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As Markets Go Down, Look Into Index Annuities


As the stock markets are looking dismal, maybe its time to re-investigate index annuities to protect your wealth.

We hear more and more about indexed annuities in an insurance based environment and their increasing popularity when it comes to retirement planning, Yet naysayers are quick to decry them with arguments such as “what does minimum guarantee really mean?”, “too complex”, “limited  earnings because of the CAP”. But when the stock markets look dismal, those that have taken advantage of these annuities are protected.

Check out our JUNE article and the above video to understand why.


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Man with  TelescopePrivate Financing has long been a concept that estate planners have used regularly, but it has become even more popular recently. With low interest rates, transferring wealth can now be done with less capital, less cost, and less administration.

The mid-term Applicable Federal Rate (AFR) is the interest rate that applies to private financing transactions where the loan term is greater than three but no more than nine years. The rate has increased slightly from its 2012-2013 lows, but is still lower now than its historic averages1 – making now an attractive time to take advantage of wealth transfer arbitrage.

 Who might take advantage of this opportunity?

People with large estates may have a need for larger amounts of life insurance than what can be purchased with their annual exclusion gifts and they may object to the gift taxes associated with gifting the additional dollars to an Irrevocable Life Insurance Trust (ILIT)2.

Private Financing may be able to provide an alternative method for funding these annual premiums. This strategy may be considered for those who have exhausted their lifetime credit or those who want to use that lifetime credit to gift other assets.

Once an irrevocable life insurance trust is established, cash can be loaned on an annual basis or in a single sum to pay premiums. Because the loan is usually coming directly from the insured and going to his or her ILIT, collateral is not required as it would be with a commercial loan. Once the loan is made, the trust will invest the assets.

All income received over and above the required annual interest payment could be used to purchase life insurance inside the trust. This loan interest is based upon the current AFR, so the lower that rate is, the more attractive the private financing  concept becomes. This lump sum loan strategy may not work as well for individuals in their early 70s and older and will generally only be a fit for individuals with large amounts of cash at their disposal.

CoupleLet’s consider the example of a wealthy married couple who are both age 65 and healthy3.

They can set up an ILIT and seed it with a $500,000 gift4. The ILIT will then purchase a Survivorship Universal Life policy on their lives with a $5,306,479 face amount and $151,198 premium due annually for nine  years5. The ILIT borrows the premium from the Grantor for a total loan of $4.5 million. The ILIT’s annual interest payments are received income tax  free from the trust to the Grantor. With a nine year loan term, they can lock in mid-term AFR. For our example, we are assuming this to be 2%. After the term, the loan will be paid back in full.

Private Finance Chart

For appropriate individuals and families, the current environment may present an excellent opportunity to put needed insurance in place.

For more information Private Finance options, call us now at (617) 527-9736 or click here to contact us.



1 http://apps.irs.gov/app/picklist/list/federalRates.html.
2 Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including the generation skipping tax). Failure to do so could result in adverse treatment of trust proceeds.
3 Case studies are offered to show how we can provide insurance solutions in the advanced sales marketplace. Results may vary, and this example does not guarantee a similar result.
4 The interest earned inside the trust is assumed at 4.0%, a 40% estate tax rate is assumed, and 100% of the note is includible in the Grantor’s taxable estate.
5 Prudential SUL Protector, based on a 65 year old male at preferred non-tobacco and 65 year old female at preferred non-tobacco in the state of Alabama. Illustration run May 22, 2015.


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Why Annuities are Gaining in Popularity

JigsawWe’re hearing more and more about indexed annuities in an insurance based environment and their increasing popularity when it comes to retirement planning, Yet naysayers are quick to decry them with arguments such as “what does minimum guarantee really mean?”, “too complex”, “limited earnings because of the CAP” and—my particular favorite—”beware of agent bonuses”.

But when it comes down to it, it’s difficult to argue with hard numbers and proven results.

So what exactly is an Indexing Strategy in an insurance based environment? This kind of strategy has two key components: a CAP or limit as to how much you can earn when the market is good and a protective floor of ZERO when the market is not good. How is this different to the S&P Index?  The S&P Index spreads the investments evenly between 500 different stock companies. There’s no cap, so it lets you keep all the gains when the market is good, but when the market is bad, you suffer the loss.

Now look at the chart below: this graph is based on ACTUAL CREDITED RATES for the period shown on a particular product* over the period 1998-2014.  It shows how $100,000 would have performed during this period had it been invested in the S&P (with dividends) and the actual credited rates of the Indexed Strategy.

With the Insurance Indexing Strategy, you can see that in the years when the market loses money, you’re protected from losses due to fixed zero floor.  The same doesn’t apply if you’re invested in the market.

 When it comes down to it, it’s difficult to argue with the numbers:

IS Graph 300 dpi

*This graph is based on actual credited rates for the period shown on the Index-5 product from American Equity which has since been replaced
 **Past performance is no guarantee of future performance and should not be relied upon as such
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What Does the CPA Firm of the Future Look Like?

Man-JugglingIn the manufacturing and consumer world, product innovation is a given – the Apple iPad was introduced in 2010 – today we’re on the 4th Generation version, not to mention the iPad Mini and the iPad Air. Manufacturing and consumer business models have changed significantly and Henry Ford’s famous quote “any color so long as it’s black” doesn’t fly any more. Customers want options – and lots of them.

In the professional world, however, we tend to forget that innovation in the services  we provide should also be considered critical if we wish to remain competitive and relevant, and just as every retail consumer wants options, so do our clients – and especially our best clients.

So what does that mean for a CPA professional?

If CPAs want to survive, thrive and remain relevant they must address the increasingly complex needs faced by their best clients and act as a catalyst, problem solver, and trusted adviser rather than a referral source to other professional problem solvers, like the pension go-to guy! The CPA firm of the future should no longer aspire to be just the first step in the problem solving process, but rather, become the complete process; essentially the “go-to guy” for any problem your best clients need solving. How can CPAs do this? By building a vibrant back office of problem solvers.

Why are you different?

Tax and audit work is increasingly becoming a commodity offering, with price being the distinguishing factor – and in a commodity situation, the lowest price usually wins. So the CPA firm of the 21st century needs to distinguish itself by offering greater value and this is done in two ways; first, by building deeper relationships with their their best clients. Second, by building a vibrant back office of renown problem solvers. The innovative CPA firm needs to offer not only a full array of essential best client services but equally important, the firm needs to adopt a different type of client acceptance policy. Having standards on who becomes your client is one of the most important differentiating points of the firm of the future.

Building deeper relationships is key.

Simply put, the new CPA firm moves from being a referral source to becoming a trusted advisor who can deal with every facet of best client services.  Relationships between the client and the firm become a long term trusted partnership. In other words, the CPA must move up the value ladder: no longer providing a commodity product, but becoming a trusted adviser and partner. The diagrams below illustrate the subtle differences in approach.





This approach was echoed by Lyle Benson, CPA and Board Member of the AICPA Financial Planning Committee in an interview with Dan Wolfe of Accounting Today. In the interview he states:

  1.  Tax returns are now a commodity. CPAs need to offer much more value to their best clients if you do not want to lose them.
  2. CPAs need to redefine their relationships with their best clients.

 Imagine for a moment

Imagine being the center of the planning team without having to find referral sources because your back office team members are some of the best planners in the country. On the 19th hole when your best clients are mingling, they are now talking about you as a valuable resource, not some referral source specialist.

The question becomes, do you want to remain a CPA firm of today with the risk of declining into commodity irrelevancy or do you wish to break with your traditional role become a vibrant CPA firm of tomorrow?



About the Author:  Barry Goldwater is Principal at Goldwater Financial Group. He works with CPAs to help them offer easy-to-implement, tax planning and wealth management solutions to their best clients. He can be reached at barry@frg-creative.com or at  617-527-9736.