 and 39 have significant financial vulnerabilities (projected reductions in living standards exceeding 20 percent), and nearly one-third have severe vulnerabilities (projected reductions exceeding 40 percent).”

29. “Moreover, only one in five of these at-risk households held sufficient life insurance to avert significant or severe financial consequences. Combining all age groups, 56 percent of secondary earners and 6 percent of primary earners would have experienced significant or severe declines in living standard upon the death of a spouse in the absence of life insurance.”

30. So what is the financial structure of the middle class? • Most middle class clients rely on employee benefits for disability insurance and life insurance, which for most people very inadequate. • If they own a life insurance policy, they have been coached by “experts” in the financial press to by inexpensive level term. • For retirement, they almost exclusively rely on their employer 401(k), 403(b) or perhaps individual IRAs.

31. They have long term debt in mortgages, and long term assets in their homes and 401(k)s • They have lots of short term debt in auto loans, credit cards and installment debt. • The have almost no cash. • When they need operating capital, they have to borrow from banks.

32. Advisors in the individual market cannot make a living serving this kind of client without changing client beliefs and behaviors.For our good and that of our middle class clients we need to change these beliefs and behaviors. Catering to the wealthy won’t save the tax deferred status for cash value life insurance.

33. The life insurance industry must go back out and serve the middle class as we did in the past. Great industrial policy companies such as Metropolitan and Prudential covered much of the middle class and the fraternal benefit societies covered half of all insured before the New Deal.

34. In order to sell life insurance we should ask:Are IRA-401(k)s good for the Middle class? Google this: Does Participating in a 401(k) Raise Your Lifetime Taxes? By Jagadeesh Gokhale, The Federal Reserve Bank of Cleveland Laurence J. Kotlikoff, Boston University and The National Bureau of Economic Research and Todd Neumann, The Federal Reserve Bank of Cleveland

35. A few select quotes: “Employers seeking to lower rather than raise the lifetime tax payments of such workers might consider abandoning their 401(k) plans in favor of making direct contributions to Roth IRAs for their workers. Alternatively, they might consider reducing the contributions they make on their workers’ behalf to their 401(k) plans and instead contributing the same amounts to Roth IRAs or to taxable saving vehicles established in their employees’ names.” [How about life insurance?]

36. Another: “To conclude, the federal government has spent over a quarter of a century encouraging workers of all strips to save in tax-deferred retirement accounts. In promoting participation in such plans, the government has encouraged workers to believe they would be saving taxes on a lifetime, rather than simply a short-term, basis.

37. For those at the upper end of the nation’s income distribution, tax-deferred saving does, indeed, convey significant lifetime tax benefits. But for those at the lower end, 401(k) participation may represent more of a tax trap than a tax shelter.” End of quote

38. Who are those who benefit most from tax deferral? • According the the study: • Under the current tax brackets, those individuals and couples with AGI over $326,450 are in the top 35% tax bracket. • Those with incomes above that threshold receive the greatest lifetime tax reduction from the 401(k)tax deferral. • Many of the rest of us actually may actually pay MORE in taxes by deferring income in qualified plans according to this study.

39. Table 2C. According to a study by the Congressional Budget Office, “Effective Tax Rates: 1979-2001”, in Table 2C: Married households with children • In 2001, the top 10% of these households had an average pretax income of $355,700 • That leaves more than a few prospects for people who may not benefit from 401(k) tax deferral and who would be candidates for permanent life insurance!

40. Another question:Is this a capitalist economy? • If it is, why do so many advisors advise clients to put money into an IRA, where the only person who can’t use the capital is the person whose name is on the account? • Has there ever been a study done of the cost to the middle class who have paid a penalty tax because they needed money and had no other savings? • Did you know 401(k) loans must be paid off immediately when you leave a job?

41. What is the correct cash position for a household? Let’s examine the “quick ratio” for a business

42. What is your Client’s Quick Ratio?From the Wall Street Journal On-line: • current ratio definition:An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations.

43. What are current liabilities? • According to Investopedia.com: Usually appearing on a company's balance sheet, it [current liabilities] represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year.

44. What are current assets? • Again, according to Investopedia.com: • Appearing on a company's balance sheet, it [current assets] represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year.

45. If a company needs two years worth of essentially cash to cover the current years bills payable or due, why do we tell the public they only need 3-6 months income as a cash reserve for their household?That is not enough for real emergencies or opportunities.

46. We leave our clients cash strapped and over reliant on equities within qualified plans, and when the rainy day comes upon them, the must cash in equities in a down market and pay taxes plus a 10% penalty to get at any real money. I see it all the time.We need to stop doing that.

47. An aged permanent life insurance policy is simply the best place for household cash assets that can provide operating capital for the on going large capital expenses that all families experience.

48. Reasons for Life Insurance Superiority: • Other cash type assets have a lower interest rate • They create on going income taxes or capital gains if they are sold. • Roth IRAs are tax deferred, but you cannot be used it as collateral and once you take the money out, you can’t put it all back in (a major shortfall). • They do not provide life insurance • They have no waiver of premium

49. Ignore the cocksure advisor who mocks permanent life insurance and advises “maxing out your 401(k)” Do right by your clients and fight to protect cash value life insurance from predatory taxation. The middle class needs this product.

50. In Conlusion: • Financial advisors need to call on the middle class and SELL them permanent life insurance and disability income. They need these products. • If the advisor can learn to help them budget and structure their debts correctly, they can help their clients buy these products