How do we add value?

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anonymous's picture
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I'm of the belief that specific investment selection is about the least important thing that we do.  As advisors, what are some opinions that we have as to how we add value?  In other words, does a client benefit from working with you even if you don't do a better job of picking investments than they do?  If so, how do they benefit?

B24's picture
B24
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To be honest, I think we almost always can pick better investments than our clients, so I DO believe we add value there.  And I am not jsut alking about return.  I am also talking about risk-adjusted returns (most would rather get 7% with a 60/40 allocation than 7% from the all-equity roller-coaster).
 
But I believe we do a couple of things to add value (and this is just me):
1. We educate clients.  In addition to the seminars I run, and the experts I bring in to speak on different topics, I help explain to my clients WHAT we are doing, WHY we are doing it, and what they can EXPECT from their investments.  I try very hard to give them realistic expectations and understand the risk/reward dynamic in real terms.
 
2. We match their investments to their risk tolerance and age/needs.  I recently had a prospect come to me that was 57, and was in an ALL-equity MFD portfolio, paying 1.5%.  Her funds were fine, not exceptional, but not terrible.  Problem is, she HATES risk.  Her advisor sold her out of a portfolio of 8% muni's that she had from somewhere else (for many years) to get into this managed account.  She LOVED her muni's, but trusted what her advisor was telling her to do.  She is also in a rather high tax bracket.  So for the life of me, I could not figure out WHY he did this.  I asked her if they discussed risk tolerance, retirement planning, etc. and she said 'no'.  She said she went to him when she moved here, and he had sort of an "in" at her employer, so she thought it was no big deal.  He jsut told her to go into this.  No questions, no probing, just do this.  THIS is a situation that would never happen in my office, and a very good way that we could bring value - by understanding the client, understanding their needs, their risk tolerance, and matching the appropriate investments to those criteria.
 
3. Planning.  How many individuals (or "brokers" for that matter) can adequately "plan" fo their retirement, or their kids education, or their estates, or to better manage taxes, or to manage their portfolio for inflation?  Very few.
 
Simply going out and picking the best funds?  Any moron can do that.  Go to Morningstar and do some research.  That's the easy part.  It's all of the planning, evaluation, and "soft" stuff that adds value.  I can't tell you how much mileage I get from calling clients jsut to talk to them about what's going on, reassure them why their portfolio is OK (and despite what Borker says, my retirees aren't having to go back to work), and how we PLANNED for these types of market cycles, why we have 3-5 years of withdrawals sitting in MMKT and CD's (so we are not poaching from our equities in down markets), etc.

Borker Boy's picture
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B24 wrote:To be honest, I think we almost always can pick better investments than our clients, so I DO believe we add value there.  And I am not jsut alking about return.  I am also talking about risk-adjusted returns (most would rather get 7% with a 60/40 allocation than 7% from the all-equity roller-coaster).
 
But I believe we do a couple of things to add value (and this is just me):
1. We educate clients.  In addition to the seminars I run, and the experts I bring in to speak on different topics, I help explain to my clients WHAT we are doing, WHY we are doing it, and what they can EXPECT from their investments.  I try very hard to give them realistic expectations and understand the risk/reward dynamic in real terms.
 
2. We match their investments to their risk tolerance and age/needs.  I recently had a prospect come to me that was 57, and was in an ALL-equity MFD portfolio, paying 1.5%.  Her funds were fine, not exceptional, but not terrible.  Problem is, she HATES risk.  Her advisor sold her out of a portfolio of 8% muni's that she had from somewhere else (for many years) to get into this managed account.  She LOVED her muni's, but trusted what her advisor was telling her to do.  She is also in a rather high tax bracket.  So for the life of me, I could not figure out WHY he did this.  I asked her if they discussed risk tolerance, retirement planning, etc. and she said 'no'.  She said she went to him when she moved here, and he had sort of an "in" at her employer, so she thought it was no big deal.  He jsut told her to go into this.  No questions, no probing, just do this.  THIS is a situation that would never happen in my office, and a very good way that we could bring value - by understanding the client, understanding their needs, their risk tolerance, and matching the appropriate investments to those criteria.
 
3. Planning.  How many individuals (or "brokers" for that matter) can adequately "plan" fo their retirement, or their kids education, or their estates, or to better manage taxes, or to manage their portfolio for inflation?  Very few.
 
Simply going out and picking the best funds?  Any moron can do that.  Go to Morningstar and do some research.  That's the easy part.  It's all of the planning, evaluation, and "soft" stuff that adds value.  I can't tell you how much mileage I get from calling clients jsut to talk to them about what's going on, reassure them why their portfolio is OK (and despite what Borker says, my retirees aren't having to go back to work), and how we PLANNED for these types of market cycles, why we have 3-5 years of withdrawals sitting in MMKT and CD's (so we are not poaching from our equities in down markets), etc.
 
I've always thought it made complete sense to have several years of withdrawals in short-term, safe investments, but my mentor and field trainer both insisted on investing fully in a portfolio of mutual funds and then starting an immediate monthly distribution if they require it.
 
I didn't argue. They're the ones with experience who were training me.
 
 

bspears's picture
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Joined: 2006-11-08

I was taught by a vet to run hypos with one of the worst times in the market...1973-1980...very eye opening on withdrawal rates and trully running out of money.   I had a prospect in a few weeks ago reviewing a proposal on his retirment money.  I ran it using a 4% withdrawal and 3% inflation adjustment each year.  He came back to me and said "Dave Ramsey said a person should be able to withdraw 8% per year on their retirement funds"...I said "you've got to be kidding me"......not on my watch!

snaggletooth's picture
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Joined: 2007-07-13

bspears wrote:
I was taught by a vet to run hypos with one of the worst times in the market...1973-1980...very eye opening on withdrawal rates and trully running out of money.   I had a prospect in a few weeks ago reviewing a proposal on his retirment money.  I ran it using a 4% withdrawal and 3% inflation adjustment each year.  He came back to me and said "Dave Ramsey said a person should be able to withdraw 8% per year on their retirement funds"...I said "you've got to be kidding me"......not on my watch!
 
I'm going to see Dave Ramsey next month only because my brother likes him.  I can't wait to sit in a room with a bunch of idiots listening to another idiot.

Borker Boy's picture
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Joined: 2006-12-09

iceco1d wrote:Aren't you free to model your recommendations however you see fit at this point?
 
Sure I am, but keep in mind that not everyone in this business has an advanced degree in Finance like you. Most of us, especially at Jones, have zero background in investments, financial planning, finance, etc.
 
I'd imagine that most of us at Jones rely very heavily on the guidance provided by our mentors and field trainers. I don't have the background to experiment with folks' portfolios, so I have to assume that a 15 year vet is leading me down the correct path.
 
I'm not saying what I've been taught is wrong; I'm just saying that it makes a lot of sense to leave 3-5 years' worth of money in short term instruments to prevent buying high and selling low--which my clients have been doing for almost a year now.
 

Indyone's picture
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Joined: 2005-05-30

snaggletooth wrote:bspears wrote:
I was taught by a vet to run hypos with one of the worst times in the market...1973-1980...very eye opening on withdrawal rates and trully running out of money.   I had a prospect in a few weeks ago reviewing a proposal on his retirment money.  I ran it using a 4% withdrawal and 3% inflation adjustment each year.  He came back to me and said "Dave Ramsey said a person should be able to withdraw 8% per year on their retirement funds"...I said "you've got to be kidding me"......not on my watch!
I'm going to see Dave Ramsey next month only because my brother likes him.  I can't wait to sit in a room with a bunch of idiots listening to another idiot.
 
As someone who is right in the middle of conducting Dave's 13-week Financial Peace University, I'm going to give you another perspective on Dave Ramsey.  While his advice is mostly simple fundamentals and common sense, he has a way of delivering it that makes people believe.  Furthermore, unlike some other idiot talking heads (Suze, etc.), (1) Dave is not anti-advisor, (2) Dave is not anti-annuity, and (3) Dave is not telling people to shun the stock market and run for the hills.  Honestly, I see nowhere in this program that indicates that an 8% withdrawal rate is appropriate.  While I'm not discounting it as impossible, I think it's more likely that your client misunderstood the advice, which may have been something to the effect of "if you invest moderately in retirement, you should be able to make 8%."  At that point, only an idiot would recommend drawing the entire 8% out each year and not planning for inflation and that runs counter to what I've seen in the program thus far.  Most of the time when I had a client tell me something that Dave said and I disagreed, I later discovered that Dave hadn't said it at all.  The client had simply misunderstood the advice.  I actually had a client trying to draw from his IRA to pay down debt, which was definitely a misinterpretation of the advice he had received.  That's when I decided to go through the program myself, so I could spot misconceptions and correct them before they became a problem.  A friend told me that your Dave clients will usually quit arguing when you tell them "I've been through the program myself, and that's not really what he's advising in that situation."
 
Wednesday evening, I had a client review with a couple in their late 20's who had been through FPU.  Not only are these folks continuing to systematically invest in the stock market, they have zero debt and have over $100K in the bank saved to start building a house in the next few years.  Most surprisingly is that their household income is less than $100K/year and they drive fairly new vehicles.  That is the mark of taking sound advice and acting upon it.
 
I'm not here to tell you that I always agree with everything Dave says, and I don't think I'm chugging the Kool-Aid here, but I do believe that he's the rare exception in tv/radio personal finance people that actually gives sound advice and makes a positive difference for most folks who take his advice.  I'd encourage you to listen with an open mind and see for yourself if you don't agree with at least most of what he has to say.  Frankly, if we had more people listening to Dave Ramsey, we probably wouldn't be in the mess we are in.

snaggletooth's picture
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Indy, of course I will listen with an open mind.  To be honest, I haven't heard him much before, so I was just (unfairly) lumping him in with other idiots like Suze.
 
For people heavy on the debt side trying to get out, I do think he might have some really good advice. 
 
On another note, the Navellier seminar I attended the other day was chalk full of DIY'ers.  THAT, was a painful experience.  Listening to Navellier was great, listening to audience questions made me want to bust my eardrums.
 
 

bspears's picture
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Joined: 2006-11-08

I will concur on bad interpretation.  The client also collaborated that the statement was based on getting 12% per year ave return in the market.  I did a quick run for him on the Dow and went back to 1998, OCT 1st.  Dow was at 9181, the day he was in we were slightly above 11,000.  My calculations show about 1.8% ave return.
I like Dave's thought process on eliminating debt.  I wish the dumbasses in Washington would take the class....

Indyone's picture
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Joined: 2005-05-30

Interestingly enough, this piece on Dave's thoughts about the economy just hit my mailbox.  Keep in mind, Dave has no idea that I'm an investment advisor...this is a mass mailing to pretty much anyone who has signed up for his newsletter...
 
Over the past month, we’ve witnessed the largest bankruptcy in history, the stock market dropping like a rock, and the talking heads on TV freaking out that the world is coming to an end. I’m here to tell you the truth—we’re going to make it. We’re going to be fine. Take a chill pill.
This month I’ve compiled some of the most-asked questions I’ve gotten recently from you:
Are we okay, Dave?

Definitely. Remember Enron and WorldCom in the recent years? We survived that. But much worse than all this was the financial crisis of the ‘80s – S&L collapse and 1,000 bank failures in 2 years. We’re nowhere near this type of thing; that was probably 50 to 100 times worse than all of this.
What does all of this come back to?

Greedy banks financing homes to broke people. It all seemed to work okay in their minds when the economy was booming, but when the economy slowed a little bit broke people quit paying on their subprime mortgages. DUH. No wonder they went out of business. Stupid decisions.
Is there anything we can do to fix this bailout mess?

YES! Here's a quick summary: Companies that had billions in subprime loans were feeling the effects of their stupid decision to make those loans in the first place, and practically gave them away for pennies on the dollar. But since no one wants these loans, and they've had to mark them down to market value, it has frozen the market. If we temporarily change the rule that forces companies to do that, that will free the market up.
This is an absolutely huge deal, and it involves everyone getting in touch with their congressperson before we spend hundreds of billions of dollars that we don't need to! Learn more (Certainly I'll take a hard look at it, but I'm not sure yet if I'll agree with this stance or not.  I will tell you that mark-to-market accountingwas a big PITA when I was CFO of a bank back in the mid-90's.)
Will the collapse of businesses and banks affect me?

No, not unless you work there. Thousands of stock brokers on Wall Street have lost their jobs in the past few weeks, but that happens in other industries across the country in good and bad times. This time it just happened in NYC where all the national news media is so they made a big deal of it.
If I have 401(k) money in a Merrill Lynch or AIG trading account, should I move the money elsewhere?

No. Your money isn’t with them; your 401(k) money is in the stocks. These big companies are just managers (unless you directly own stock in their company). The only thing that may be an issue is if they crash later, you may have some customer service issues, but your money is still safe. This is a good reminder to not have all of your money in one stock—that’s stupid. Always spread out your money in various growth stock mutual funds. (I'd put some in value also, Dave!  Honestly, I think he uses the word "growth" anytime he talks about stocks, so this is probably a Dave misnomer.  I will agree to a growth bias right now, but certainly not exclusively growth.)
With these acquisitions, will my 401(k) account and entire portfolio with Merrill Lynch be lost?

No. They just own the company Merrill Lynch. Look at it this way—if I owned 6 rental properties and hired a management company that eventually failed, I would still own the properties; I just wouldn’t have a manager. Your broker doesn’t have title to your stuff. Your 401(k) is not a company asset; that’s the beauty of it.
Should I sell my US stocks to buy gold and foreign stocks?

Absolutely not! Why would you think foreign stocks are any better than US stocks? Again, diversify your money in good growth stock mutual funds instead.
What practical lessons should small business owners learn from these bank difficulties?

When you have no cash, you freakin’ go broke. You must keep some cash on hand, no matter what kind of business you have. Give yourself some wiggle room where you can take a hit and still be standing.
Remain calm, America. We’re in a slow time, but just pay your bills and you’re going to be fine.

That, in my mind, sounds nothing like Suze Orman.

snaggletooth's picture
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Joined: 2007-07-13

Timely email!  Well his stock went way up in my book.
 
As far as Suze, someone posted the other day she was advising people to get out of money market funds.  She's possessed.
 

anonymous's picture
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Joined: 2005-09-29

"I did a quick run for him on the Dow and went back to 1998, OCT 1st.  Dow was at 9181, the day he was in we were slightly above 11,000.  My calculations show about 1.8% ave return."
 

Speaking of bad interpretations...  Your calculations forgot about dividends.  During that time period the return was a shade under 6.5%.
 

anonymous's picture
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Joined: 2005-09-29

I'm hesitant to make this next post because it's so coincidental that I don't know that if there is any way for me to write this without it sounding like I'm making it up.  
 
Less than 30 minutes after starting this thread, I was heading to a meeting and checked my voice mail.  A client called and wanted to talk to me.  He said that he just got out of the hospital. 
 
He had suffered a major head trauma and was not breathing when they took him to the hospital.  He spent 3-4 days in a coma.  They didn't know if he'd survive.  Obviously, he did.  He may make a full recovery, or he may never work again, or it may be somewhere in between.  To talk to him now, he just seems slightly "off".
 
When I called to set the original appointment with him, he, like many of my 1st appointments, had zero interest in meeting.   We hit it off pretty well and took a complete factfinder.  His interest was with the investments and he was pretty annoyed that I spent so much time on the insurance side of the equation.  We increased his life insurance by a factor of 5, and more importantly, in hindsite, I didn't let him make any changes in his DI which was sold by someone else.  He wanted to find a way to pay less and wanted me to help him save money.  I told him "No way.  It's all about the contract.  I can save you lots of money and screw you with an inferior contract."
 
My sales process is insurance first and then investments.  Thank god.  His insurance was put into place within two weeks of his accident.  His investment rollovers actually took place just a couple of days before his accident.  If we did things in the other order, he would not have proper insurance.
 
Could any one imagine being in a hospital in critical condition and knowing that one's family is not going to be ok financially if they don't recover?
 
When I met with him this afternoon, it shouldn't be very surprising that the expense ratio of his investments wasn't a concern, nor was how they compared to the S&P.   
 
We make a difference.  The difference is life changing and isn't measured in basis points.

stokwiz's picture
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Good job Anon.
 
I had a client call today scared, 2nd time in a week, I thought we put this to bed during our last conversation, be was watching SUZE who recommends sell everything and go into FDIC insured savings only. What a carpet munching moron.
 
Of course my reply was "how can she advise you when she knows nothing about you? I don't recommend trusting your financial future to a magazine or a talk show host." He said thanks, just wondered what I thought.
 
Thanks to the 24 hour news networks, this is what our clients are exposed to when they aren't talking to us.
 
Stok

Borker Boy's picture
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Joined: 2006-12-09

I watched "On the Money" on CNN for the first time (during commericals during the USC/OSU game) Thursday night. A guy called in with a lump sum that he wanted to make grow for retirment in 20 years. The guy was a young disabled vet who is receiving military and social security disability. The show host's advice: long term CDs.
 
I'll bet if we were in a bull market, the advice would have been growth stock mutual funds.
 
 
 

deekay's picture
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Joined: 2007-05-15

This is to all the investment advisors on this board:  Anon's post goes to show that if you're not taking care of your clients' insurance needs, you're doing them a grave disservice.  If you do not have the experience and knowledge, partner with someone who does.  Or, form a relationship with a top-notch insurance agent to refer business back and forth.  It's too important.  If a client takes a hit in their investment account, all is not lost.  They can recover with enough time.  If they make a mistake in their protection portfolio, all can be lost in the blink of an eye.

gvf's picture
gvf
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Joined: 2008-07-01

I just happened to catch this clip the other night, it's Jim Cramer explaining how to survive the market crisis if you're under 40.  What's the first thing he says?  Insurance:http://www.thestreet.com/story/10439596/1/cramer-5-steps-to-financial-survival.html?puc=_tscrss

optimist's picture
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Joined: 2008-10-14

Anon,
 
In your initial meetings with prospects, how do you explain your insurance first, investments second process? I'm sure it is appropriate for all cases, but I have a case now that I would really like to apply this conversation.

anonymous's picture
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Joined: 2005-09-29

 In your initial meetings with prospects, how do you explain your insurance first, investments second process? I'm sure it is appropriate for all cases, but I have a case now that I would really like to apply this conversation.
I'm not sure what you mean by "initial meeting".  Sometimes, my initial meeting is a quick, "This is what I do.  This is how I work."  At this type of meeting, I don't talk about my insurance first process.  Other times, it is a fact finder meeting.   It is at the end of a factfinding meeting that I will discuss this.  It is really part of my medical close.
 
When I take a fact finder, I know my clients goals and objectives, what they are currently doing, their risk tolerance, etc.  After the FF, I want to be in a position to offer specific suggestions and recommendations.  The problem is that I know that my clients will be "approved" for the investment recommendations, but I don't know if they will be approved for the insurance recommendations.  The investment recommendations are actually contingent on the insurance decisions. 
 
For instance, I like putting long term conservative money inside of a whole life insurance policy.  Until we apply, we don't know if this is even a possibility.  We also don't know if the client is going to accept the policy.  How can I make specific investment recommendations before the insurance gets approved?  To some extent, I can't. 
 
Therefore, I simply explain to my clients, "We can't make decisions in a vacuum.  Therefore, we won't be talking about any specifics until after we know the insurance rates and we won't know the insurance rates until after we apply.  Is Tuesday morning at 8:00 a good time for you to get examined?"   This will not stop me from ACATing assets or rolling money over into an IRA.  It will just delay the talk of the specifics.
 
I'll give you an example from today.   A client of mine has a $500,000 beneficiary IRA.  I'm guessing that very possibly the best thing for him to do is to purchase a SPIA and then use it to fund a 10 pay life insurance policy.   The reality is that I won't know if this is a good idea until I know the rates for the life insurance policy.  I called my client today and said, "Client.  Purchasing life insurance may give you the best chance to achieve your financial goals.  We won't know until after we get a policy approved.  When are you free to get examined?"
 
There was zero talk about the amount of insurance or the price.  It's irrelevant until we have an approval.  It's a great business to be able to do what is best for the client and make a fairly easy $30,000.

gvf's picture
gvf
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Joined: 2008-07-01

Anon, Can you give a few specific reasons why you'd recommend the whole life on the beni IRA, rather than buy term and invest the difference?  I realize you didn't say much about the client, but I'm getting quite a few clients lately who are moving over and have been sold very large whole life policies that, to me, seem inappropriate given their estate characteristics.I mean, the commissions are great, but I assume you have other reasons.  Thanks! 

Morphius's picture
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Joined: 2007-07-21

gvf, what are the estate characteristics that make WL seem inappropriate to you?  

anonymous's picture
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Joined: 2005-09-29

"buy term and invest the difference"
 
You need to drop that phrase from your vocabulary.  It makes absolutely no sense on so many levels.
 
1) They insure different things.  Term insurance is insuring against a possibility.  Whole Life insures against a certainty.
 
2) Over a long period of time, WL is actually cheaper than term.  Therefore, a better saying would be "Buy WL and invest the difference".
 
3) Why assume that money that goes into WL is money that would otherwise be invested?  It's a mistaken assumption.  To be clear, I am not saying that BTID won't work because people won't follow through and invest the money.  Rather, I am saying that money that goes into WL isn't money that would otherwise be going towards equity investments.  Therefore, BTID makes as much sense as saying, "Don't take your wife out to Ruth's Chris for your anniversary.  Stay home and make Hamburger Helper and invest the difference."  The point here is that the purchase of WL should be done in such a way that it doesn't cause the person to invest less money, thus there is no "difference" to invest.
 
4)It makes no sense to compare WL to an equity investment because of vastly difference risk characteristics.
 
"Can you give a few specific reasons why you'd recommend the whole life on the beni IRA, rather than buy term and invest the difference?"
 
Now that you know that I think that BTID is a silly concept, I can answer your question.  Let me rephrase it so that it makes sense.  "Can you give a few specific reasons why you'd recommend the whole life on the beni IRA, rather than term insurance"  
 
Term insurance is great and I sell tons of it.  Term insurance is great for a temporary insurance need or temporary insurance want.  It doesn't solve the problem of someone who can benefit from having insurance at death regardless of when death occurs.  My client can benefit from having insurance in force at death regardless of when death occurs.
 
He does not need insurance.  If he died today, his wife would be ok.  We have to look at his goals.  They are 1)Live comfortably for the rest of his life.  2)Leave as much money behind as possible at death.  They are very risk adverse.
 
Without going into their entire situation, let's look at what a single life SPIA combined with a 10 pay WL will do for them.  Can we agree that he will either die within the next 10 years or after the next 10 years?
 
The SPIA is going to be used to pay the WL premiums and to pay taxes on the distribution.  If he dies during the next 10 years, the SPIA will stop.  However, his wife will get a tax free benefit that should be in the neighborhood of what they started with.  In other words, they would be exchanging $500,000 taxable for $500,000 + growth tax free.   If he is still alive after 10 years, he will be getting an income of over $30,000 a year for the rest of his life.  Additionally, at death, his wife will be getting $500,000 + growth tax free.   This is with zero investment risk.  He also has access to cash in his policy if he so desires.
 
Try to make this work with a "BTID" strategy.
 
 

walking9's picture
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Joined: 2008-09-30

Well put.

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