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Annuity Annuitization plus Long Term Care Sales Script

Mr. and Mrs. Sample, we recently had a conversation about the deferred annuity that you purchased 5 years ago. The current value is $100,000; funds that you have concluded are not likely to be needed for future income. Unless unforeseen circumstances occur, this asset will be left to your children.

I suggested to you that there are financial strategies that can substantially increase the current and future value of this asset to your heirs. I have a proposal that will illustrate a simple, safe, and sensible way to redirect this deferred annuity that, in addition to enhancing its value, will preserve it for your heirs if the most likely reason you would need it occurs. That possible need is to pay for long-term disability.

In the first section of the proposal there are some assumptions that we need to agree on:

I.

(1)

The current value is $100,000.

(2)

The cost basis, your investment, is $70,000.

(3)

The rate of return is 5%. Assume no future change.

(4)

Your income tax rate is 28%. Assume no future change.

(5)

When your family inherits this asset, they will be taxed

on the total gain as ordinary income. Their tax rate,

under current law, could reach 39.6%. Let's assume 28%.

(6)

Let's assume also that your future estate value will be taxed

at the current minimum of 37%.

May we proceed based on these assumptions?

II.

The second part of this illustration is a look at the future performance of this asset based on our assumptions.

One year from now, the annuity value will be $105,000 (Column 1).

The cost basis will still be $70,000; the gain is $35,000. Inheritors would owe $89,800 in income tax and $38,850 in estate tax, leaving a net $59,976 (Column 7).

If the inheritance occurs 10 years from now, the net to heirs would be $88,235.

Twenty years from now the net is $132,702.

If $100,000 today pays out $132,702 twenty years from now, the average compound rate of return is less than 1.5%.

Deferred annuities are a good strategy to accumulate funds for future retirement income. Deferring taxes on the annual gains until the future need, then only paying taxes on the gains that represent part of your annual income allows you to spread out the taxes on the gains over your lifetime.

If you, Mr. and Mrs. Sample, however, have come to realize that you will not need income from this annuity and will likely leave it to your heirs, the tax advantages of deferred annuities become problematic.

III.

Here are the actions we need to take to redirect this deferred annuity to greatly increase its future value to your heirs and protect its value from erosion or depletion from a serious threat. The odds are that one of you or both could use up most or all of it paying for the cost of long term disability.

(1)

Use this deferred annuity to do what it was originally meant to do - provide income by converting it to an immediate annuity.
(2)

Receive an $8,000 annual payment guaranteed for as long as either of you are living.
(3)

Pay income tax in the amount of $1,361 per year, leaving a net after tax of $6,639.
(4)

Purchase a last survivor life insurance policy for an annual premium of $4,392.
(5)

Purchase a long term care policy covering both of you with the $2,247 that's left. The total available long term care benefit is $438,000 ($150.00 per day each for 4 years.)

The death benefit payable is $279,389. That is more than the 20th year $265,330 annuity value before taxes (refer to Page 1, Column 1).

Using the total $438,000 long term care benefit has no affect on the $279,389 death benefit.

To keep the death benefit from being included in your estate you should consider making your children the owner and beneficiaries of the life policy. The simple way to do this is to make an annual gift to them of $4,392 and let them pay the premiums. You can also consider having an irrevocable insurance trust own the policy and make the annual gift to the trust to pay the premium.

Keep in mind that the $8,000 annual payment comes to you and you have no obligation to either pay premiums nor to make gifts in the future.

IV.

Now let's examine the results of redirecting the current value of your deferred annuity and compare the difference.

The red boxes represent the future value of the deferred annuities net to heirs years 1, 5, 10, 15, 20 shown in column 7 of page 1 of the illustration. The blue boxes represent the death benefit from the life insurance policy.

If your children get their inheritance during the next 20 years, the difference you have would between 5 times as much and 2 times as much.

In addition to dramatically increasing your children inheritance, it provides you with a long term care account of $438,000, which could be the key to preserving a large part of their inheritance.

Mr. and Mrs. Sample, when you ultimately inherit the proverbial pine box, your children can inherit either the red box or the blue box. Which do you prefer to leave them?

	(c) 2009 CatMark, Inc.