Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Life Health > Life Insurance

The case for the glass slipper

Your article was successfully shared with the contacts you provided.

Salt Lake City’s John Homer is not an advisor you’ll find at seminars entertaining audiences with a dazzling light show or bombastic monologues better served at a comedy improv. That’s not his style. Homer is a thoughtful, analytical man, a quiet man, as far as advisors go — a listener as much as he is a talker. You have to lean in a little when he speaks and what he says is worth hearing.

“I have a strategy and it’s the only one I know where the client’s cash flow is greater after buying a policy than when they put it in.”

What? I must have heard him wrong. I’m thinking that doesn’t pass the smell test. If that’s the case, why isn’t everyone taking advantage?

We’re in Homer’s Downtown Salt Lake City office. On the conference table between us is a bronze statue. The image is of the grandfather of the scultptor, about to leave town on a horse. It looks like it weighs a ton. I want to pick it up, but am fairly certain I couldn’t without help or great effort. The statue isn’t the only western art in the room.

Growing up, more than anything, Homer wanted to be a cowboy. But didn’t we all? I mean, I have childhood pictures of myself in a blue suede fringe vest holding a cap gun at the camera. The difference is, Homer was a real cowboy.

Homer takes a photo from a desktop. It’s faded but the gist of the image is not lost on me. It’s a rodeo, a real one with fences and people in the stands, and a cowboy is roping a calf. The cowboy is John Homer. And to think, I’d almost told him about the photo of me in my blue suede vest.

I realize Homer and I could spend the rest of the day telling cowboy tales. He could tell me about riding on the range and rustling cattle; I could tell him about my cowboy and Indian-themed fifth birthday party, where, feeling adventurous, I’d worn a red suede vest instead of the signature blue.

But we have to get back to the topic of money, of other people’s money, of saving and growing it. We have to get back to what he’d said, that he’d found a “strategy where the client’s cash flow is greater after buying a policy than when they put it in.”

The following conversation is taken from communication between Homer and me via phone, email and in-person in his office, the one with the pictures of a real cowboy. And the conversation hinges, not on cowboys, but of all things, a glass slipper.


DANIEL WILLIAMS: In our earlier conversations, you talked about the Cinderella Slipper strategy. What is that?

JOHN HOMER: The Cinderella Slipper strategies are a group of related strategies that take advantage of the natural leverage that exists between the payout from a Guaranteed Income Annuity and the cost (premium) of a Guaranteed Life Insurance policy in order to achieve a specific economic objective. 

WILLIAMS: Why Cinderella?

HOMER: Because they only fit certain feet. The appropriate candidate is someone between the ages of 70 and 90 who is in good enough health to obtain life insurance at standard, or better, rates. In addition, they will have specific economic needs. Among those could be guaranteed cash flow, removing liquid assets from a taxable estate, creating an economic cash flow for a charitable trust, washing the accumulated income tax liability from a tax deferred annuity, or avoiding a double taxation from Estate and IRD taxes on qualified retirement plan monies. 

WILLIAMS: How does it work?

HOMER: The candidate transfers a lump sum of cash into the Guaranteed Income Annuity and elects the “life only” income option. That will provide cash flow for as long as they live, guaranteed. The older they are, the greater the payout rate will be. But, this annuity has a major downfall. Since the cash flow is paid only for the length of the annuitant’s life, upon death the annuity ends with no refund. It simply stops. All the money put into the annuity is gone. If the annuitant dies three months after purchasing the annuity, and has only received three monthly payments from it, he or she will have lost everything else except those three payments that they received before dying. 

WILLIAMS: That sounds like a deal killer.

HOMER: It would be, but to overcome that huge problem the candidate purchases a life insurance policy equal to the amount they are putting into the Guaranteed Income Annuity. 

[Editor’s Note: at this point, Homer steps to a dry erase board and provides the following case study as an example.]


If the candidate puts $1 million into the annuity, they purchase a $1 million life insurance policy. So no matter when they die, the insurance proceeds will replace the amount that was put into the annuity. If the candidate is between 70 and 90, the payout from the annuity is often, but not always, enough to pay the premiums on the life insurance policy and leave a significant cash flow for the candidate to spend.

Example:  If $1 million was used to purchase the annuity and paid a guaranteed cash flow of 12% to the annuitant, and if the cost of $1 million of life insurance was 7% of the face amount of the insurance benefit, the cash flow would be: 

Annual Cash Flow from Annuity:      $120,000

Annual Premium of Insurance          -  70,000

Annual Cash Flow left to spend         $50,000

Since $50,000 is 5% of the $1 million that was used to fund the strategy, the end result is a 5% cash flow, fully guaranteed, in a market that is paying far less than 5% on liquid assets. Since any money moved into the annuity disappears upon death, a wealthy estate owner can move any amount of money out of his or her taxable estate by putting it into one of these annuities. If the life insurance policy is owned by a trust that is outside the estate, the death benefit will escape estate taxes. In the mean time, the estate owner has enjoyed a 5% cash flow.

You will note that I have not referred to the cash flow as “income.” This is because it isn’t interest. It isn’t a dividend. It isn’t income. AND, it mostly isn’t taxable. Generally, about 80-95% of the cash flow will be tax-free until the person reached the point of their life expectancy.

WILLIAMS: You also mentioned there had been regulatory or legislative changes that had taken place that made the Cinderella strategy tougher to fit. What exactly took place to make it tougher and how are you adjusting to that?

HOMER: Over the years since 2001, the National Association of Insurance Commissioners (NAIC) has sought to insure that insurance companies would have adequate and uniform reserves for certain guaranteed life insurance contracts.  Two regulations known as XXX (Triple X) and AG 38 came into being over that time period. They simply increased the amount of reserves that insurance companies have to set aside for those term and universal life policies covered by the regulations. Higher reserves equate to higher premiums or products being withdrawn by insurance companies. 

WILLIAMS: What was the fallout from that?

HOMER: Many companies simply elected to pull their guaranteed universal life products from their portfolios. This lessened the availability of the products. Companies that kept the products in their portfolio were forced to increase the premiums in order to meet the reserve requirements. The combination of these two results makes it more difficult to obtain the spread desired between the payout of the annuities and the cost of the insurance utilized in the Cinderella Slipper Strategies.

WILLIAMS: How has it made you adjust?

HOMER: In each individual case, the agent has to determine if the strategy is a valid strategy. This can only be done after underwriting is complete. Previously, it was common for someone in a standard underwriting class to have a policy with a premium that left the desired spread between the annuity payout and the policy cost. That is no longer the case. Usually, preferred underwriting is needed now. However, there are exceptions, particularly if we can straddle an age change so that the policy is issued at the younger age and the annuity is issued at the older age. I have always shopped the market for competitive rates. Annuity rates change weekly. Policy rates change less often, but do change. I monitor the annuity rates continually. Underwriting is the key to the cost of the policies. If a candidate has good health history, it is easy to compare rates. But, in this age range, there is usually an abundance of health issues. So, it is important to be able to shop the market for the best underwriting class.

WILLIAMS: Have you changed the way you do business or do you have plans to make changes in light of regulatory changes?

HOMER: No. The changes simply dictate that fewer people will find these to be viable strategies for their circumstance. The numbers tell the story. We have always monitored the annuity rates. We have always shopped the life coverage. The fit is still there, but you have to do the underwriting and do the due diligence because there are fewer prospects to make it work.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.