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Vol. 73, No. 2, March 2019
FOCUS ON Insurance & Disability Planning
College Education Planning: Indexed Universal Life Insurance versus 529 College Saving Plans
Zhixin Wu, PhD, ASA, MAAA
Lei Liang, PhD, CFA, CFP, CAIA, FRM
This study compared the performance of indexed universal life (IUL) insurance policies with 529 college saving plans in college education planning by Monte-Carlo simulations and sensitivity analysis. The IUL policies showed lower return and risk than the all-stock 529 portfolios but higher return and risk than the typical age-based 529 portfolios. The expected family contribution (EFC) impact should be considered in the decision-making process. All key market variables were modeled as correlated stochastic processes in the simulation. Important actuarial assumptions and tax-related issues driving the performance of the IUL and 529 investments were thoroughly analyzed. The study reported how these factors affected the performance of two alternative funding solutions.
The Impact of Premium Conversion on Social Security Benefits
Stephen M. Avila, PhD, CPCU
Manoj Athavale, PhD
Kevin Gatzlaff, PhD
Through premium conversion, employees have the option of choosing to pay insurance premiums on a pretax basis, meaning that their contributions are exempt from federal, state, and local income tax as well as Social Security and Medicare taxes. Electing premium conversion reduces Social Security benefits. This paper analyzes the impact of premium conversion on Social Security benefits. Based on several different scenarios, the authors conclude that the value of the tax savings from premium conversion outweighs the loss of Social Security retirement benefits, but the loss of Social Security survivor benefits and Social Security disability benefits outweighs the value of the tax savings for an employee and family members who would qualify for them.
Retirement Income from Indexed Universal Life Insurance Policies—Risks and Solutions
Ben Wolzenski, FSA, MAAA
The article describes a problem that can arise if retirement income taken from life insurance policies is not managed and adjusted. Specific examples and extensive testing results are cited for a model policy of indexed universal life insurance. Actions to address the problem are briefly described for advisors and insurance companies.
Using Roth Conversions of Legacy Retirement Plans to Fund Special Needs Planning
Lewis Hershey, PhD, MA
Annemarie Kelly, JD, LLM
Financial planners who engage in special needs planning (SNP) must be careful not to overlook legacy retirement plans (i.e., plans from previous employers) as possible sources of funding. While some research exists on the best practices for using Roth individual retirement account (IRA) conversions for general estate planning and wealth transfers, there is little guidance available on how to use Roth conversions of legacy retirement plans to fund SNP tools, such as special needs trusts (SNTs) and Achieving a Better Life Experience (ABLE or 529A) accounts. This article examines the strategy and reasoning for using Roth conversions of legacy retirement plans and suggests there are at least seven advantages of this strategy for clients with SNP issues: 1) access to funds at age 59½, rather than 70½; 2) no required minimum distribution (RMDs) in the lifetime of the account owner; 3) no future taxes; 4) reduced risk; 5) wealth transfer in perpetuity; 6) generally not subject to Medicaid recapture if properly structured (subject to certain conditions); and 7) no limitation on the amount of money that can be converted.
The Role of a Retirement Plan Specialist
Kenn Beam Tacchino, JD, LLM
Financial planning careers sometimes focus on providing assistance to plan sponsors regarding their retirement plan. Oftentimes a planner finds him or herself in the position of advising a small business or a solo practitioner to navigate the Employment Retirement Income Security Act (ERISA). Many professional competencies are needed to service a client’s retirement plan needs. Skills include ascertaining which plan best helps the client, determining the optimal plan design, directing the plan installation process, and resolving plan administration issues, among others. This review of the services that are involved with comprehensive planning for a plan sponsor may help an advisor assess whether they are providing expected services.
Accounting & Taxation
Proposed Regulations Clarify—No Clawback in Using the Higher Exemption Now
Thomas Commito, JD, LLM, CLU, ChFC, AEP
The IRS has issued proposed regulations and a revenue notice concerning various effects of the increase in gift and estate tax exclusion amounts that is in place from 2018 through December 31, 2025, and the effect that a 2026 decrease in those amounts will have on gifts made when the higher exclusion amounts were in effect. The proposed regulations, while complicated, are very positive. They mean there will be no clawback if gifts are made during the current exemption period, and the client dies in a future year when exemptions are lower. The net result for an estate planner is clear: “Use it or lose it.” Use the higher exemption to make gifts now, and you will not lose the exemption if the client dies when the exemption is lower.
Advice for the New Planner
Life Insurance for Business Owners: Inside or Outside?
April Caudill, JD, CLU, ChFC, AEP
The reduced income tax rates for businesses have led many business owners to consider whether it makes more sense to accumulate life insurance values inside a C corporation or outside. A closer look suggests that the benefits inside the company might not be as profound as owners expect. In addition, there are significant nontax considerations that should be weighed.
Testamentary Charitable Lead Annuity Trusts—Have Your (Charitable) Cake and Eat It, Too (Well, at Least Your Heirs Get to Enjoy It!)
Mark R. Parthemer, Esq., AEP (Distinguished)
We focus on a highly effective, multigenerational planning structure, particularly beneficial in a low-interest-rate environment (like today) with a substantial generation-skipping tax exemption (like today).
Ethics & Regulation
Fiduciary Standard for All CFP® Professionals—a Half-Century Journey
James Pasztor, MSF, MPAS, CFP
The newly adopted CFP Board Code of Ethics and Standards of Conduct has been a work-in-progress that started in 1969. Anyone in the financial services field, not just CFP professionals, would be well served to build their practices around the standards outlined in this concise and well-crafted 28-page document. Doing so will be taking advantage of a half-century’s worth of hard work and wisdom from dedicated and passionate financial planners who have helped build a profession.
The Ageism Within and How to Counter It
John N. Migliaccio, PhD, RFG, FGSA, MEd
As the population continues to age along with its baby boomers, there looms a tipping point when former notions of what the nation looks like will change, affecting both markets and consumers for financial services and financial services professionals. Being aware of when these market changes will occur, and what they may look like and foreshadow for financial services businesses, can help clarify what financial professionals need to do to prepare for, and respond to, the evolving landscape in ways that will enhance their services to both current and future clients.
Insurance & Risk Management
Removing the Irrevocable Life Insurance Trust as the Default in Estate Planning
Steve Parrish, JD, RICP, CLU, ChFC, RHU, AEP
Life insurance in estate planning needs a fresh look. Instead of assuming the use of an irrevocable life insurance trust (ILIT) as the default estate planning approach, we should instead look at it as one of many ways of implementing a life insurance strategy. A new approach to life insurance planning is the wealth conservation and protection plan (W-CAP). A W-CAP is a simple estate planning methodology designed to preserve the client’s estate both while alive and at death.
Social Security Planning
Public Oversight of the Social Security Program
Bruce D. Schobel, FSA, MAAA, CLU, CEBS
We take a deep dive into the administrative groups and people who oversee the Social Security system. There are many mechanisms in place to ensure that the operations run smoothly.
Innovation and Disruption in Technology
Richard M. Weber, MBA, CLU, AEP (Distinguished)
Twenty years ago, we obsessed about Y2K and wondered if that dreaded digital anomaly would brick our devices and hurl us a figurative 100 years back in time. While the tech industry accelerated in the 1990s and then temporarily stalled out in the dawn of the twenty-first century, even futurists failed to anticipate the opportunities and disruption brought about by exponentially expanding digitization. “What—you’re not using your electric toothbrush’s remote toothpaste dispensing app on your iPhone 27 XLS?”