MKA Executive Planners Blog

Summary

The purpose of this article is to discuss the “living benefit” aspect of life insurance.  By “living benefits” I mean its use as an alternative, non-correlated, investment component of an overall investment portfolio.  My premise is that life insurance may provide a greater total lifetime return with less market risk than a portfolio that does not include life insurance, with particular emphasis on its use by Dynasty Trusts.

I was speaking with a CPA recently who is a partner in a large, successful accounting firm.  We were discussing the firm-sponsored group life insurance plan.

He was covered by a typical multiple of salary base plan and had also purchased additional supplemental insurance.  He was thinking of retiring, and we discussed whether the employer-sponsored insurance was sufficient for his needs.  This was especially important since he had some health issues and is in his late 60’s.

For most people retirement planning is about the number.  How much do I need to have invested at retirement to support my lifestyle for the balance of my life?  In most cases financial advisors will structure an investment savings program based upon five primary considerations: (1) how long before your retire, (2) how long will you live after retirement, (3) what is an appropriate assumed after tax rate of return on investments, (4) an appropriate rate of inflation, and (5) other sources of income such as social security, or pensions.  This is a daunting task with a number of important variables. 

The number one risk in retirement is longevity risk.  Once you retire, the amount of money required to cover your retirement needs increases with number of years before death.  For example, if you were to die three years after retirement, the amount you need is not significantly impacted, but the various investment risks (i.e., market risk, inflation, etc.).  If, however you live to age 85, 90 or older, the amount you need at retirement is significantly lager, and the impact of the various investment risks is significantly more.

The Obama Administration recently released its federal budget for fiscal year 2016 proposing several tax law changes, which, if enacted, could significantly increase your federal income, capital gains and/or estate tax exposure. Although Congress may not take action on these proposals, they may provide some insight into potential areas of consideration for future tax reform legislation. Some of the more notable proposals include:

So often we hear the excuse, "I can't afford to buy life insurance."

The reality is that because life insurance is tied to thoughts of one's own death, there is an automatic mental barrier to its purchase.  This can be offset by focusing on the living benefits of life insurance, which today include accumulation of cash surrender value that grows in many ways: interest credited by the insurer, performance of stock indexes or performance of funds that directly invest in various markets and companies.  These funds can be utilized for emergencies or to provide retirement income.

Studies have shown that Americans don’t plan well for retirement.  Whether it is, “What am I going to do with 40 to 60 hours a week of leisure?”  Or, “How much will it cost to fill that open time?”  It is likely that you have not put pencil to paper, perhaps not even have it on your radar.  Remember that a great plan requires time and effort. 

The current disconnect between payments made to health care systems and the compensation plans of physicians employed by them is an elephant in the waiting room.  Unlike the smooth pendulum swing of the 1990s from fee-for-service to global payments, there are now several new flavors of risk and most organizations are trying them all.  Fee-for-service, shared savings, alternative quality contracts, bundled payments and global capitation all require a different approach to maximize value.  Yet other than niche organizations that focus on one brand of risk and pair it with appropriate reimbursement, is anyone actually doing that?

The Boston Herald recently published an opinion piece by Barry Koslow that focuses on some of the problems the Massachusetts retirement system is facing. Here’s how the piece begins: