Even the most diversified portfolios were devastated as the S&P shed 38 percent toward the end of 2008. The first part of 2009 is proving to be an encore performance.
With the retirees of America looking for solutions to their portfolio woes, a shining light is rising in the world of “safe” financial options–life settlements.
Transferable insurance policies (“TIPs”), also known as life settlements, can be used as a fixed “piece” of a properly allocated portfolio, along with fixed indexed annuities. One can then structure the equities portion of the allocation through a professional money manager. For those accredited investors who do not want any stock market exposure at all, an appropriate blend of TIPs and FIAs is recommended.
Here are two proven strategies that have been successful in helping clients see the value in life settlements:
Case Study # 1
This particular client had $1.2 million remaining after the 2008 stock market losses ravaged his portfolio. He was looking for guaranteed income of $60,000 per year, while preserving his principal with moderate growth.
The strategy meeting began with the discussion of proper asset allocation and the rule of 100. Given the fact that he was 66 years of age and his wife was 64, an average age of 65 was used in preliminary asset allocation, and a risk profile was completed confirming the allocation of 65/35.
The conversation about the fixed portion (65 percent) of their allocation included four options: certificates of deposit, bonds, annuities and life settlements. The advantages and disadvantages of each were discussed thoroughly.
As the life settlements option was considered, the client was presented with a brief history of the strategy. We told the story of an existing 78-year-old client who had a life insurance policy for 15 years and no longer needed the $1 million death benefit, or the high premiums that accompanied it.
After the presentation, the following question was posed to the client: “What would happen to all of the premiums paid into the policy, approximately $168,000, if it was to lapse?”
“The client would receive the cash value,” he responded. This was correct, the client would receive $73,000 of cash value if in the policy was cashed in. The alternative option would be to sell the policy and receive $200,000. The advantage of selling the policy to the life settlement company was apparent.
This is a winning situation for both the clients who decide to sell their policy and for potential investors. In the past, this option was only available to institutional investors. However, within the last four years, accredited investors throughout the country have begun using TIPs.
The advantages of TIPs for investors include diversification to portfolios without stock market correlation, safety of principal and gains due to ‘A’-rated (or better) life insurance contractual relationships and the potential of a double digit return with an 18-year track record.
With this information in mind, the investing client agreed that he should have at least $500,000 of his fixed portfolio in TIPs, and $280,000 in fixed index annuities with a solid income rider. The remaining $420,000 would be placed in a managed money portfolio, providing $60,000 for the next nine years.
Moving forward into the next five to 10 years, the greatest planning opportunity for TIPs comes with the the pending tsunami of Roth conversions. TIPs stand out from the rest as an investment that can you convert into a Roth IRA, and have an absolute return that will be completely tax free.
Case Study #2
This particular 62-year-old client had his IRA decimated by the stock market over the past 18 months and wanted to make lemonade out of his discounted “lemon” of an IRA. He was also interested in recapturing as much of his losses without sticking his neck on the stock market chopping block again.
He had no need or desire to take distributions out of his IRA now or into the future, and wanted maximum growth to provide for his spouse’s future income needs if he predeceased her. He was wary of annuities because of recent bad press and his broker’s reinforcing negative comments.
Aware of the fact that decisions made by President Obama and Congress would certainly lead to higher taxes in the future, the client acknowledged that, at 25 percent, he was currently at the lowest tax bracket he would ever see.
With this in mind, his answer was to place the $317,000 IRA into TIPs, where his investment would grow from $317,000 to $570,600, an 80 percent return. A portion would be converted each year to a Roth IRA (without going into a higher tax bracket), allowing the 80 percent growth to be tax-free, eliminating required minimum distributions and providing his spouse with a tremendous tax-free income.
Despite today’s economic conditions, TIPs and Roth conversions are smart and responsible strategies offering numerous opportunities for superior return.