Thought For The Week – October 16, 2014

My Comments: This comes from a colleague in San Diego. He owns an agency whose focus is seniors and the insurance they need to achieve financial freedom. From time to time he sends out his ‘Thoughts For The Week” which are worth repeating. This is one of them.
retired person

By Gene Pastula of Westland Financial –  I have pointed out many times how frustrating it is to get a call from an advisor whose client has asked him/her to look into long-term care insurance. All too often it turns out that they have been informed they have a chronic health condition that won’t get better and there is a good chance of needing nursing care before all is said and done. But now it is too late to find an insurance company willing to commit to paying the bills.

Of course nothing is said but most of us suspect that the advisor never brought up the subject previous to this and probably felt correct in ignoring the issue because, “they could afford to self-insure”…which of course they can, and will; and I guarantee, no one will like it.

I recently addressed a question in the CFP All Member Open Forum concerning guidelines for determining “a need range” for long-term care planning. My answer was as follows:

There is no “need range”. Many of the folks who “need” long-term care insurance are those who could easily run out of money paying for care. For the higher net worth individual the question boils down to “how smart is it to not suggest that your client write a check for $4000 each year to fund long-term care because they can afford to pay for it themselves? Then eventually their family members must write checks for $8000 (or more) PER MONTH, (each month) to pay bills for care for perhaps several years. That makes no sense at all….especially when you realize that each month of benefit reimburses a year of insurance cost.

“Self-insuring” only seems like a smart idea until you start writing checks for long-term care and realizing that the odds of doing this in the first place was 50/50 at best. That’s when the idea suddenly seems really dumb.

Insurance, the alternative investment for the retirement portfolio.

“Miss Client. I certainly can help you with building your retirement portfolio. Let’s start with creating a Roth-type plan that will allow you to accumulate money tax free and receive an income-tax free retirement income. With that and your 401(k) and your Social Security, you should be in great shape for a stress free retirement. The excess money you receive from bonus’ etc. we will use to build you a managed account and hopefully create some serious wealth.”

A few weeks ago I had the opportunity to talk with a woman who is the CFO for a high tech company in Silicon Valley. She is 38 years old, single and makes almost $300k per year. She is very smart and particularly inquisitive when it comes to investing for her future. She has maxed out all she can do through her company 401(k) and doesn’t qualify for a Roth IRA so the rest of her investing will require active management and creative options. She had been exposed to the concept of the Roth Alternative using max-funded, index-based life insurance policies and was referred to me as someone who could answer all of her questions.

She was attracted by the insurance because it offered a more predictable result. Once the plan is put in place, she can accumulate large amounts with annual savings, get a reasonable return with safety and still access money from the account any time and all without tax and government restrictions. And when it’s time to retire, she will receive a healthy tax free income. Plus any life or chronic care insurance needs she might ever have will be included.

She asked me to show her what she might expect from this strategy over time. I suggested that she use two carriers for this; first to provide basic diversification and also to add some additional flexibility to her strategy should her situation or desires change downstream. Both are top insurers, highly rated and both offer a current crediting rate on the cash value equal to what the S&P increases each year (not including dividends) up to 13%. Also she is impressed by the low costs and the complete downside protection on the S&P with this strategy. All upside and no downside is very compelling.

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