Archive for the ‘Annuity and Life Insurance’ Category
Multi-generational families
A business owner came to me for help in untangling a “dynasty trust” he has regretted setting up.
I sat down with him for a discovery meeting.
Now I am no expert in trust law and estate tax matters.
Still, after asking a few pointed questions, I found the trust arrangement problematic.
Here is a record of the question and answer session I held with him.
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Annuities and Life Insurance
I recently met with a physician couple who became clients of mine.
Their investment portfolio is chock-full of annuities and life insurance; even their qualified retirement plans are not exempt.
They told me that they went to financial seminars and were convinced that these products were good wealth accumulation vehicles. In fact, they are anything but.
These insurance products have nothing with do with wealth accumulation (except for insurance agents).
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[Guest Post by Christopher Guest] There are ways a person could use the two year window provided in the Tax Compromise of 2010 to leverage a person’s gifting opportunities, reducing a person’s taxable estate. One strategy that can be used and would not consume any, or only minimally consume, your lifetime gift tax exemption is the Grantor Retained Annuity Trust, or “GRAT.” A GRAT is a form of irrevocable trust that allows the grantor to take a calculated risk to lower the grantor’s taxable estate.
The grantor transfers specific assets or property into the GRAT. The language in the GRAT stipulates that every year the grantor will receive a fixed payment, i.e. an annuity payment, back from the trust over a fixed number of years. A typically time period for a GRAT is 2 to 5 years. At the end of the term, the remainder beneficiaries get whatever is left. For gift tax purposes, the value of the gift is calculated on day one, when the trust is created and funded, but the gift value is discounted, as discussed below.
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What Can Happen When You Have a Life Insurance Salesman as Financial Advisor
Posted on: January 19, 2012
Financial Salesman
In an online forum, a doctor’s wife shared with me her story that should serve as a cautionary tale for all doctors.
Her husband had a solo medical practice. They had a “financial advisor” who advised them to put their saving into a $5mm cash value life insurance policy. They believed the product not only provided protection in the event of the doctor’s death but also was a great savings vehicle.
Last July, her husband was struck by an uninsured drunk driver. He suffered brain damage. Though he recovered from the coma, he was unable to practice medicine any more.
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I was called a “wing nut” by a commenter for pointing out all the malpractices of insurance companies. Indeed, I could go nuts seeing how they mislead their customers into financial peril. They know full well that their customers are not going to read beyond the first few pages of their hundred-page contract, so they put all the goodies on the first page and keep the disclaimers on the back pages.
The following is an actual annuity contract a client of mine purchased a few years ago, much to his regret now.
On the first page of the contract, all the warm and fuzzy keywords are used: “GUARANTEE”, “fixed”, “annualized interest rate of 5.75%”. Pay attention to the following line though: This rate is subject to change each month.
Annuity Contract Front Page
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I recently met an entrepreneur friend of mine. I was pleasantly surprised to learn that he had sold his business and was now looking forward to retirement. He has about $1mm in his 401k plan. As any shameless financial advisor would do, I asked him if he had someone helping him manage his money.
“As a matter of fact, yes!” he answered. “A friend of mine is also a financial advisor, and he helped me create a balanced portfolio.”
He related that “50% of the money will be in safe investment—a (deferred) annuity that has a guaranteed yield of 5%; the other 50% will be in alternative investments for higher performance.”
To say that I was flabbergasted is a serious understatement. With a friend like that, who needs enemies?
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Watch the show and you’ll know what I meant.
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Invest in a Variable Annuity
Recently, a client of mine brought me the variable annuity he bought a few years ago.
Prominently displayed on the first page are the benefits of the annuity:
Death Benefit: Enhanced Guaranteed Minimum Death Benefit
Living Benefit: Lincoln Lifetime Income Advantage
as well as the fact that the money will earn an fixed annualized rate of 5.75%. Under the bold ACCOUNT FEE subtitle, it states: Account fee is $35 per contract year.
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Annuity without Risk
Recently, I was approached by a prospective client named John, who has all of his retirement in one annuity.
I have always been intrigued by how annuities and life insurance are sold. Listening to John explain his decision-making process and reading through the annuity contract is like turning on the light bulb in my head.
It turns out that the unique selling point of this product is the “200% Step-Up of the Guarantee Amount (GA).” The way John puts in, if he just keeps the annuity for 10 years, he will get back 200% of what he put in. What is there not to like about that! After all, he gets guaranteed upside with absolutely no downside risk.
The Investment Scientist 