We’ve all seen Jurassic Park, right? They bring dinosaurs back to life using dinosaur DNA found in a prehistoric mosquito trapped in amber. Total science fiction, at least for now. In our business, we have an opportunity to bring back a pension plan of sorts, and create a baseline of guaranteed income and other risk management features that protect the rest of the client’s retirement assets.
“This then becomes one of a relatively few instances where doing what is in the best interest of your client is also in the best economic interest of the Advisor.”
AIG has opened up the software for us to run illustrations with the income starting as early as age 65, but you need to know the secret handshake. Here’s how it works:
Run the AG product with the LIS or the AGAP, depending on state approvals. Pay premiums to age 65, and set the income to run from 85 – 95:
$1MM of income taken over ten years, over $780K more than the client paid in premium. The internal rate of return (IRR) on that would be 4.25%. Guaranteed! Remember, this is a contractually guaranteed income. Where else can you get that guaranteed rate of return over that long a period? Nowhere. And if this were a bond what would you expect the rating to be? Pretty high I would bet.
Want an even better deal? Drop it into your client’s qualified plan. That IRR doesn’t care whether or not it is in a tax favored environment but your client sure does. What would the pre-tax equivalent yield be on an IRR of 4.25%? 5.0%? 5.5%
So here’s the big objection: I don’t want to wait until age 85 to turn on the income. Great, you don’t have to…all you need to do is use the secret handshake I mentioned when you run the illustration.
AIG will allow you to turn on income as early as policy year 15 provided the premium payment period is over. This is why paying to age 65 is so key. Now the client can manage this policy in retirement like they would any other source of income, electing to defer the income to maximize payout if they want, or turning it on early to let other positions stay invested and grow. It’s the client’s choice…if you have the secret code for the illustration software.
If we revisit the income scenarios, we have some choices:
• Income @ 75: The IRR is still a solid 4.04%, guaranteed
• Income @ 65: The IRR is still $3.29%. Where can you get that on a guaranteed basis? Right now, you likely can’t, and if you factor in the fact that this is actually life insurance and is self-completing, it becomes all the more attractive
While you can’t illustrate it, the client also has the ability to stretch the income over longer than ten years. The IRR’s are obviously going to change, but the point is that the decision lies with the client, and they can integrate this guaranteed income with the rest of their retirement planning strategy.
Bonus: In most states, you also have the Chronic Illness Rider included, as you have to include both in states where they are both approved.
So that’s the story: A client can create a “pension-like” guaranteed income with Secure Lifetime and the Lifestyle Income Solution that they can manage just like they would any other retirement asset. They can even drop it into an actual qualified plan for an even better use of this growth.
This really shines when you consider it as an alternative to a very common strategy among Advisors. A lot of advisors are in the business of accumulating assets under management and selling term to cover death needs. What about a strategy where you replace the bond (or bond-like) component of a portfolio with this product? You have a better return with this product than from any currently available bonds that I am familiar and with roughly equivalent risks. Then, you can drop the term if this policy appropriately addresses the death benefit need. This then becomes one of a relatively few instances where doing what is in the best interest of your client is also in the best economic interest of the Advisor. What we are talking about here is a better than bond replacement for the client and a permanent product commission for your Advisor. And we have only talked about the guaranteed elements, there is upside potential also.
Sound too good to be true? The supporting illustrations can be had here: