MENTOR PROGRAM. The Circle of Wealth System Client Process. (321)

Transcription

1 The Circle of Wealth System Client Process MENTOR PROGRAM SESSION 3 Workbook We are in a belief changing business. Two things will differentiate you from other advisors - what you know & what you can communicate. Every agent has product but not every agent has something to say the client wants to hear. We are dedicated to providing you with the tools to effectively communicate financial solutions. (321)

2 Table of Contents Mentor Session 3 Workbook Objective & Study Guide... 3 Tax Master: Compound Interest The Dark Side!... 6 Tax Master: CIT 6 Screens At-A-Glance... 7 Tax Master: CIT Script Outline... 8 Tax Master: CIT Don s Dialog Tax Master: IFR 12 Screens At-A-Glance Tax Master: IFR Script Outline Tax Master: IFR Script Outline Tax Master: IFR Don s Dialog Tax Master: BTID 11 Screens At-A-Glance Tax Master: BTID Script Outline Tax Master: BTID Investment Account Don s Dialog Tax Master: BTID Life Style Account Don s Dialog Qualified Plans 8 Screens At-A-Glance Qualified Plans Script Outline Qualified Plans Don s Dialog Qualified Plan Bombs CD Bombs Step 8: Discuss Client Ideas Step 9: Life Insurance & Other Products Private Reserve Strategy 17 Screens At-A-Glance Private Reserve Strategy Script Outline Private Reserve Strategy Three Legged Stool 9 Screens At-A-Glance Three Legged Stool Script Outline Three Legged Stool Minute Lesson on Life Insurance 1 Screen (34 Reveals) Minute Lesson on Life Insurance Script Outline Understanding Policy Loans 1 Screen Understanding Policy Loans Script Outline Mentor Session 3 Workbook Revision Date:

3 Objectives & Study Guide Objective(s) to be covered during September 16 Group Coaching Call at 11:30 a.m. Eastern Tax Master: CIT be clear on the purpose and use of Tax Master: CIT presentation in Step 7 being able to demonstrate with clients Tax Master: BTID be clear on the purpose and use of Tax Master: BTID presentation in Step 7 being able to demonstrate with clients Study Guide: Complete lesson 7 s Tax Master section videos CIT & BTID in Circle of Wealth 10-Step Client Process o Available on the members website: Memorize the CIT screens and dialog; present to study group Memorize the BTID screens and dialog; present to study group Watch marketing vignette videos listed below. o Available on the members website: o VVCOW12 Standing In the Tax Line Listen to COW Tales: 22 24, 92 o Available on the members website: Objective(s) to be covered during September 30 Group Coaching Call at 11:30 a.m. Eastern Tax Master: IFR be clear on the purpose and use of Tax Master: IFR presentation in Step 7 being able to demonstrate with clients Taxable Account a Different View Study Guide: Complete lesson 7 s Tax Master section video IFR in Circle of Wealth 10-Step Client Process o Available on the members website: Memorize the IFR screens and dialog; present to study group Listen to COW Tales: 33-34, 50-51, 125, 130 o Available on the members website: Review final practice exam questions Mentor Session 3 Workbook Revision Date:

4 Objective(s) to be covered during October 14 Group Coaching Call at 11:30 a.m. Eastern Qualified Plans & Taxes be clear on the purpose and use of Qualified Plans presentation in Step 7 being able to demonstrate with clients Review Final Exam Practice Questions Study Guide: Complete lesson 7 s Tax Master section video Qualified Plans in Circle of Wealth 10- Step Client Process o Available on the members website: On Screen 2 of Qualified Plans, answer the quiz and then explain your rationale behind each answer to your study group. Review all of the applications associated with Qualified Plans: o Pay Off Debt or Contribute to QP? o Qualified Plan Company Match o Qualified Plan Fundamentals o QP Do 2 Things o QP Questions to Ask o QP Return Potential o QP vs. Taxable Investment o Tax Deferred vs. Tax Favored o Types of Qualified Plans Memorize the Qualified Plans screens and dialog; present to study group Watch the on-screen video tutorials for Tax History, Tax Threshold and Government Intervention presentations/screens. Watch marketing vignette videos listed below. o Available on the members website: o VVPEM17 The Tax Filter o VVPEM20 Qualified Plan Contributions o VVCOW05 Qualified Plans Do Two Things o VVCOW10 You May Not Be Saving Taxes o VVCOW18 Average Rate of Return vs. Real Return Listen to COW Tales: 28 30, 48 49, 60, 108, 127 o Available on the members website: Review final practice exam questions Crystal or your group master requests for any areas you need to revisit for next session. Mentor Session 3 Workbook Revision Date:

5 Objective(s) to be covered during October 28 Group Coaching Call at 11:30 a.m. Eastern Self Assessment Review Areas of Need Bases on Survey Response Review Final Exam Practice Questions Study Guide: Review final practice exam questions Objective(s) to be covered during November 4 Group Coaching Call at 11:30 a.m. Eastern High Net Worth Clients and COW Retirement Income Alternatives Review Final Exam Study Guide: Review 10Q, 10 Steps, RRON, CP, CQ, MM, TM, PRS, PEM, QP Mentor Session 3 Workbook Revision Date:

6 Tax Master: Compound Interest The Dark Side! The Tax Master module provides three major discussions regarding compounding investments in a taxable environment. CIT Presentation = Compound Interest Tutorial BTID Presentation = Buy Term Invest the Difference IFR Presentation = Increase, Flatten or Reduce Mentor Session 3 Workbook Revision Date:

7 Tax Master: CIT 6 Screens At-A-Glance Mentor Session 3 Workbook Revision Date:

8 Tax Master: CIT Script Outline Intro Comments: o Purpose: CIT Compounding Interest Tutorial. The purpose of this presentation is to show a prospect how much they would need to deposit in a side account upfront to pay all the taxes their taxable investment will create over time. It s a Net Present Value story to grab a prospects attention. o Remember when using this presentation that you are talking about compounding interest in taxable accounts. This should not be used when discussing Qualified Plans since this illustrates taxes that are being paid each year on the interest or earnings growth. You will notice that the presentation builds from one screen to the next. Go slowly and make sure that your prospect is with you every step of the way before moving on to the next point to make sure they fully understand the problem when you are done. 1. Screen 1 a. Let's illustrate the impact that compounding interest can have on your Circle of Wealth. We can use your numbers if you like. b. Advisor notes: This is the initial assumptions input screen. Enter the data and click calculate. You many enter either a lump sum (initial amount), annual contributions, or both. 2. Screen 2 a. Let's go through the years slowly watching the account grow on the left, which represents the money you will have in your account. b. The account on the right represents the taxes, which you must pay in order to maintain the account on the left. c. What is your first reaction to seeing this happening to your account? d. Where are you getting the money to pay the taxes due each year earned on your investment account? (current income or lifestyle) e. If I can show you some opportunities which would allow you to avoid transferring those taxes to the government each year it would have a dramatic impact on your Circle of Wealth. f. This screen is not the whole picture because we have not even considered the opportunity cost. g. Advisor notes: Illustrate the increasing balance of the compounding account along with its associated increasing tax burden. Use the slider to change the displayed values. Often clients focus their attention on the rate of return or amount being earned without any idea of the additional cost to be in these type accounts. Rolling the interest earned each year back into the same account creates an increasing tax liability which can greatly impact the outcome over time. The taxes must be paid each year and usually come from their lifestyle account which can easily be illustrated with the Personal Economic Model. 3. Screen 3 a. This screen is similar to the last screen, but it displays the opportunity cost of the taxes paid. b. Advisor notes: Illustrate that one not only loses the tax, but also everything those tax dollars could have earned if they were not transferred away. If this is the first time you have introduced the concept of Opportunity Cost make sure they get this point. Paying taxes that could be avoided is what we mean by finding money. The tax is Mentor Session 3 Workbook Revision Date:

9 one thing and may not get their full attention but once they understand they are also losing the value of those tax dollars paid they begin to pay closer attention. 4. Screen 4 a. This screen demonstrates the taxes paid, the cumulative taxes paid, and the cumulative taxes paid with opportunity cost. b. Advisor notes: This screen displays the increase in tax liability as the investment grows. Compounding interest in a taxable environment and rolling the interest back in the same account creates an increasing tax liability. The underlying account is not the issue but rather the rolling of the interest earned back in the same account. The more interest the account earns the greater the problem. Unfortunately many are of the misconception that they can make up for the loss with higher returns. This is not true because the taxes paid that could have been avoided must now be calculated at the higher return rate. Since many are paying the taxes due on these accounts from their lifestyle dollars they usually do not even realize there is a problem until their taxes get large enough to impact their lifestyle. By this time they have lost a great deal and those losses can never be recovered. 5. Screen 5 a. This screen calculates the present value of the taxes paid. b. The documentation proves that the lump sum present value of the taxes would be consumed over the time period by the taxes paid. c. Advisor notes: Make sure you client understands that this screen calculates and displays the present value of the taxes paid. That is, it calculates in today s dollars how much you would need to put in a fund which would: 1. Be compounded at the net opportunity investment return. 2. Pay the taxes due at the end of each year. 3. Have a zero balance at the end of the projection. This is a powerful screen which illustrates how much they would have to give to the government on day one of the investment to cover the taxes that they will have to pay from their lifestyle account over the number of years they intend to keep money in this account. Knowing the present value of the future tax stream can bring a different perspective on what is really going on in this account. Remember you have a partner in this investment account which is the government meaning the more interest you earn the greater their cut. Don t forget that you are taking all the risk. 6. Screen 6 a. This screen illustrates graphically the growth of the investment and the consumption of the lump sum (present value of taxes). b. Advisor notes: This screen provides a graphical illustration of the growth of the investment and the decline of the hypothetical present value of tax fund. As the investment grows, it requires more and more taxes be paid from lifestyle. The importance of this screen is to illustrate that the lump sum will be gone by the end of the period. The client would think twice before writing a check like this and give it to the government on the first day they made the investment. The point we want the client to see is that perhaps without even knowing they are going to send the equivalent over time if they continue to compound interest in a taxable account. Mentor Session 3 Workbook Revision Date:

10 Tax Master: CIT Don s Dialog What you should say: Let's illustrate the impact that compounding interest can have on your Circle of Wealth. We can use your numbers if you like. This is the initial assumptions input screen. Enter the data and click calculate. You many enter either a lump sum (initial amount), annual contributions, or both. Transition: Remember when using this tool you are talking about compounding interest in taxable accounts. This should not be used when discussing Qualified Plans since this illustrates taxes that are being paid each year on the interest or earnings growth. You will notice that the presentation builds from one screen to the next. Go slowly and make sure that your prospect is with you every step of the way before moving on to the next point to make sure they fully understand the problem when you are done. Mentor Session 3 Workbook Revision Date:

11 What you should say: Let's go through the years slowly watching the account grow on the left, which represents the money; you have in your account. The account on the right represents the taxes, which you must pay in order to maintain the account on the left. What is your first reaction to seeing this happening to your account? Where are you getting the money to pay the taxes due each year earned on your investment account? (current income or lifestyle) If I can show you some opportunities which would allow you to avoid transferring those taxes to the government each year it would have a dramatic impact on your Circle of Wealth. This screen is not the whole picture because we have not even considered the opportunity cost. Illustrate the increasing balance of the compounding account along with its associated increasing tax burden. Use the slider to change the displayed values. Transition: Often clients focus their attention on the rate of return or amount being earned without any idea of the additional cost to be in these type accounts. Rolling the interest earned each year back into the same account creates an increasing tax liability which can greatly impact the outcome over time. The taxes must be paid each year and usually come from their lifestyle account which can easily be illustrated with the Personal Economic Model. Mentor Session 3 Workbook Revision Date:

12 What you should say: This screen is similar to the last screen, but it displays the opportunity cost of the taxes paid. Illustrate that one not only loses the tax, but also everything those tax dollars could have earned if they were not transferred away. Transition: If this is the first time you have introduced the concept of Opportunity Cost make sure they get this point. Paying taxes that could be avoided is what we mean by finding money. The tax is one thing and may not get their full attention but once they understand they are also losing the value of those tax dollars paid they begin to pay closer attention. Mentor Session 3 Workbook Revision Date:

13 What you should say: This screen demonstrates the taxes paid, the cumulative taxes paid, and the cumulative taxes paid with opportunity cost. This screen displays the increase in tax liability as the investment grows. Transition: Compounding interest in a taxable environment and rolling the interest back in the same account creates an increasing tax liability. The underlying account is not the issue but rather the rolling of the interest earned back in the same account. The more interest the account earns the greater the problem. Unfortunately many are of the misconception that they can make up for the loss with higher returns. This is not true because the taxes paid that could have been avoided must now be calculated at the higher return rate. Since many are paying the taxes due on these accounts from their lifestyle dollars they usually do not even realize there is a problem until their taxes get large enough to impact their lifestyle. By this time they have lost a great deal and those losses can never be recovered. Mentor Session 3 Workbook Revision Date:

14 What you should say: This screen calculates the present value of the taxes paid. The documentation proves that the lump sum present value of the taxes would be consumed over the time period by the taxes paid. This screen calculates and displays the present value of the taxes paid. That is, it calculates in today s dollars how much you would need to put in a fund which would: 1. Be compounded at the net opportunity investment return. 2. Pay the taxes due at the end of each year. 3. Have a zero balance at the end of the projection. Transition: This is a powerful screen which illustrates how much they would have to give to the government on day one of the investment to cover the taxes that they will have to pay from their lifestyle account over the number of years they intend to keep money in this account. Knowing the present value of the future tax stream can bring a different perspective on what is really going on in this account. Remember you have a partner in this investment account which is the government meaning the more interest you earn the greater their cut. Don t forget that you are taking all the risk. Mentor Session 3 Workbook Revision Date:

15 What you should say: This screen illustrates graphically the growth of the investment and the consumption of the lump sum (present value of taxes). This screen provides a graphical illustration of the growth of the investment and the decline of the hypothetical present value of tax fund. As the investment grows, it requires more and more taxes be paid from lifestyle. Transition: The importance of this screen is to illustrate that the lump sum will be gone by the end of the period. The client would think twice before writing a check like this and give it to the government on the first day they made the investment. The point we want the client to see is that perhaps without even knowing they are going to send the equivalent over time if they continue to compound interest in a taxable account. Mentor Session 3 Workbook Revision Date:

16 Tax Master: IFR 12 Screens At-A-Glance Mentor Session 3 Workbook Revision Date:

17 Tax Master: IFR Script Outline Intro Comments: o Purpose: IFR it stands for Increase, Flat, Reduce. There are three ways to pay taxes on money that are compounding in a taxable environment. These tools going to give you the chance to illustrate each and every one of those positions to your prospect. o Again, there is no right answer here. It s just helping them understand which would be more efficient than the one they re already doing. 7. Screen 1 a. There are several ways to deal with the taxes due from compounding interest in a taxable investment. b. The first and most obvious would be to move the entire account to a tax favored position. This is not always possible or the most prudent thing to do. c. There are basically three things you can do which we will cover together. d. Advisor notes: You want your client to understand there are three ways to deal with taxes in a taxable investment: 1. Increase taxes (as the investment grows), 2. Flatten taxes, 3. Reduce taxes. Your client is most likely rolling their interest earned each year back in the same account which we call the Increasing Tax position. Once they see the tax issue they will want to explore different alternatives. One would be to move all the money to a tax favored position with the stroke of a pen or over a given period of years which could reduce their taxes. The other option would be to leave the account as is and move only the interest earned which would be the Flat Tax position. Helping your client find the option that best suits their current financial position is the right strategy for the client. None of the options are bad, just some are more tax efficient than others. 8. Screen 2 a. The investment rate of return in Account 1 represents the rate of return you are currently earning on your investment. b. Account 2 is the account, which you may wish to divert some of your dollars to avoid the Compound Interest problem. c. This will become clearer to you as we show you the alternatives available to you. d. Let s put in some assumptions. e. Inputs: current age 60, years of accumulation: 20, initial account balance $500,000, return on taxable account 1: 5%, tax favored account 2: 5% (where the money can grow tax free), opportunity cost: 5%, ordinary tax bracket: 40% and future tax bracket: 40%. Advisor notes: Keep all the percentages the same so you don t get into interest rate conversation. f. Advisor notes: This is an input screen. Since an annual contribution could be diverted directly to another account to solve the tax problems, we will be looking at lump sum contributions from this point on in the program. I like to start this discussion using the same rate of return in the both accounts one and two to avoid getting into risk discussions before the client understands the real issue. Obviously an account with greater returns will outperform another especially if that account is Tax Favored meaning the money in the account grows tax deferred and comes out tax free. 9. Screen 3 a. This is what compounding your money looks like. Mentor Session 3 Workbook Revision Date:

18 b. You start with a lump sum investment and each year your account grows as the interest is paid. c. Most people just roll the interest earned back into the investment account, which continues to add to the compounding effect. d. While the major focus is on the compounding interest, the increasing tax often goes unnoticed. e. Let's look at what I am talking about. f. Advisor notes: Give your client a picture to hang on to of what Compound Interest looks like. No magic here, we are simply showing the future value of the account over time. This is where most focus their attentions with little regard of what we are about to illustrate in the screens to come. Don t forget, you are taking your prospect up the stairs one step at a time and when you are done with your discussion you want them to see things as they really are not what they think they are. 10. Screen 4 a. The government is a silent partner is this account. b. They take no risk but participate in all the profits. c. While you are focusing on the interest, they are counting their returns. d. Your interest is growing but the taxes are growing right along with the growth of your account. e. Advisor notes: The taxes are increasing right along with the compound (increasing) interest. Compound interest creates an increasing tax liability. Taxes do not compound upon themselves. As the account grows so grow the future taxes. Make sure you are using accurate words to describe what is actually going on in these accounts. 11. Screen 5 a. On the left you will notice the account growing at the given interest rate and the taxes growing at the current tax bracket as well. b. The numbers at the bottom of the screen give a year-by-year description of what is happening - illustrating the net account value after the taxes have been paid. c. Remember that most people are paying these tax dollars from their current lifestyle rather than taking the tax due from the investment account. d. Advisor notes: You want your client to understand that they are not only losing money in taxes but they are also losing the money on the tax dollars could have earned had they not had to pay the tax. This is a powerful screen and sets the stage for the rest of your conversation so it is important that you viewer understands first the taxes they will pay from their current lifestyle and then the opportunity cost of what those dollars could be worth to them if they chose another alternative. 12. Screen 6 a. One might say, "What if I just moved it all? Wouldn't that be best?" b. Well, it may or may not be possible or prudent to move the entire lump sum into a tax favored account with the stroke of a pen, but if it was done, it may look something like this. c. Since all the growth is generated within the tax favored account, there would be no annual tax requirement to be paid from lifestyle. d. Instead the tax would be deferred until such time that the growth was actually pulled from the account and used. e. Advisor notes: It is possible, but not always prudent, to immediately move an entire taxable investment into a tax favored account. They have seen the problem and Mentor Session 3 Workbook Revision Date:

19 now they want to solve it. If they are not moved enough to solve this problem they either do not fully understand what you have been saying or they are not interested in saving taxes. If I could should a few alternatives that are legal which may help you reduce or eliminate the taxes you are currently paying as well as future taxes you will have to pay, would you like to take a look at a few of those options? 13. Screen 7 a. Since you are removing the interest earned each year, you can then put those dollars in an investment account which is tax deferred or tax favored. b. This position assumes that you like the investment you are currently in, but are not in favor of the growing tax liability caused by compounding the interest in the same account. c. Advisor notes: Interest earned each year is removed from the principal investment and invested is a tax favorable position. You must not forget that clients who have a great deal of money in these accounts are usually not interested in moving all their money to a different account even if the risk level is the same or even less. They have worked long and hard to get the money in the account and believe that compound interest is somehow magical. Once they see the tax liability clearly they will be looking for options. Perhaps the easiest to understand is the Flat Tax strategy which leaves their original investment alone and removes only the earnings each year to compound in a tax favored account thus creating a flat tax. 14. Screen 8 a. Account 1 (the taxable account) is level or constant which in turn levels or flattens the taxes due each year. b. The interest earned is then moved to account 2 where it can grow in a tax-favored environment. c. Advisor notes: Illustrate the principal in account 1 remains constant. Illustrate the taxes generated from account 1 remain constant. Illustrate the interest removed from account 1 each year growing in a tax-favored position. Although this screen looks busy it will be up to you to point out exactly what your prospect is seeing. Focus first on the left side. After you get through scrolling through the years illustrating the tax issues then click on account 2 and show what those tax dollars could do first if they were saved and invested in a deferred account. Then click on Deferred and illustrate the outcome if they put the money in a tax favored account. Click on the Net in purple at the bottom of the screen and it will pop up a window to show the differences between each of the strategies. d. Click on the Net (Account 1 + Account 2 Taxes LOC): purple dollar amount. e. This shows the difference between what you are doing currently in compound interest account vs. what may be possible by flattening the taxes and investing those dollars in a tax deferred or tax favored account. f. Advisor notes: There is a considerable difference in taxes between these two positions. Give your prospect an opportunity to ponder this difference and ask for their thoughts. 15. Screen 9 a. Since you are removing principal as well as the interest earned each year, the interest earnings are less and less each year. b. Since the annual interest earned is the taxable portion- the taxes are reduced. c. The next screen will illustrate the effect of repositioning the principal over time. Mentor Session 3 Workbook Revision Date:

20 d. Advisor notes: Taxes decline as the principal declines because there is less taxable interest earned. Moving all the money to another account in a lump sum is in effect a reducing account but remember that few will wish to move the entire account with the stroke of a pen. More likely you will be able to help your prospect find an amount suitable to their desires. 16. Screen 10 a. Here you can see the results of the reducing tax strategy. b. If we accelerate the amount of the annual withdrawal, we can even further reduce the current tax liability. c. Advisor notes: Illustrate what happens year-by-year as the principal account is reduced. Illustrate the effects of the pay down by accelerating the reduction. Use this to illustrate first what the results would be to move it all at once then move on quickly to the other options they should consider before making a decision. The purpose of the conversation is not to sell them something but rather to help them find what is best in their situation. There is no wrong strategy. Some are more efficient than others but ones present position and personal desires may over ride what you think is best. d. Click OK e. Let s look at the results if you moved all the money to first a tax deferred account and then to a tax favored position. f. Advisor notes: Moving all the money may be the most tax efficient but we want to help them find the strategy that best suits what they want. We are not telling the client what they should do but rather giving them options to consider to determine the best strategy they have available. g. Click on purple text: Tax Deferred to change to a Tax Favored account h. Now let s look at the Tax Favored. i. This is the most tax efficient but there are other things you need to consider. j. The chief concern would be access to capital. k. Advisor notes: Show your prospect that you are concern about them and their interest. If your prospect wants to move it all, stop talking and start talking about where you would suggest them put them money. 17. Screen 11 a. You will notice that all four positions have the same account values on the top. b. The thing to consider is how much it cost to get there. It is obvious that there is a great deal of wealth, which can be recaptured by avoiding the Compound Interest position. Remember compound interest is not the problem, its increasing tax. Since most people try to pay these taxes from their lifestyle, it can have a dramatic effect if these taxes can be avoided. The best thing to note here is that these changes can be made without incurring any additional expense. There are really two things we can do to avoid paying increasing tax on the Compound Interest besides changing the investment altogether. One would be to flatten the tax as we have discussed. Second would be to create a reducing tax position by removing not only the interest but some of the principal as well over time. These two alternatives have a little different philosophy from each other, which should be addressed. c. The flat tax position basically says that I like the investment vehicle I am in currently; I am just not fond of paying taxes. I am satisfied with the amount of risk and the rate of return I am earning and wish not to change my investment. I understand that I do Mentor Session 3 Workbook Revision Date:

21 not want to continue to compound my interest because of tax and wish to remove the interest earned each year, pay the tax, and find another place to park the remaining interest where I can compound my interest in a tax favorable environment. Many are in this position when they retire because they begin living off the interest, which is taxable (unless it is in a Roth IRA or other tax favored account already). Since their account is not getting larger from rolling the interest back over each year, the tax is now flattened. Unfortunately, they may have been able to have more for their retirement had they not compounded their tax burden through their saving years. The reducing tax position varies only slightly. This stance says I am not really that fond of the investment I am in currently, but for several reasons, I am not willing to move the entire lump sum today. I would feel more comfortable moving all the interest earned each year along with some of the principal because of the tax advantages. d. Advisor notes: you want your prospects to see that you are knowledgeable and that you do focus on the process rather than the product. Let your prospect decide which strategy they want. e. Click on documentation f. Anytime you want to see the documentation just let me know. g. Advisor notes: showing the documentation proves there are no smoke and mirrors; however, make sure you understand and have looked at each documentation screen before your prospect asks you to see it and explain. 18. Screen 12 a. What did we learn? b. Compounding interest in a taxable environment creates increasing tax liability c. You can minimize that loss by flattening the taxes simply by moving the earnings from that account to a separate account where the money can grow in a tax favored basis d. Then finally, you can reduce the tax liability overtime by taking principle and interest from the account and moving that to a tax favored position. Mentor Session 3 Workbook Revision Date:

22 Tax Master: IFR Don s Dialog What you should say: There are several ways to deal with the taxes due from compounding interest in a taxable investment. The first and most obvious would be to move the entire account to a tax favored position. This is not always possible or the most prudent thing to do. There are basically three things you can do which we will cover together. There are three ways to deal with taxes in a taxable investment. 1. Increase taxes (as the investment grows) 2. Flatten taxes 3. Reduce taxes Transition: Your client is most likely rolling their interest earned each year back in the same account which we call the Increasing Tax position. Once they see the tax issue they will want to explore different alternatives. One would be to move all the money to a tax favored position with the stroke of a pen or over a given period of years which could reduce their taxes. The other option would be to leave the account as is and move only the interest earned which would be the Flat Tax position. Helping your client find the option that best suits their current financial position is the right strategy for the client. None of the options are bad, just some are more tax efficient than others. Mentor Session 3 Workbook Revision Date:

23 What you should say: The investment rate of return in Account 1 represents the rate of return you are currently earning on your investment. Account 2 is the account, which you may wish to divert some of your dollars to avoid the Compound Interest problem. This will become clearer to you as we show you the alternatives available to you. This is an input screen. Since an annual contribution could be diverted directly to another account to solve the tax problems, we will be looking at lump sum contributions from this point on in the program. Transition: I like to start this discussion using the same rate of return in the both accounts one and two to avoid getting into risk discussions before the client understands the real issue. Obviously an account with greater returns will outperform another especially if that account is Tax Favored meaning the money in the account grows tax deferred and comes out tax free. Mentor Session 3 Workbook Revision Date:

24 What you should say: This is what compounding your money looks like. You start with a lump sum investment and each year your account grows as the interest is paid. Most people just roll the interest earned back into the investment account, which continues to add to the compounding effect. While the major focus is on the compounding interest, the increasing tax often goes unnoticed. Let's look at what I am talking about. Give your client a picture to hang on to of what Compound Interest looks like. Transition: No magic here, we are simply showing the future value of the account over time. This is where most focus their attentions with little regard of what we are about to illustrate in the screens to come. Don t forget, you are taking your prospect up the stairs one step at a time and when you are done with your discussion you want them to see things as they really are not what they think they are. Mentor Session 3 Workbook Revision Date:

25 What you should say: The government is a silent partner is this account. They take no risk but participate in all the profits. While you are focusing on the interest, they are counting their returns. Your interest is growing but the taxes are growing right along with the growth of your account. The taxes are increasing right along with the compound (increasing) interest. Transition: Compound interest creates an increasing tax liability. Taxes do not compound upon themselves. As the account grows so grow the future taxes. Make sure you are using accurate words to describe what is actually going on in these accounts. Mentor Session 3 Workbook Revision Date:

26 What you should say: On the left you will notice the account growing at the given interest rate and the taxes growing at the current tax bracket as well. The numbers at the bottom of the screen give a year-by-year description of what is happening - illustrating the net account value after the taxes have been paid. Remember that most people are paying these tax dollars from their current lifestyle rather than taking the tax due from the investment account. I am not only losing money in taxes I am also losing the money those tax dollars could have earned me had I not had to pay the tax. Transition: This is a powerful screen and sets the stage for the rest of your conversation so it is important that you viewer understands first the taxes they will pay from their current lifestyle and then the opportunity cost of what those dollars could be worth to them if they chose another alternative. Mentor Session 3 Workbook Revision Date:

27 What you should say: One might say, "What if I just moved it all? Wouldn't that be best?" Well, it may or may not be possible or prudent to move the entire lump sum into a tax favored account with the stroke of a pen, but if it was done, it may look something like this. Since all the growth is generated within the tax favored account, there would be no annual tax requirement to be paid from lifestyle. Instead the tax would be deferred until such time that the growth was actually pulled from the account and used. It is possible, but not always prudent, to immediately move an entire taxable investment into a tax favored account. Transition: They have seen the problem and now they want to solve it. If they are not moved enough to solve this problem they either do not fully understand what you have been saying or they are not interested in saving taxes. If I could should a few alternatives that are legal which may help you reduce or eliminate the taxes you are currently paying as well as future taxes you will have to pay, would you like to take a look at a few of those options? Mentor Session 3 Workbook Revision Date:

28 What you should say: Since you are removing the interest earned each year, you can then put those dollars in an investment account which is tax deferred or tax favored. This position assumes that you like the investment you are currently in, but are not in favor of the growing tax liability caused by compounding the interest in the same account. Interest earned each year is removed from the principal investment and invested is a tax favorable position. Transition: You must not forget that clients who have a great deal of money in these accounts are usually not interested in moving all their money to a different account even if the risk level is the same or even less. They have worked long and hard to get the money in the account and believe that compound interest is somehow magical. Once they see the tax liability clearly they will be looking for options. Perhaps the easiest to understand is the Flat Tax strategy which leaves their original investment alone and removes only the earnings each year to compound in a tax favored account thus creating a flat tax. Mentor Session 3 Workbook Revision Date:

29 What you should say: Account 1 (the taxable account) is level or constant which in turn levels or flattens the taxes due each year. The interest earned is then moved to account 2 where it can grow in a tax-favored environment. Illustrate the principal in account 1 remains constant. Illustrate the taxes generated from account 1 remain constant. Illustrate the interest removed from account 1 each year growing in a taxfavored position. Transition: Although this screen looks busy it will be up to you to point out exactly what your prospect is seeing. Focus first on the left side. After you get through scrolling through the years illustrating the tax issues then click on account 2 and show what those tax dollars could do first if they were saved and invested in a deferred account. Then click on Deferred and illustrate the outcome if they put the money in a tax favored account. Click on the Net in purple at the bottom of the screen and it will pop up a window to show the differences between each of the strategies.. Mentor Session 3 Workbook Revision Date:

30 What you should say: This shows the difference between what you are doing currently in compound interest account vs what may be possible by flattening the taxes and investing those dollars in a tax deferred or tax favored account. There is a considerable difference in taxes between these two positions. Transition: Give your prospect an opportunity to ponder this difference and ask for their thoughts. Mentor Session 3 Workbook Revision Date:

31 What you should say: Since you are removing principal as well as the interest earned each year, the interest earnings are less and less each year. Since the annual interest earned is the taxable portion- the taxes are reduced. The next screen will illustrate the effect of repositioning the principal over time. Taxes decline as the principal declines because there is less taxable interest earned. Transition: Moving all the money to another account in a lump sum is in effect a reducing account but remember that few will wish to move the entire account with the stroke of a pen. More likely you will be able to help your prospect find an amount suitable to their desires. Mentor Session 3 Workbook Revision Date:

32 What you should say: Here you can see the results of the reducing tax strategy. If we accelerate the amount of the annual withdrawal, we can even further reduce the current tax liability. Illustrate what happens year-by-year as the principal account is reduced. Illustrate the effects of the pay down by accelerating the reduction. Transition: Use this to illustrate first what the results would be to move it all at once then move on quickly to the other options they should consider before making a decision. The purpose of the conversation is not to sell them something but rather to help them find what is best in their situation. There is no wrong strategy. Some are more efficient than others but ones present position and personal desires may over ride what you think is best. Mentor Session 3 Workbook Revision Date:

33 What you should say: Let s look at the results if you moved all the money to first a tax deferred account and then to a tax favored position. Moving all the money may be the most tax efficient but we want to help you find the strategy that best suits what you want. Transition: We are not telling the client what they should do but rather giving them options to consider to determine the best strategy they have available. Mentor Session 3 Workbook Revision Date:

34 What you should say: Let s look at the net effect of moving all the money with the stroke of a pen. First the Tax Deferred then the Tax Favored. This is the most tax efficient but there are other things you need to consider. The chief concern would be access to capital. You are concerned about them and their interest. Transition: If your prospect wants to move it all, stop talking and start talking aobut where you would suggest them put them money. Mentor Session 3 Workbook Revision Date:

35 What you should say: You will notice that all four positions have the same account values on the top. The thing to consider is how much it cost to get there. It is obvious that there is a great deal of wealth, which can be recaptured by avoiding the Compound Interest position. Remember compound interest is not the problem, its increasing tax. Since most people try to pay these taxes from their lifestyle, it can have a dramatic effect if these taxes can be avoided. The best thing to note here is that these changes can be made without incurring any additional expense. There are really two things we can do to avoid paying increasing tax on the Compound Interest besides changing the investment altogether. One would be to flatten the tax as we have discussed. Second would be to create a reducing tax position by removing not only the interest but some of the principal as well over time. These two alternatives have a little different philosophy from each other, which should be addressed. The flat tax position basically says that I like the investment vehicle I am in currently; I am just not fond of paying taxes. I am satisfied with the amount of risk and the rate of return I am earning and wish not to change my investment. I understand that I do not want to continue to compound my interest because of tax and wish to remove the interest earned each year, pay the tax, and find another place to park the remaining interest where I can compound my interest in a tax favorable environment. Many are in this position when they retire because they begin living off the interest, which is taxable (unless it is in a Roth IRA or other tax favored account already). Since their account is not getting larger from rolling the interest back over each year, the tax is now flattened. Unfortunately, they may have been able to have more for their retirement had they not compounded their tax burden through their saving years. (continued next page) Mentor Session 3 Workbook Revision Date:

36 The reducing tax position varies only slightly. This stance says I am not really that fond of the investment I am in currently, but for several reasons, I am not willing to move the entire lump sum today. I would feel more comfortable moving all the interest earned each year along with some of the principal because of the tax advantages. You are knowledgeable really do focus on the process rather than product. Transition: Let your prospect decide which strategy they want. Mentor Session 3 Workbook Revision Date:

37 What you should say: Anytime you want to see documentation on any calculation just let me know. No smoke and mirrors Transition: Make sure you understand and have looked at each documentation screen before your prospect asks you to see it and explain. Mentor Session 3 Workbook Revision Date:

38 What you should say: Compound Interest creates the largest wealth transfers. Removing interest from your account each year may reduce your tax liability. Removing interest and principal each year may further reduce your taxes. Transition: Mentor Session 3 Workbook Revision Date:

39 Tax Master: BTID 11 Screens At-A-Glance Mentor Session 3 Workbook Revision Date:

40 Tax Master: BTID Script Outline Intro Comments: Purpose: BTID Buy Term Invest the Difference. Explore (and expose) the often overlooked costs involved with buying term and investing the difference in a taxable scenario. 1. Screen 1: a. Most people are familiar with the rewards of compounding interest, but few are familiar with the tax ramifications associated with interest earned. b. The following discussion is designed to uncover some of these hidden costs. c. Let's enter your data and shine some light on this problem. d. Opportunity Cost may be a term you are not familiar with. e. Basically it represents the interest you could have earned on a given amount had you been able to avoid losing or transferring it away. f. A dollar paid unnecessarily not only cost the dollar but what the dollar could have earned had you not given it away. g. Advisor notes: It is very difficult to calculate the exact results but this tool will give you the opportunity to get in the ballpark and close enough for the client to understand the issues they face trying to win with the buy term and invest the difference strategy. It is important to note that permanent life insurance will not win in every case you illustrate, especially when rates of return are in the double digits in the investment account. Be careful to not get caught up in the rate of return game. There is a place for permanent insurance as well as investments especially if one is planning to leave money to their heirs. When all is said and done the risk involved as well as the fact that term insurance goes away paints a positive picture for have permanent insurance in ones portfolio. 2. Screen 2: a. Over the period of years, in looking at your investment at X interest rate, the results look very impressive. b. At first glance, it looks as if you invested X to get Y. c. Advisor notes: Compound interest can create a sizable account over time. As we begin on this screen this is the amount the client assumes they will have in their account at the end of the period based on a given rate of return. As we move forward we will begin to chip away at that amount with all the expenses due which they have often failed to calculate. They are taxes, opportunity cost on taxes, term cost, opportunity cost on term, and capital gains. 3. Screen 3: a. You really invested X in after tax dollars to get Y. b. Y represents the amount of interest you have earned over the period. c. Advisor notes: Subtract your basis (the contributions) to get the interest earned. A visual picture of the amount of money the client actually put into the account with after tax dollars is an important bench mark. Don t forget that the client had to earn more than the amount the invested to cover the tax due on their earned income. We are not showing that on this screen but it is important to make the point. 4. Screen 4: a. Often we tend to focus on the amount that we actually have in our account as illustrated in screen 4. Mentor Session 3 Workbook Revision Date:

41 b. In order for you to have that amount in your left pocket, you had to reach into your right pocket to cover the taxes due on the interest earned. c. The tax paid over the period is represented in red. d. Advisor notes: In an investment where the interest is compounding in a taxable environment there is a cost. The tax represents a cost to maintain this particular investment. Any tax paid is significant. Compare their tax rate with their return rate. Minimizing, avoiding, or eliminating taxes are strategies your client will be very interested in. Income taxes can t be avoided on earned income however additional tax on those same dollars invested can be avoided or at least minimized. 5. Screen 5: a. What do most people do with the interest they earn in their investment account? Most let it compound through re-investment. b. Very few people pay the taxes due on their investment from the interest earned in the investment. c. They roll the interest back into the account, which gives the appearance of magical growth. d. Where do they get the money to pay the additional taxes due from the investment? e. It usually comes from another source, which we call lifestyle. f. Most likely the taxes due from their investment results are included in their overall tax picture and go unnoticed. g. Unnoticed for a while, which brings us to the next point: h. In what year will the annual tax due be more than your annual contribution? i. Advisor notes: i. Most people roll their investment earnings back into their investment account. They pay the additional taxes due each year from their lifestyle. At some point in the future the tax due will exceed their annual savings. ii. Hint: When you step forward to answer the third question, the program automatically searches for the year in which the tax is equal to or greater than your contribution. This is a very important screen because it illustrates to the client that they may not be able to afford to continue compounding their interest because of the increasing taxes. First let s assume that this particular client can only afford to save $5,000 each year as is represented in the default numbers. Compound interest creates a tax, which is due each year. In year one the client pays little attention to the additional taxes due. Since they are rolling the interest back into the account each year, the tax liability is getting larger each year as well. At some point, their lifestyle may not continue to support the investment contribution and the taxes due, unless they are capable of finding additional funds to pay the tax. They have basically two choices. One would be to pay the taxes out of their lifestyle or secondly they could begin paying taxes by withdrawing the taxes due from the investment account. iii. Either way they are going to have less than they had anticipated. This screen offers a great opportunity for you to discuss other avenues, which can avoid transferring these taxes and incurring the additional cost of the tax. iv. The majority of dollars used to cover the taxes generated in taxable accounts is paid through one s lifestyle account. Once the account gets large enough to generate taxable earnings large enough for it to impact current lifestyle the Mentor Session 3 Workbook Revision Date:

42 client begins to take notice. Your job is to help them see the problem well in advance before the taxes become a serious problem. 6. Screen 6: a. Do people pay more taxes than they have to? b. The obvious answer is yes, but not because they want to. c. Most people would prefer to avoid the tax if they knew of a way to do so. d. If the tax was reduced, they could take less risk and perhaps still have the same or more money, especially if it did not affect their lifestyle. e. Remember if you pay a tax you could have avoided, you not only lose the tax dollar, but what that dollar could have earned for you had you not given it away. f. This is known as Opportunity Cost. g. Advisor notes: Opportunity Cost should be considered when determining the validity of any strategy. The tax lost is one thing and for many they have no problem paying the tax. Opportunity cost on the tax brings the tax loss into the light. This is perhaps the greatest economic principle one needs to understand to better manage their financial decisions. 7. Screen 7: a. Opportunity costs on taxes paid are a cost to be considered when compounding interest in a taxable investment. b. Advisor notes: i. Paying Expenses from Lifestyle: Taxes can be considered the maintenance fee or cost for an investment that yields 1099 income. Opportunity cost is another cost, which must be considered. If you give away a dollar unnecessarily, you have also lost what that dollar could have earned for you had you been able to keep it. ii. Paying Expenses from Investment: Taxes can be considered the maintenance fee or cost for an investment that yields 1099 income. Opportunity cost is another cost, which must be considered. When you take money from your investment account to pay a tax that could have been avoided it not only costs you what you took out but what those dollars would have earned for you had you been able to leave them in your investment. iii. Depending on the rate of return used the opportunity cost can be as high or higher than the actual taxes paid. Notice we break out the tax and the opportunity cost is an additional loss on top of the taxes paid. We do not want the client to miss this serious wealth transfer. 8. Screen 8: a. Let s factor in the term premiums into the equation. b. Advisor notes: Term Insurance has a cost as well. Often the cost of term is so low few people even count it as an expense but as we will see in the next screen with opportunity cost added it can be very costly. The most costly part of term insurance is the fact that you are using money to purchase it which you have less than 1% of ever collecting and when you really need it it become cost prohibitive. 9. Screen 9: a. You can only know the true cost and benefit of owning term insurance at your death. b. At that time you would add up all the premiums paid and compound them at interest to determine the opportunity cost of term. c. The cost would need to be weighed against the benefits received. Mentor Session 3 Workbook Revision Date:

43 d. Advisor notes: The opportunity cost of the term insurance premiums. Term insurance may be the most suitable recommendation for some client's circumstances. Their insurable need may only last the duration of the term, and term insurance may provide the greatest coverage for what they are able to afford. Adding the opportunity cost brings the true cost into focus. We are not saying you should not have term coverage but if you took the risk which we are not telling you to do and you invested the term premiums in your account you would have those dollars as well as the interest they would have earned. Make sure your client is doing all the math in their calculations. e. Click on the purple asterisk * next to opportunity on term f. Now we are looking at all the factors that make up the BTID strategy. g. Advisor notes: You won t your client to feel that you are very through and you have left nothing out. Remember the first screen where the client saw how much money they had in the account and how much they put in to get it. This is hard to argue against when you have broken out each and every expense. Just as there are many more expenses to consider when driving a car than the price of the car, there are expenses in taxable account than they failed to see before they began. 10. Screen 10: a. Finally in our review we would need to include any capital gains to get a true picture of this strategy. b. Advisor notes: Some of the money in their account may be subject to capital gains tax when they liquidate the account. Depending on how you structured the account on the input screen will dictate the effects of capital gains. Some accounts would not be taxed each year on the gain but have taxes deferred until they are sold. Often you will find your client in accounts that have a combination of both ordinary income and capital gains. 11. Screen 11: a. Now that we have accounted for all of the expenses. Let s compare the two positions: compound interest vs. permanent life insurance looking through the eyes of the Lifestyle Account Summary. b. Here on this screen we are going to be able to look at compound interest in a taxable account, buying term and investing the difference, verses permanent insurance and how it compares to the buy term invest the difference strategy. c. Instructor note: Lifestyle Account Summary means they are paying all of the additional expenses (taxes and the term) out of their lifestyle account. It is recommended that you don t put any amount into the permanent life insurance account until you go through each of expense and then come back at the end to talk about the insurance contract. d. Click on each one and explain what they are seeing on the left (compound interest) and on the right (permanent life insurance) e. Instructor Notes: Inputs: Initial Balance: $0, Annual Contributions: $10,000 at beginning of each year, Contribution Years: 30, Accumulation Years: 30, Rate of Return: 10%, % Treated as Ordinary Taxable: 100%, % Treated as Capital Gain: 0%, Ordinary Tax Bracket: 40%, Capital Gain Tax Bracket: 20%, All Term Premiums are set to zero i. Accumulation: Put your mouse pointer on the phrase of Accumulation and click to view the end of the period value calculated from the initial assumptions. A default example of $10,000 invested at 10% for 30 years at a Mentor Session 3 Workbook Revision Date:

44 40% tax bracket will show the figure $1,809,434 on the accumulation line on the left hand side of the screen and zero on the right. The $1,809,434 is the amount the investor is counting on having in their account. At this point we are going to leave the accumulation on the Permanent Insurance side at zero and come back to it at the end of the discussion. When you click on the line items in the middle of the screen; you will not only see the individual values to the left and the right but also at the bottom of the page you will see the difference in the two accounts. The difference arrow will point to the side with the greatest value. As you go through the line items, you will see the net accumulation and the difference change in proportion to each calculation. Using the default assumptions, you will notice at this point that the difference is in favor of the Buy Term & Invest The Difference side by $1,809,434. ii. Less Contributions: The next line item to review is the amount that each contributed to receive the accumulation value shown. You will notice that it is the same on both sides of the ledger and is a negative amount shown in red. iii. Plus Taxes Avoided: The next line illustrates the amount of taxes which must be paid in addition to the regular annual after tax contributions. You will see that the compound interest strategy required $603,774 in taxes on the interest earned. There is a zero in the left-hand column because this person had to pay $603,774 in taxes and at the end of the 30-year period has no claim to any of the dollars sent to the government. The person on the right however had no taxes to pay but still had to reach into their lifestyle and subtract $603,774. The permanent insurance required no additional taxes (under current tax law) so the taxes that were avoided by using permanent insurance could now be invested in a side fund. Let's assume that every time our person on the left wrote a check to the government for taxes due on the interest earned the person on the right put that same amount under their mattress. At the end of the period, our person on the right would have the same dollar amount in cash that the person on the left paid to the government. In order to get the true picture the same out of pocket cost must be accounted for on both sides of the ledger. iv. Plus Opportunity Earnings of Taxes: When clicked, the opportunity cost of the taxes are displayed in the right column. Compound interest created the taxes, which must be paid. Taxes paid cannot then be invested, they are gone and gone forever. The opportunity cost becomes real when those dollars can be redirected and the taxes, which would have been necessary, are avoided. This is a major benefit currently of permanent insurance, the growth inside the policy compounds without being taxed annually. Since the person on the right did not have to pay the taxes they could have not only saved them, but could have invested them. If the person on the right had invested the taxes saved and earned 10%, the default sample investment/opportunity cost rate of return, they would have an additional $832,178. v. Plus Fund Term Premiums Avoided: Now we have to factor in another item which affects the bottom line. The term insurance cost that you entered on the assumptions screen will show up when you click the button. Since our investor on the left wanted to make sure the family had something in case of their premature death they purchased some term insurance. The actual cost of the premiums is shown on this line. The person who purchased the Mentor Session 3 Workbook Revision Date:

45 permanent insurance on the other hand had the same amount of death benefit, which was included in the contract along with their annual $10,000 after tax premium, and it s cost has been factored into the cash value available. In other words, they purchased a policy for the same amount of death benefit as the person on the left for the same dollar amount of premium as the person on the left was investing. ($10,000 a year) In some cases the amount the person on the left is investing will not be enough for the person on the right to purchase a permanent product replacing all the term insurance the person on the left owns. There may also be situations where the annual amount being invested will be more than enough to purchase a permanent policy and you can load the contract with additional cash thus increasing the cash value at the end of the period making the net accumulation even larger. The zero cash value was designed to allow you to use any product you choose so that you can build the permanent life contract to meet the wants and desires of the client. When you factor in these dollars our buy term and invest the difference person on the left had to pay, the picture gets even clearer. Our person on the left paid all those premiums and has zero to show for it today. Yes they had the coverage but they have to cash from this transaction. If they are still alive at the end of the period they may be forced to drop the coverage because now it is getting cost prohibitive or can continue to pay the increasing premiums. Either way the cost is getting greater and greater the longer they live. vi. Plus Opportunity Earnings of Term: Just like the tax paid had an opportunity cost, so does the term premiums. When you click on Opportunity cost on Term you see what the actual premiums would have earned had you invested them at the investment rate of return entered on the assumptions screen. The person on the right was able to recoup the cost of the term premiums so they could also have invested them. Had they done so they would have the opportunity cost in addition to the premiums saved. vii. Plus Capital Gain Tax Avoided: Finally we must factor in any capital gain tax. viii. Total: Now we know that the policy we have been putting this $10,000 a year in has some cash values because there are some illustrated cash values* in the contract. Pull out a ledger from your carrier and circle the illustrated cash value* at the end of the period and type that number in the cell on the top right side of the ledger by accumulation under Permanent Insurance. The net accumulation will now increase on the right by the illustrated* cash value and the difference between the two accounts will also recalculate. Mentor Session 3 Workbook Revision Date:

46 Tax Master: BTID Investment Account Don s Dialog What you should say: Since most people are familiar with the rewards of compounding their interest but are not so familiar with the tax ramifications associated with the growth on the interest earned, the following discussion is designed to uncover some of the hidden costs. Let's enter your data and shine some light on this problem. Opportunity Cost may be a term you are not familiar with. Basically it represents the interest you could have earned on a given amount had you been able to avoid losing or transferring it away. A dollar paid unnecessarily not only cost the dollar but what the dollar could have earned had you not given it away. This is the initial assumptions screen for the main Tax Master presentation. The contributions are always made at the beginning of the year. The program includes an annual contribution at the beginning of the first year. Therefore, if you want a specific amount as the initial contribution, deduct the annual contribution from that initial contribution you desire. For example, if you want to start with exactly $100,000 and add $5,000 each year. Enter an initial balance of $95,000 and annual contributions of $5,000. (continued next page) Mentor Session 3 Workbook Revision Date:

47 Transition: It is very difficult to calculate the exact results but this tool will give you the opportunity to get in the ballpark and close enough for the client to understand the issues they face trying to win with the buy term and invest the difference strategy. It is important to note that permanent life insurance will not win in every case you illustrate, especially when rates of return are in the double digits in the investment account. Be careful to not get caught up in the rate of return game. There is a place for permanent insurance as well as investments especially if one is planning to leave money to their heirs. When all is said and done the risk involved as well as the fact that term insurance goes away paints a positive picture for have permanent insurance in ones portfolio. Mentor Session 3 Workbook Revision Date:

48 What you should say: Over the period of years we are looking at your investment at X interest rate looks very impressive. At first glance, it looks as if you spent X to get Y. Compound interest can create a sizable account over time. Transition: As we begin on this screen this is the amount the client assumes they will have in their account at the end of the period based on a given rate of return. As we move forward we will begin to chip away at that amount with all the expenses due which they have often failed to calculate. They are taxes, opportunity cost on taxes, term cost, opportunity cost on term, and capital gains. Mentor Session 3 Workbook Revision Date:

49 What you should say: You really spent X amount in after tax dollars to get Y. Y represents the amount of interest you have earned over the period. Subtract your basis (the contributions) to get the interest earned. Transition: A visual picture of the amount of money the client actually put into the account with after tax dollars is an important bench mark. Don t forget that the client had to earn more than the amount the invested to cover the tax due on their earned income. We are not showing that on this screen but it is important to make the point. Mentor Session 3 Workbook Revision Date:

50 What you should say: Often we tend to focus on the amount that we actually have in our account as illustrated in screen 4. In order for you to have that amount in your left pocket, you had to reach into your right pocket to cover the taxes due on the interest earned. The tax paid over the period is represented in red. In an investment where the interest is compounding in a taxable environment there is a cost. The tax represents a cost to maintain this particular investment. Transition: Any tax paid is significant. Compare their tax rate with their return rate. Minimizing, avoiding, or eliminating taxes are strategies your client will be very interested in. Income taxes can t be avoided on earned income however additional tax on those same dollars invested can be avoided or at least minimized. Mentor Session 3 Workbook Revision Date:

51 What you should say: What do most people do with the interest they earn in their investment account? Most let it compound through re-investment. Very few people pay the taxes due on their investment from the interest earned in the investment. They roll the interest back into the account, which gives the appearance of the magical growth. Where do they get the money to pay the additional taxes due from the investment? It usually comes from another source, which we are calling lifestyle. Most likely the taxes due from their investment results are included in their overall tax picture and go unnoticed. Unnoticed for a while, which brings us to the next point: In what year will the annual tax due be more than your annual contribution? Most people roll their investment earnings back into their investment account. They pay the additional taxes due each year from their lifestyle. At some point in the future the tax due will exceed their annual savings. (continued next page) Mentor Session 3 Workbook Revision Date:

52 Hint: When you step forward to answer the third question, the program automatically searches for the year in which the tax is equal to or greater than your contribution. This is a very important screen because it illustrates to the client that they may not be able to afford to continue compounding their interest because of the increasing taxes. First let s assume that this particular client can only afford to save $5,000 each year as is represented in the default numbers. Compound interest creates a tax, which is due each year. In year one the client pays little attention to the additional taxes due. Since they are rolling the interest back into the account each year, the tax liability is getting larger each year as well. At some point, their lifestyle may not continue to support the investment contribution and the taxes due, unless they are capable of finding additional funds to pay the tax. They have basically two choices. One would be to pay the taxes out of their lifestyle or secondly they could begin paying taxes by withdrawing the taxes due from the investment account. Either way they are going to have less than they had anticipated. This screen offers a great opportunity for you to discuss other avenues, which can avoid transferring these taxes and incurring the additional cost of the tax. Transition: The majority of dollars used to cover the taxes generated in taxable accounts is paid through ones lifestyle account. Once the account gets large enough to generate taxable earnings large enough for it to impact current lifestyle the client begins to take notice. Your job is to help them see the problem well in advance before the taxes become a serious problem. Mentor Session 3 Workbook Revision Date:

53 What you should say: Do people pay more taxes than they have to? The obvious answer is yes, but not because they want to. Most people would prefer to avoid the tax if they knew of a way to do so which could reduce their risk and at the same time give them more money, especially if it did not affect their lifestyle. Remember if you pay a tax you could have avoided, you not only lose the tax dollar, but what that dollar could have earned for you had you not given it away. This is known as Opportunity Cost. Opportunity Cost should be considered when determining the validity of any strategy. Transition: The tax lost is one thing and for many they have no problem paying the tax. Opportunity cost on the tax brings the tax loss into the light. This is perhaps the greatest economic principle one needs to understand to better manage their financial decisions. Mentor Session 3 Workbook Revision Date:

54 What you should say: Opportunity costs on taxes paid are a cost to be considered when compounding interest in a taxable investment. Paying Expenses from Lifestyle: Taxes can be considered the maintenance fee or cost for an investment that yields 1099 income. Opportunity cost is another cost, which must be considered. If you give away a dollar unnecessarily, you have also lost what that dollar could have earned for you had you been able to keep it. Paying Expenses from Investment: Taxes can be considered the maintenance fee or cost for an investment that yields 1099 income. Opportunity cost is another cost, which must be considered. When you take money from your investment account to pay a tax that could have been avoided it not only costs you what you took out but what those dollars would have earned for you had you been able to leave them in your investment. Transition: Depending on the rate of return used the opportunity cost can be as high or higher than the actual taxes paid. Notice we break out the tax and the opportunity cost is an additional loss on top of the taxes paid. We do not want the client to miss this serious wealth transfer. Mentor Session 3 Workbook Revision Date:

55 What you should say: Let s factor in the term premiums into the equation. Term Insurance has a cost as well. Transition: Often the cost of term is so low few people even count it as an expense but as we will see in the next screen with opportunity cost added it can be very costly. The most costly part of term insurance is the fact that you are using money to purchase it which you have less than 1% of ever collecting and when you really need it it become cost prohibitive. Mentor Session 3 Workbook Revision Date:

56 What you should say: You can only know the true cost and benefit of owning term insurance at your death. At that time you would add up all the premiums paid and compound them at interest to determine the opportunity cost of term. The cost would need to be weighed against the benefits received. The opportunity cost of the term insurance premiums. Term insurance may be the most suitable recommendation for some client's circumstances. Their insurable need may only last the duration of the term, and term insurance may provide the greatest coverage for what they are able to afford. Transition: Adding the opportunity cost brings the true cost into focus. We are not saying you should not have term coverage but if you took the risk which we are not telling you to do and you invested the term premiums in your account you would have those dollars as well as the interest they would have earned. Make sure your client is doing all the math in their calculations. Mentor Session 3 Workbook Revision Date:

57 What you should say: Now we are looking at all the factors that make up the BTID strategy. You are very through and you have left nothing out. Transition: Remember the first screen where the client saw how much money they had in the account and how much they put in to get it. This is hard to argue against when you have broken out each and every expense. Just as there are many more expenses to consider when driving a car than the price of the car, there are expenses in taxable account than they failed to see before they began. Mentor Session 3 Workbook Revision Date:

58 What you should say: Finally in our review we would need to include any capital gains to get a true picture of this strategy. Some of the money in their account may be subject to capital gains tax when they liquidate the account. Transition: Depending on how you structured the account on the input screen will dictate the effects of capital gains. Some accounts would not be taxed each year on the gain but have taxes deferred until they are sold. Often you will find your client in accounts that have a combination of both ordinary income and capital gains. Mentor Session 3 Workbook Revision Date:

59 Tax Master: BTID Life Style Account Don s Dialog What you should say: Disclosures: The rate of return used for the Life Insurance Illustration should have a gross rate of return equal to the rate of return used in the hypothetical account in the Tax Master program. The hypothetical account does not factor investment costs, and if it did, the hypothetical account's results would be less. ANY NUMBER APPEARING IN THE ACCUMULATION CELL UNDER PERMANENT INSURANCE MUST BE DOCUMENTED IN WRITING BY THE PROGRAM USER MAKING THE PRESENTATION. A COPY OF THE INSURANCE PROPOSAL ILLUSTRATING ANY NUMBER OTHER THAN ZERO MUST ACCOMPANY ANY PRINTING OF THIS COMPARISON. Usage Hints: Click the descriptive label for each row to include the value in the account comparison. Click the "Difference" row to quickly display all the information. Enter the cash value of the insurance in the top right box that appears when you click the Account 2's Accumulation ($0). Press tab or enter after you enter the cash value. Click CV to change the display to surrender value. Click SV to toggle the display to death benefit. Click DB to toggle back to cash value. (Each value must be entered individually from a valid policy illustration.) Mentor Session 3 Workbook Revision Date:

60 Toggle between paying expenses from lifestyle or from the investment account by clicking the summary heading (Lifestyle/Investment Account Summary.) (continued next page) Sample Default Inputs: Initial Balance: $0 Annual Contributions: $10,000 at beginning of each year Contribution Years: 30 Accumulation Years: 30 Rate of Return: 10% % Treated as Ordinary Taxable: 100% % Treated as Capital Gain: 0% Ordinary Tax Bracket: 40% Capital Gain Tax Bracket: 20% All Term Premiums are set to zero Compound Interest Vs Permanent Insurance taking the expenses from the Investment Account. Accumulation: When you click on the first line (Accumulation) you will notice the amount of $1,809,434 (assuming sample default values listed above) on the left hand side of the page with a zero on the right under permanent insurance. Our viewer is assuming that he will have the $1,809,434 in his account at the end of the 30-year period in this example. You can show the cash value illustrated in your company product in this field but we suggest that you postpone doing so until you have walked your client through the entire presentation. Otherwise, they will not have all the information necessary to understand what these two numbers really mean. Less Contribution: In our default example each is saving $10,000 in after tax dollars and putting it into the respective accounts. You will notice that each put away the exact same amount over the period. Less Ordinary Tax: Remember that in this comparison any and all expenses must be taken from the investment account. The interest is compounding in the account on the left, which creates a tax due each year. Over the period our person on the left must reach into the investment account and remove $358,678 in order to pay the taxes due. The $358,678 assumes you have entered zero term insurance values or are not considering term and the other default values listed above. The person on the right with the permanent insurance has no additional taxes to pay so nothing must be subtracted from their account. Currently the federal government allows the cash value of life insurance to accumulate tax deferred. Less Opportunity Cost of Ordinary Taxes: The opportunity cost on the taxes paid can amount to a great deal of money. When you click the purple center label for Opportunity Cost of Ordinary Tax, notice that the dollar value representing the opportunity cost is displayed in the left column. Since our person on the left paid a tax, which could have been avoided, they not only lost the tax dollar, but what that dollar could have earned for them had they not given it away. The person on the right with the permanent insurance paid no additional taxes so the opportunity cost on zero is zero. Opportunity cost is an idea regarding a potential lost opportunity and not an actual deduction to an account. Less Term Insurance Premiums: The dollars spent for term life insurance must be subtracted from the investment account to cover the risk in the event the person on the left die before they have time to accumulate the dollars required in their investment account. The person on the Mentor Session 3 Workbook Revision Date:

61 right did not have to purchase any additional term insurance because the $10,000 they put in the permanent insurance contract gave them the same amount of life coverage the person buying term and investing the difference was carrying. (continued next page) Mentor Session 3 Workbook Revision Date:

62 Less Opportunity Cost of Term: Had our person on the left not purchased any coverage at all, they could have invested the dollars spent on premiums in their investment account and they would have those dollars plus the interest they would have earned over time. In order to understand the true cost we must factor in what the term premiums could have earned had they been invested. Our person on the right paid zero in term premiums, thus the opportunity cost is also zero. Opportunity cost is an idea regarding a potential lost opportunity and not an actual deduction to an account. Less Capital Gain Tax: Finally, any capital gains tax is subtracted. Investment Account Summary: At this point we still have one more input to make. The permanent insurance policy does in fact have some cash value to be accounted for. At this point you should type in the value illustrated in your proposal system on the product you wish to illustrate. When you enter an input you will see the disclaimer stating that you must be able to document any number in this field other than zero. Once you have made your point with the guaranteed* value you will want to show the result if the company pays you what they are illustrating currently. While the policy does have many additional benefits to discuss helping a client to see the cost of each alternative is a good place to begin. *Guarantees are based on the claims paying ability of the issuing insurance company. Compound Interest Vs Permanent Insurance - expenses taken from Lifestyle. Accumulation: Put your mouse pointer on the phrase of Accumulation and click to view the end of the period value calculated from the initial assumptions. A default example of $10,000 invested at 10% for 30 years at a 40% tax bracket will show the figure $1,809,434 on the accumulation line on the left hand side of the screen and zero on the right. The $1,809,434 is the amount the investor is counting on having in their account. At this point we are going to leave the accumulation on the Permanent Insurance side at zero and come back to it at the end of the discussion. When you click on the line items in the middle of the screen; you will not only see the individual values to the left and the right but also at the bottom of the page you will see the difference in the two accounts. The difference arrow will point to the side with the greatest value. As you go through the line items, you will see the net accumulation and the difference change in proportion to each calculation. Using the default assumptions, you will notice at this point that the difference is in favor of the Buy Term & Invest The Difference side by $1,809,434. Less Contributions: The next line item to review is the amount that each contributed to receive the accumulation value shown. You will notice that it is the same on both sides of the ledger and is a negative amount shown in red. Plus Taxes Avoided: The next line illustrates the amount of taxes which must be paid in addition to the regular annual after tax contributions. You will see that the compound interest strategy required $603,774 in taxes on the interest earned. There is a zero in the left-hand column because this person had to pay $603,774 in taxes and at the end of the 30-year period has no claim to any of the dollars sent to the government. The person on the right however had no taxes to pay but still had to reach into their lifestyle and subtract $603,774. The permanent insurance required no additional taxes (under current tax law) so the taxes that were avoided by using permanent insurance could now be invested in a side fund. Let's assume that every time our person on the left wrote a check to the government for taxes due on the interest earned the person on the right put that same amount under their mattress. At the end of the period, our person on the right would have the same dollar amount in cash that Mentor Session 3 Workbook Revision Date:

63 the person on the left paid to the government. In order to get the true picture the same out of pocket cost must be accounted for on both sides of the ledger. (continued next page) Mentor Session 3 Workbook Revision Date:

64 Plus Opportunity Earnings of Taxes: When clicked, the opportunity cost of the taxes is displayed in the right column. Compound interest created the taxes, which must be paid. Taxes paid cannot then be invested, they are gone and gone forever. The opportunity cost becomes real when those dollars can be redirected and the taxes, which would have been necessary, are avoided. This is a major benefit currently of permanent insurance, the growth inside the policy compounds without being taxed annually. Since the person on the right did not have to pay the taxes they could have not only saved them, but could have invested them. If the person on the right had invested the taxes saved and earned 10%, the default sample investment/opportunity cost rate of return, they would have an additional $832,178. Plus Fund Term Premiums Avoided: Now we have to factor in another item which affects the bottom line. The term insurance cost that you entered on the assumptions screen will show up when you click the button. Since our investor on the left wanted to make sure the family had something in case of their premature death they purchased some term insurance. The actual cost of the premiums is shown on this line. The person who purchased the permanent insurance on the other hand had the same amount of death benefit, which was included in the contract along with their annual $10,000 after tax premium, and it s cost has been factored into the cash value available. In other words, they purchased a policy for the same amount of death benefit as the person on the left for the same dollar amount of premium as the person on the left was investing. ($10,000 a year) In some cases the amount the person on the left is investing will not be enough for the person on the right to purchase a permanent product replacing all the term insurance the person on the left owns. There may also be situations where the annual amount being invested will be more than enough to purchase a permanent policy and you can load the contract with additional cash thus increasing the cash value at the end of the period making the net accumulation even larger. The zero cash value was designed to allow you to use any product you choose so that you can build the permanent life contract to meet the wants and desires of the client. When you factor in these dollars our buy term and invest the difference person on the left had to pay, the picture gets even clearer. Our person on the left paid all those premiums and has zero to show for it today. Yes they had the coverage but they have to cash from this transaction. If they are still alive at the end of the period they may be forced to drop the coverage because now it is getting cost prohibitive or can continue to pay the increasing premiums. Either way the cost is getting greater and greater the longer they live. Plus Opportunity Earnings of Term: Just like the tax paid had an opportunity cost, so does the term premiums. When you click on Opportunity cost on Term you see what the actual premiums would have earned had you invested them at the investment rate of return entered on the assumptions screen. The person on the right was able to recoup the cost of the term premiums so they could also have invested them. Had they done so they would have the opportunity cost in addition to the premiums saved. Plus Capital Gain Tax Avoided: Finally we must factor in any capital gain tax. Total: Now we know that the policy we have been putting this $10,000 a year in has some cash values because there are some illustrated cash values* in the contract. Pull out a ledger from your carrier and circle the illustrated cash value* at the end of the period and type that number in the cell on the top right side of the ledger by accumulation under Permanent Insurance. The net accumulation will now increase on the right by the illustrated* cash value and the difference between the two accounts will also recalculate. Mentor Session 3 Workbook Revision Date:

65 *Illustrated cash values are based on the claims paying ability of the issuing insurance company.(continued next page) Mentor Session 3 Workbook Revision Date:

66 You may wish to illustrate the results not factoring in the opportunity cost. Simply hit the reset button and go through the calculations again without clicking on the opportunity cost. Simply do not click on that particular line item and its cost will not appear. Transition: The important thing here is to make sure you client understands the difference between paying their taxes from their lifestyle and the results should they take the money from the investment account. Your client may be thinking like money is coming out of their account when in reality they are paying expenses from their lifestyle. Mentor Session 3 Workbook Revision Date:

67 What you should say: Let s take a look at the lifestyle summary first without illustrating the cash value of the permanent insurance contract. You are going to show the life insurance values at the end. Transition: It is important that you show the cash value at the end of this screen rather than the beginning to avoid making this simply a club or product discussion. In the lifestyle summary you are looking at the money that could have been invested had they bought permanent insurance and invested the dollars which would have been necessary in the BTID strategy. Mentor Session 3 Workbook Revision Date:

68 What you should say: Let me run the proposal on the life insurance product. Here is the cash value at the end of year 30 in this example and I will type it into the cv or cash value field and we can see the difference between the two strategies. You are illustrating a product that has the highest cash value accumulation available for the premium used over the same period of years. Transition: Insurance will not win this discussion every time but if you are close you have a chance for your client to see the value of owning permanent insurance over simply focusing on rate of return. Mentor Session 3 Workbook Revision Date:

69 What you should say: Let s look at another benefit of the permanent contract which is the death benefit. Permanent insurance offers benefits BTID does not. Transition: Do not forget to mention the strongest benefit of the permanent insurance which is the net death benefit. Remember the term insurance by now is gone and if the client could get it by now it is cost prohibitive. You may also wish to talk to them about the benefit of being able to spend some of their hard assets during retirement knowing that the death benefit will replace that asset with tax free dollars to their heirs. Mentor Session 3 Workbook Revision Date:

70 Transition: You should notice that the Investment Account summary is more efficient than paying taxes from one s lifestyle. This is due to the fact that when you take the expenses out of the investment account as you go the account does not grow as large which does not have the same losses and less opportunity cost as well. Mentor Session 3 Workbook Revision Date:

71 Qualified Plans 8 Screens At-A-Glance Multiple Mentor Session 3 Workbook Revision Date:

72 Qualified Plans Script Outline Intro Comments: Purpose: Share with your prospect how Qualified Plans really work and help them see the benefits and the potential issues with using deferred retirement plans in their overall economic model. It s important to note that we are not saying qualified plans are bad, quite the contrary. They are popular financial accounts that work well for many people in preparation for their retirement. However, they are often misunderstood. The purpose of this conversation is to help your prospects get their arms around how these plans really work. o When asked, why participate in a qualified plan, most will answer that they do so to save taxes. o In fact, they may or may not save taxes over time, but they do defer the payment of taxes to a later date, and the tax rate that will be used to a later date. If taxes go up, you lose. If taxes go down, you win. Any contribution above a company match is a tax risk. o The tax deferral of tax payment is just an apparent benefit because we don t know the future tax bracket. 1. Screen 1 a. As you can see there are many different types of Qualified Plans. b. All these plans are Federal government special tax treatments for your savings. Instructor Note: Move your mouse over each plan type to bring up an explanation. 2. Screen 2 a. Why do you like to put money in a qualified plan? Instructor note: Typically they will answer that they are saving taxes. b. What do qualified plans do? i. They do two things. ii. They defer the tax, and the tax calculation c. Let s change the word defer to postpone (Click on purple text defer to change it to postpone ) d. The government does not say 'you don t owe us the tax', they say 'you can postpone the tax till later'. e. That brings up two questions: i. The first question: What tax bracket will you be in at retirement? What do you think is going to happen in the future? Whether you know or not, you re going to have to take an educated guess because it will impact the future net retirement income you will be able to spend from this account. Instructor note: You can click on tax history to bring up the Tax History calculator. Prior to meeting with your client, spend some time going through the tax history calculator so you understand how it works. Obviously if they re in a 30% tax bracket today and they think taxes are going up, that could cause a problem. If they re in a higher bracket today and could take out at lower bracket that could be a win. It s important to understand the average. ii. The second question: What deductions will you have when you withdrawal the money? Most people take their deductions during their working years and Mentor Session 3 Workbook Revision Date:

73 have few during their retirement years as the house is paid off and the kids have moved out. Instructor note: The other thing you want to look at on the screen besides tax history is the tax threshold. It s interesting that the tax threshold is a key component to people really understanding what s going on tax-wise. If you look out to 1941, the tax bracket top rate was 81% but you had to make over $5,000,000. The next year, they raised taxes to 88% but now you only had to make over $200,000 to be in that bracket. Helping people get their arms around those issues are extremely important and just walking them through the bracket change can help. 3. Screen 3 a. Qualified plans postpone the tax and the tax calculation. Let s look at how this actually works. b. Inputs: annual contribution: $10,000, Current tax bracket 30%, withdrawal bracket 30%, years until withdrawal: 30, investment return 6%. c. If you are putting $10,000 in a qualified plan of 401(k) for 30 years, you would think you are going to have $838,000. d. However, that is not quite accurate. e. You will only have $586,000 depending on your future tax bracket. f. Why? Because your partner, the IRS, wants their share. g. That brings up the Apparent Taxes Deferred. h. Now in this example, you deferred $3,000 every year of your $10,000 contribution. i. People often miss that they wrote a check for $10,000 to put $10,000 in the account but only $7,000 was theirs. The $7,000 s is going to grow at interest (click on Your share) for you and the $3,000 s is going to grow at interest (click on Amount due IRS) for the government j. The Apparent Taxes Deferred is extremely important. k. The apparent tax advantage for putting money in a qualified account and deferring the tax to later is $90,000. l. What does that mean? Let s look at our documentation (click on documentation). m. The Apparent Tax Saving is $3,000 a year over the 30 year window, that s $90,000. n. But the IRS doesn t want $90,000, they want $251,000 which is the $3,000 a year at interest. o. Instructor note: You can illustrate what we just talked about on the previous screen by increasing the withdrawal tax bracket, Increase the withdrawal tax bracket to 40% What if the government decides they want more? They raise the bracket, now your share goes down and the IRS s share goes up. 4. Screen 4 a. Let s take a look at how tax brackets affect returns. b. First, let s take out the company match so we can see what is happening. c. Inputs the following: Annual contribution: $10K, no annual match, investment return: 6%. Tax brackets for periods: 30%, 30%, 30%, withdrawal 30%. d. Here s someone, they re going to earn 6%. e. We are going to look at three 10-year periods. f. Let s say they were in a 30% tax bracket all the way across. g. You would expect a rate of return to be 6% in each period. h. Change inputs for the Tax brackets for periods: 10%, 20%, 30%, withdrawal 30%. Mentor Session 3 Workbook Revision Date:

74 i. But that s not how they started. Let s say they were in a 10% tax bracket when they started. Then they were in a 20% tax bracket. And then finally in their last 10 years, they were in the 30% tax bracket. j. When they withdraw, they re one of the fortunate ones that can take the money out at the same bracket they were in when they were working. k. What s that do with the returns? As you could see, it drives the return down. l. Now, what happens if they were in a 40% bracket at the end? (Change the withdrawal to 40% and let your client see the significant effect.) m. When you look at this, do you think this is a great place to be putting your money or not? n. Now let s look at the example if they have a company match. o. Inputs the following: Annual contribution: $10K, annual match $5,000 (50 cents on the dollar up to $5k), investment return: 6%. Tax brackets for periods: 10%, 20%, 30%, withdrawal 30%. p. If they are trying to earn a 6% return on their contribution, with the match and the lower early brackets, the match helps to improve the final rate of return. q. In this example, the best years to contribute to this plan was in the last 10 years. Why? Because the tax brackets are the same. r. However, if you go to a 40% tax bracket at withdrawal, obviously what s going to happen? (Change the withdrawal to 40%) s. It s going to decrease the effective returns. t. So, any contributions above the match are likely to suffer reduced returns due to the tax brackets. (change match to $0 to demonstrate) 5. Screen 5 a. When asked what tax bracket they think they will be in when they retire, most people respond with: I don t know. b. Well, the history of taxes will give us some great insight into what we can expect in the future. c. Inputs: $300,000 in the account balance. Move the line up and down to show the change from one tax bracket to the next. d. As you can see, when I change the tax brackets, it changes the your share versus the IRS's share. e. Advisor notes:draw a big question mark on the screen out at the end of the years to represent that they don t know what is going to happen with taxes. What do you think is going to happen with taxes? Are they going up or going down? Advisor notes: Don t forget to click on Show Events and it will give you all of the issues and history that you d like to point out as well. Mentor Session 3 Workbook Revision Date:

75 6. Screen 6 a. Would you be surprised to find out that tax deferred savings will net the same retirement income as taxed savings that grow and withdrawn tax free? b. Let me show you. c. Inputs annual contribution $10,000, current tax bracket: 30%, withdrawal tax bracket 30%, 30 years until withdrawal, investment return 6%. Click on calculate. d. If you put pre-tax money in a qualified account, you defer the tax and you have a taxable withdrawal. e. At $10,000 a year, your account grows to $838,000. You are going to owe the IRS $251,000 and net $586,000. f. On the other hand, if you put after-tax money in an account that has tax free withdrawals, you will end up with the same net amount. g. At $7,000 (after-tax) put in a tax free account, your balance will grow to a net $586,000. Advisor notes: That s an eye-opener for a lot of people. Good conversation for them to understand, especially when you re going to talk to them about putting money over and above the match in a tax favored position so they re not in a danger there. Actually the position is much the same, depending on access to the money. They could even find themselves in a better financial position. 7. Screen 7 a. Now let's take a look at saving in a qualified plans versus a taxable account. b. The qualified plan has the advantage of tax deferral, where the taxed account suffers from tax payments each year. c. Let s take a look at a comparison scenario. d. Inputs: Initial Account Balance 0, Annual Contribution $10,000, Company Match $0, Current Tax Bracket: 30%, Withdrawal Tax Bracket: 30%, Years Until Withdrawal 30, Investment Return 6%. e. When you look at these results, you would think, I would choose to save in a qualified plan because it will outperform a taxable account" and that's true, it most likely will. Advisor notes: Click on documentation and point out what s going with their account. There s your $10,000. You got to pay your taxes. So you are only left with $7,000. f. (Click on purple text: Taxable Growth.) Now, like the last screen, if we could change the taxable growth to tax free growth, the results would be the same. g. So again, tax free growth and withdrawals can end up the same as a qualified plan, depending on the tax brackets. h. (Change Tax Brackets to be a higher percent.) If tax brackets are higher when you withdrawal, a tax free account is better. 8. Screen 8 a. In conclusion, if you choose to save money in a qualified plan, there are three important questions you need to ask before doing so. b. What tax bracket will you be in at retirement? Your future tax bracket should affect what decisions you make today. c. What deductions will you have when you take the money? It s important that we answer this question. If we can put you in a position where you do have deductions when you re taking the money that could be significant. Mentor Session 3 Workbook Revision Date:

76 d. Finally, What is your exit strategy? How are you going to get the money out without paying all the taxes? Advisor notes: this is the hook that s probably going to get the conversation going even further. e. If I can help you plan ahead to put yourself in a position to be able to get the money from your tax deferred account with deductions or without paying taxes, would you be interested in having that conversation? Advisor notes: Anytime you meet someone who has money in a qualified account, I would say this is a great question to ask. We are not saying qualified plans are good or bad. Just ask Hey what s your exit strategy? or How are you going to get the money out without paying all those taxes? Mentor Session 3 Workbook Revision Date:

77 Qualified Plans Don s Dialog What you should say: Which one of these do you have or do you recognize? This screen lists some of the many types of Qualified Plans. Click on the name of a Qualified Plan to display a definition of the plan. Transition: Take the opportunity to ask them what is their understanding of how qualified plans work? Mentor Session 3 Workbook Revision Date:

78 What you should say: Qualified Plans do two things: First, they defer the tax (but they do not necessarily save taxes). Second, they defer the tax calculation. Since the taxes are deferred, it is misleading to use the phrase Saves Taxes in conjunction with Qualified Plans. Since the calculation of taxes is deferred (until withdrawals start), qualified plans will work great if the you retire in a lower tax bracket than your current tax bracket. However, if you retire in a higher tax bracket, then the qualified plan has cost you money. This is because you pay more taxes in the higher tax bracket. This screen emphasizes that Qualified Plans defer the tax as opposed to eliminating the tax. Transition: Clicking on the word defer changes it to postpone. We like to use postpone because the government did not say you don t owe any tax, they said you can pay us later. At what bracket? That is a great question. Mentor Session 3 Workbook Revision Date:

79 What you should say: If we begin with a $5,000 annual contribution and a 30% tax bracket both currently and at withdrawal over a 30-year period with a return of 8% we will notice the following. Our account balance will be $611,729 of which we receive $428,211 and the government gets $183,519. The apparent taxes deferred are $45,000. The IRS wants the $1,500 of apparent tax savings we received during the years of contribution back at interest. Since we earned 8% on our money the IRS wants their money back at 8% as well and the total comes to $183,519. Should the withdrawal tax bracket increase or decrease our apparent taxes deferred will not change because we are assuming a constant tax bracket during the years of contribution. If the withdrawal tax bracket increases the government will receive a bigger piece of the pie. However the apparent tax benefit we thought we received did not change. If the withdrawal tax bracket is lower than we actually received more tax benefits than we anticipated compared to our bracket at the time of contribution. Remember the key is that not only are you deferring the taxes but you are You do not save taxes in a qualified plan you defer them. It is not a tax saving plan but a tax deferral plan. You defer the taxes and you defer the future tax calculation. The taxes you defer are really apparent tax savings; you will not be sure until withdrawal. Transition: If taxes are lower when you take the money than when you put it in you win. If taxes are higher you lose. Check Story Mentor Session 3 Workbook Revision Date:

80 What you should say: Let us use rate of return first. Let us assume a $10,000 annual contribution with $2,500 match and an investment return of 8%. If we look at three working periods of your life (in this case each period is for ten years) and keep the tax bracket at 30% for all three periods as well as at the time of withdrawal we will see that the investment's overall internal rate of return is 8%. This proves the calculator is correct. If we change the withdrawal rate up we will notice that our rate of return will go down. If we change the withdrawal rate down we will notice that our rate of return will go up. The tax rate at the time of withdrawal has a dramatic impact on what happens to the money from a qualified plan. Increasing the withdrawal tax bracket will decrease the internal rate of return and decreasing the withdrawal tax bracket will increase the return. Transition: You may want to ask your client what tax bracket they want to be in at retirement? Many will say the lowest. That really means they will have no money. What they are looking for is to be in the highest tax bracket because they have the income that puts them there but have someone like you who can help them with strategies to reduce or avoid unnecessary tax losses where possible. Mentor Session 3 Workbook Revision Date:

81 What you should say: Be prepared to explain (or be prepared to defer questions to a tax expert) the differences in the tax rates over the years. Use language such as the following when you cannot answer a particular tax question: That's a good question. I don't know the answer, but I do suggest you consult your tax adviser. Also, I recommend visiting the IRS web site, to anyone with tax questions or anyone who would like information about the IRS. Taxes were to be temporary when first created. Taxes change. What does the client think taxes are going to do in the future? The objective is to adequately answer consumer questions regarding historical changes in tax rates without giving incorrect or misleading information. TAXES: This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances. (continued next page) Mentor Session 3 Workbook Revision Date:

82 LIFE INSURANCE: Please remember the primary reason to purchase a life insurance policy is to protect one's beneficiaries through the death benefit. However, permanent life insurance can also serve as an accumulation tool that has some very unique benefits. To qualify for life insurance, one must take a health examination to determine insurability. Not everyone is insurable. Life insurance products contain fees, such as distribution fees and mortality and expense charges. The main way that a permanent life insurance policy is positioned to be tax advantaged is though policy loans. Policy loans may reduce the cash value and death benefit of a policy, and if they are not repaid, a loan could cause a policy to lapse. If a policy is over funded and becomes a MEC contract, the contract's earnings will be taxed as ordinary income at withdrawal, and may be subject to a 10% penalty if withdrawn before age 59 1/2. All hypothetical presentations must be based off of policy illustrations, and the illustration must be presented to the client. Transition: This tool can be used to do an entire hour presentation however it is here to give your client some perspective on the past and where taxes may be headed in the future. If one believes their taxes will go down by retirement they should put as much in qualified accounts as possible. However if the reverse is true they should begin looking for different alternatives where after tax dollars grow tax deferred and come out tax free. Mentor Session 3 Workbook Revision Date:

83 What you should say: No script is provided for this screen This tool compares tax deferral to tax favored investments. When everything else (tax brackets, rates of return, etc.) is the same, it shows the two alternatives are equal. Transition: If one is going to have the same amount of money in either position then additional benefits that one can receive with the same dollars makes perfect sense. Make sure you talk about the benefits available with permanent insurance. Mentor Session 3 Workbook Revision Date:

84 What you should say: Compounding investments in a taxable environment not only compounds the interest but the effect of the taxes as well. When you lose a dollar in taxes that you could have avoided you not only lose that dollar, but also what that dollar could have earned for you had you not given it away. That is called opportunity cost. Qualified plans outperform taxable investments because of the ability to defer the taxes on growth. Be sure and illustrate the opportunity cost of the taxes in a taxable investment. Transition: It is no secret that qualified plans out preform after tax contributions in taxable accounts but what may be a secret to many is that at the same tax bracket and interest rates after tax dollars in tax deferred accounts that come out tax free are the same. All things being equal I would want the benefits and in addition to death benefit is access to capital during the accumulation years which is not available in the qualified plans without penalty. Mentor Session 3 Workbook Revision Date:

85 What you should say: Before you put money in a qualified plan there are three questions you should be asking yourself. What tax bracket will you be in at retirement? Highest in the land. What deductions will you have when you take the money? Many will have none. It would seem that the best time to have deductions is when you have the most money. What is your exit strategy? Are you working with someone who is helping you maximize your wealth potential and minimizing your tax liability? You are the person they need to be working with for their future. Transition: Client should not want to put more than their company match into these accounts and with not match should consider if they should put in any at all. Now you can go to the 10 Minute Lesson on Life Insurance and illustrate a powerful after tax alternative. Mentor Session 3 Workbook Revision Date:

86 Qualified Plan Bombs (Deferred) 1. What did the tax man say to the qualified plan? Gime, Gime, 2. Do you know the easiest, tax free way to get access to your qualified money before retirement? No? Shoot, neither do I after studying this for 30 years, I was hoping you could tell me. Or - Me either, that s why I don t recommend them for most of my clients. 3. You put a dollar in, a dollar at interest comes out; how much is yours? 4. If you write a check for $10,000 to make a contribution to your QP, how much do you have in the account? $10,000. Don t forget about your partner, it is good that he is not sensitive because you never seem to include him. 5. Do you have someone helping you pay the tax liability on your QP or are you paying it all? (company match) 6. So what does your crystal ball say about future tax rates? Up or Down? Would you like to see what has happened to taxes since Congress has been taking tax? 7. What tax bracket do you want to be in at retirement? If you are in a lower bracket it only means one thing, you are broke. 8. Would you borrow money not knowing what the interest rate you are being charged will be? 9. If there were legal ways to get some, part, or all of your QP money out tax-free would you want to know how? 10. Do you know what step-up in basis means? No. That s ok it does not apply to QP money. Your heirs will have to pay tax on every dollar left to them in this account. 11. Do you like people telling you what to do with your money? In a QP, the government tells you the maximum you can put in, how long you have to leave it in, how much you must take out and the penalty if you do not do it the way they say. 12. Inflation is tough enough; every dollar you spend during retirement from your QP is going to cost you an additional 20 to 40% on top of the inflated price. 13. It s like having your money in a trust with the IRS being the trustee. 14. You must really trust the government? What do you mean? You trust the government to keep future tax rates fair for those like you who have saved and invested their money and those who saved nothing. Mentor Session 3 Workbook Revision Date:

87 CD Bombs I m curious, knowing it ll cost you about 20% more in taxes, why did you choose to buy your CDs from the bank? Did you know there is a penalty for selling your CDs early? Yes. Did you know there is a bigger penalty for holding them to maturity? You said you do not want to get out of your CD because of the penalty. Do you know what the penalty for keeping them is? Do you know what CD stand for? Certain Dividends - for the government that is. Do you know what the guarantee on a CD guarantees? Guarantees I can t lose my principal. It also guarantees you are going to pay taxes on any interest you earn. I m curious, when you bought your CDs, did you budget for the extra tax you ll need to pay each year just for holding them? Do you pay the taxes due on your CD from your current or future lifestyle? You already paid taxes once on the money you put in the CD. Rolling the interest earnings each year back into the CD is like getting back in the tax line to give the government even more. Do you like the rate of return you re getting on your CDs? No. Funny, that s what most my clients say and that s why I don t often recommend them. If you don t like the return you are earning on your CD, why do you have it? Safety. So would you like to see something safer than a CD that gives you access to your money with no tax on gains? Are your CDs safe? Yes, they are FDIC insured. Do you know why banks are forced to buy FDIC insurance? No. Because they need it. Are you happy with your low interest, no benefits, increasing tax, parking place for your money? Is a CD really a safe place to park your money when the after tax rate of return is less than your inflation rate? The best thing you have going for you in your CD is that you are not earning any interest. (Higher the interest earned the greater the LOC.) You can t outrun losses with gain in a taxable account. Mentor Session 3 Workbook Revision Date:

88 Mentor Session 3 Workbook Revision Date:

89 Step 8: Discuss Client Ideas Where would you like to put the money? Mentor Session 3 Workbook Revision Date:

90 Step 9: Life Insurance & Other Products Life Insurance & Other Products: Investment Products Mentor Session 3 Workbook Revision Date:

91 Private Reserve Strategy 17 Screens At-A-Glance Multiple Mentor Session 3 Workbook Revision Date:

92 Private Reserve Strategy Script Outline Intro comments: The Private Reserve Strategy is a discussion to educate prospects and clients on the need to build a strong and protected capitalization base. 1. Screen 1 a. The Private Reserve Strategy is a strategy designed to help develop or improve one s financial position by avoiding or minimizing unnecessary wealth transfers where possible, and at the same time accumulate an increasing pool of capital providing accessibility, control, and uninterrupted compounding. b. A fundamental key to the private reserve account, meaning where you are going to put this money, is that it must be accessible through collateralization. 2. Screen 2 a. Some transfers are avoidable, others you can only minimize. b. Let me give you an example. You can t avoid income taxes, however you can minimize them. c. You finance everything you buy. d. You are either going to pay interest or give up the ability to earn interest. And every dollar not saved is consumed by transfers and lifestyle 3. Screen 3 a. Capital transfers create wealth transfers. b. Let s take a look at a few of these wealth transfers to illustrate the transfer that can take place. 4. Screen 4 a. Before you buy anything there are two things you need to look at, two sides of the coin so to speak. b. The first is you ve got to consider the cost, and it s not just the money you spent but we also have to introduce this principle called opportunity cost. What the dollars could have earned for you had you been able to keep it and invest it yourself.. c. The second thing we want to talk about is how are you going to pay for it? 5. Screen 5 a. Now that we understand how much the item is going to cost, let s figure out how we are going to pay for it. b. Your goal is to find the most efficient purchasing strategy that still puts you in control of your money. 6. Screen 6 a. One way to secure your financial future is to have a better understanding of how you buy, borrow, and pay for major capital purchases. b. What is a major capital purchase? A major capital purchase is anything that you need to buy or want to buy that you cannot afford to pay for in full with your monthly cash flow. c. Let s take a look at these three very important issues and how they impact your financial future. Mentor Session 3 Workbook Revision Date:

93 7. Screen 7 a. This is known as the zero line. This person has no resources financially, they have no money, but they owe no money so they are at zero. Let s look at how things begin. Because they don t have any money, they have no cash; they have not put any money away now they have to buy things. How are they going to pay for them? b. The debtor borrows against future earnings so they go below the line, they go into debt. Then they start making payments to the lender to get back to what? Zero, not ahead, but back to zero. Unfortunately, many people are caught in this trap and never get on the other side of zero. c. The saver saves to avoid paying interest, so they are saving and putting money away for a future purchase. They didn t pay any interest along the way, and they are earning interest while they re saving. But now the expense comes, what do they have to do? They have to drain the tank so to speak, spend the money which finds them back at the zero line. These people live a lifetime like this, saving for a future expense, avoiding paying interest, but losing their ability to earn interest when they make the purchase. d. The wealth creator has a little bit of a different story. They also have to buy things. These people are savers and they are compounding their interest, but when it comes time to make a purchase they borrow against their resources. They keep their money compounding, and make sure that their money has uninterrupted compounding. They borrow against their resources, and the more money they have, the more collateral they have, the bigger opportunities they have to make even larger purchases or to cover larger opportunities. So the wealth creator borrows against their funds and pays back the loan to a lender using other people s money. By the time they get the loan paid off their money has compounded and has moved them even higher up on the scale. 8. Screen 8 a. We all understand there is a huge problem with consumer debt. b. First you have an obligation on your future earnings. c. You lost the money you spent plus the interest that money could have earned if you could have kept it. d. You re a debtor to the creditor. e. And you lost control to the lending institution. f. Going into to debt to buy things is a very inefficient purchasing strategy. g. So if you are not going into debt to buy things. If you want to stay out of debt, how do you pay for things? h. What s the number one answer? Pay cash. 9. Screen 9 a. The problems with paying cash. Now we all know that debt is a problem, but how could paying cash have problems? b. The first thing, to be able to pay cash you need to save, and that s a problem for a lot of people. Meaning you ve got to put money in the tank, you ve got to fill the tank. c. The second problem is that as you fill the tank, you are going to have to pay taxes on the gain along the way. That s a problem. Mentor Session 3 Workbook Revision Date:

94 d. You finally get the tank full, meaning you have enough money in your tank to buy whatever it is that you want. But then you have to do what? e. You have to drain the tank to make the purchase. And when you drain the tank what happens? f. You lose the interest that you could have earned had you not drained the tank. g. Remember, you gave up the principal, but you also lost the interest, which is a key factor we want to help people to understand. h. The people that are paying cash, they did save interest, but they also lost interest. 10. Screen 10 a. Let s talk about the True Cost of Paying cash. b. There is more that meets the eye than the purchase itself. We have to also factor in the time value of money or the opportunity cost. What those dollars would have earned had you not spent them. c. Understanding the true cost of your purchase can play a very important role in helping you be more efficient in your purchase. 11. Screen 11 a. What if you could make your purchase without emptying the tank? b. This would allow your private reserve to continue to employ the benefits of compounding - minimizing the associated lost opportunity costs that go along with that. c. You're probably asking yourself a question. If I don't use my money, whose do I use? d. You collateralize a loan from a financial institution. e. You borrow the money from someone else, keeping your money in your tank compounding at interest. f. You collateralize the loan, meaning you secure the loan by pledging a portion of the money you have in your private reserve - or in your tank. 12. Screen 12 a. Let me introduce you to the Private Reserve Strategy. b. You have money in an account, we are calling that your Private Reserve, and you are compounding interest. You need to buy something, let s say a car. Do you want to drain the tank to do that? No, because you understand now that when you drain the tank you give up what? Not only what you took out, but also what the money was earning while it was in the tank. c. Then how do you buy it? Well you collateralize it. So you are going to go to a financial institution, and because you have money they will loan you money. The more money you have, the more money they will loan you and the better the rates because you can negotiate those as we will take a look at later. d. Ok, so I don t want to drain the tank, I want to buy the car, I go to this institution, and they give me an amortizing loan. They also take a lien against my collateral. They put a lien on the money I have available, for protection. Now I make payments to the institution. Notice that the payments are structured principal and interest payments. Which means that they want them on a timely basis. You also need to understand that these institutions all talk to one another. So if you are ever late on a payment, everyone knows about it. If you ever miss a payment, every other institution knows Mentor Session 3 Workbook Revision Date:

95 about it which is going to affect your borrowing power in the future. Meaning you are going to have to pay even higher rates. e. Well here is an interesting thought. Remember, your money is still compounding interest on the money you have in a collateral position. That s the secret to the Private Reserve Strategy. That your money is still earning interest on the full amount that you have even borrowed against. f. Now, if you can buy the car without giving up your collateral, and I ll click on the word collateral. This puts you in even greater control than you were before because now you still have access to all of the money that you have in the tank. That will keep you in a position of strength, and control. However, sometimes you ve got to buy things that come along that you have to have a collateral position. Meaning that the institution is going to want to hold a security, a value. If so, you can do that. If not, you would never want to release your collateral if you don t have to. g. So the power of the strategy is that you continue to earn compound interest, even on collateralized funds. 13. Screen 13 a. Let me introduce you to a new term called Collateral Capacity. A lot of people understand net worth, but Collateral Capacity takes on a little bit of a different meaning. b. What is it? It is simply the amount of money that you have, that you can get your hands on. That you have accessible, that can be collateralized. c. Three things impact your collateral capacity. i. One, contributions into your tank. The more you put in, the more capacity you have. ii. Two, growth on the money in the tank. Remember, one of the key factors is that the money that you have in the tank has uninterrupted compounding going on. iii. And then finally, lien reduction. As you pay off the lien, you are going to have even more capacity. But the key issue here is that you are earning compound interest even when you have a lien against your capacity. 14. Screen 14 a. So in looking for an account to act as your Private Reserve, you are going to be looking for an account that has benefits. What are the ideal benefits that you would be looking for? i. Well certainly tax deferred growth would be extremely important, because if you are compounding interest in a taxable account, it is not going to be to your advantage. ii. Tax free distribution would be super, to put the money in and take the money out tax free. iii. How about a competitive rate of return, certainly that would be great. High contributions, meaning that you want an account that you can put a lot of money in as opposed to being limited to how much you can put in. iv. Deductible contributions that would be nice. Mentor Session 3 Workbook Revision Date:

96 v. Collateral opportunities, if it does not provide collateral opportunities it s not going to perform very well as a private reserve. You have to have access to the capital. vi. Safe harbor, I want this money safe. No loss provisions, wouldn t it be great to have that in the contract, that where you have the money there are no loss provisions. vii. Guaranteed loan options, I don t have to negotiate a loan, it s guaranteed that I have access to the money. viii. Unstructured loan payments, so I m in control of how I pay the money back, at what rate, and when. ix. Liquidity, use and control. x. Additional benefits like suit protection, disability waiver, death proceeds. I d like all of that. b. While many accounts will work as a private reserve, there are some that work better than others. c. 15. Screen 15 a. Here on screen 15 we are going to start looking at the types of accounts that one could utilize as a private reserve. You simply go to the down arrow, click, and it s going to give you a laundry list of the accounts that you can look at. b. With a savings account, interest rates tend to be relatively low. Interest is taxed at ordinary income. Loans must still be negotiated; call provisions are included in the loan covenants. Accounts are subject to creditor attachment. And Liquidity from loans is not assured unless your credit line has been negotiated. So here are the benefits, and those are good benefits. Return is probably not going to be one of them, it s not very competitive. So as you review this with folks, if this is the account that they re in you are going to want to spend some time on this particular account. c. Let s go to a CD. A CD acts much like a money market account, same positions, pretty much the same benefits. Interest tends to be relatively low. Interest is taxed as ordinary income. Loans still must be negotiated. Call provisions in loan covenants. Accounts subject to creditor attachment. Liquidity of loans not assured again. Underlying principal tied up for a fixed period and penalties may exist for early withdrawal. So again, helping them walk through what is really going on in those accounts. d. Let s look at the qualified plan. There are only three benefits listed. 401k loans are limited to a maximum of $50,000 or one half of the account balance, whichever is LESS. Most people don t know that. They also don t know that loans must be repaid within 5 years or they are considered a distribution. If this occurs and the account holder is less than 59½ years old, a 10% penalty is imposed on top of their ordinary tax rate. That s a pretty hefty penalty. Interest on the loan is paid on an after-tax basis while later distributions are taxable resulting in double taxation on the loan interest. So when you borrow utilizing your 401k you have to pay that money back within 5 years at interest with after tax dollars. A job change triggers a distribution event. So if you change jobs, now you have to pay that loan off. It requires a loan Mentor Session 3 Workbook Revision Date:

97 repayment or if you can t pay it off, you have an additional 10% tax penalty. Unfortunately, layoffs are considered a job change. e. Let s go on to a margin account on stock portfolio, again great benefits. The amount available is typically only half the value of the stock portfolio. Amount available can change subject to Federal Regulations. Decline in underlying stock portfolio could result in a margin call, that s not a fun day. Margin calls require cash deposits, and margin call sales could trigger capital gains tax on your stock sales. Loan rates usually tied to LIBOR and can fluctuate. Hedge fund shorting could trigger a decline in the underlying security value and cause a margin call. So there are a lot of issues when using a margin account on your stock portfolio to act as your private reserve. f. What about real estate with a home equity line of credit? Tax deferred growth and collateral opportunities are available, but HELOCs must be granted by banks and are conditional. You are going to have to qualify, and they can be revoked at any time by discretion of the bank. Most HELOCs have call provisions. Given the fluctuation of the housing market the amount of equity available for some borrowers could be insufficient for their needs, and a lot of people are finding that to be the problem now. HELOC s generally have caps on the amount of available credit, they re not going to let you have access to 100% of the equity in your house. g. Now you wouldn t go through each and every account with your client, but if you asked them to choose what type of account to use as a private reserve, the last one they are likely to pick is going to be permanent life insurance. Before you get off of this page though, you are going to want to have this conversation. I d like to show you permanent insurance. I know that you probably don t even like insurance, but I want to show you the benefits. Permanent insurance act s very well as a private reserve account. Why? Policies may include guaranteed cash value that increases independent of their dividends. Once dividends are paid they become guaranteed cash. Cash value grows tax deferred in a life insurance contract. Loans are a contract feature. Contracts are unilateral and provisions can only be changed by the owner. Death benefit is paid income tax free. Insufficient payments, dividends, or paid up additions surrenders to cover base premiums may lead to policy lapse and tax consequences. So that s a negative, you ve got to make sure that you make the payments. Cash value deficit during initial capitalization funding period. So as you get started with a life insurance contract, you are not going to have access to 100% of the cash that you put in. But I d like to introduce you to what we call the Ten Minute Lesson on Life Insurance for you to understand how a life insurance policy can perform as your private reserve. 16. Screen 16 a. One of the great benefits of owning permanent life insurance is the guaranteed loan option you have with an insurance carrier. b. Remember not always do you need to be borrowing money against your policy from the insurance company. There are other options with other financial institutions. c. Before we look at the insurance companies and what happens with loans against our contract, let s take a look at other financial institutions (click on the building in the middle of the screen) and let s see the differences between those two opportunities you have to access capital. Mentor Session 3 Workbook Revision Date:

98 17. Screen 17 a. Let s talk about the efficiency enhancer. How do take the strategy you are employing in your financial position and make it even more efficient when you have extra cash flow? b. You have money in your private reserve, your life insurance contract as cash value - that is your collateral capacity. You want a loan, so you go to the insurance carrier and you borrow the money against your cash value. c. Now, to enhance efficiency, you want to make accelerated principal and interest payments. Not only do you want to pay what they suggest, in this example over four years, you want to do so quicker. d. The faster you pay back principal and interest the less you're going to lose in that situation. e. Once the loan has been satisfied, you will still have cash flow coming from your lifestyle account that you can use to make extra payments. f. Where can those extra payments go? You can put more money in the policy you already have - if it hasn't already reached the MEC limit. g. If it's full, you may consider purchasing additional policies (or tanks) that would allow you a larger reserve capacity for your money. So you private reserve could grow to encompass multiple policies (or tanks) over time. Mentor Session 3 Workbook Revision Date:

99 Private Reserve Strategy Screen 1: The Private Reserve Strategy Definition What you should say: Mentor Session 3 Workbook Revision Date:

100 Screen 2: You finance everything you buy What you should say: Mentor Session 3 Workbook Revision Date:

101 Screen 3: Wealth Transfers What you should say: Mentor Session 3 Workbook Revision Date:

102 Screen 4: Opportunity Cost What you should say: Mentor Session 3 Workbook Revision Date:

103 Screen 5: How would you like to pay for it? What you should say: Mentor Session 3 Workbook Revision Date:

104 Screen 6: How to Buy, Borrow and Pay for a Major Capital Purchase What you should say: Mentor Session 3 Workbook Revision Date:

105 Screen 7: Zero Line What you should say: Mentor Session 3 Workbook Revision Date:

106 Screen 7: Debtor What you should say: Mentor Session 3 Workbook Revision Date:

107 Screen 7: Saver What you should say: Mentor Session 3 Workbook Revision Date:

108 Screen 7: Wealth Creator What you should say: Mentor Session 3 Workbook Revision Date:

109 Screen 8: The Problem with Debt What you should say: Mentor Session 3 Workbook Revision Date:

110 Screen 8: The solution to going into debt! What you should say: Mentor Session 3 Workbook Revision Date:

111 Screen 9: The Problem with Paying Cash What you should say: Mentor Session 3 Workbook Revision Date:

112 Screen 10: The True Cost of Paying Cash (Initial balance illustration) What you should say: Mentor Session 3 Workbook Revision Date:

113 Screen 10: The True Cost of Paying Cash (annual contribution) What you should say: Mentor Session 3 Workbook Revision Date:

114 Screen 11: What If? What you should say: Mentor Session 3 Workbook Revision Date:

115 Screen 12: The Private Reserve Strategy Illustrated What you should say: Mentor Session 3 Workbook Revision Date:

116 Screen 13: Collateral Capacity What you should say: Mentor Session 3 Workbook Revision Date:

117 Screen 14: Ideal Benefits Listed What you should say: Mentor Session 3 Workbook Revision Date:

118 Screen 15: Select Type of Account What you should say: Mentor Session 3 Workbook Revision Date:

119 Screen 15: Select Type of Account (Savings Account / Money Market) What you should say: Mentor Session 3 Workbook Revision Date:

120 Screen 15: Select Type of Account (Permanent Life Insurance) What you should say: Mentor Session 3 Workbook Revision Date:

121 Screen 15: Score Card What you should say: Mentor Session 3 Workbook Revision Date:

122 Screen 16: Permanent Insurance as your Private Reserve What you should say: Mentor Session 3 Workbook Revision Date:

123 Permanent Insurance as a Private Reserve (Expenses) What you should say: Mentor Session 3 Workbook Revision Date:

124 Permanent Insurance as a Private Reserve (Opportunities) What you should say: Mentor Session 3 Workbook Revision Date:

125 Permanent Insurance as a Private Reserve (10 M.L.) See the 10 Minute Lesson on Life Insurance Script Outline What you should say: Mentor Session 3 Workbook Revision Date:

126 Screen 17: The Efficiency Enhancer What you should say: Mentor Session 3 Workbook Revision Date:

127 Private Reserve Strategy (continued) Screen 17: The Efficiency Enhancer (Other collateral opportunities) What you should say: Mentor Session 3 Workbook Revision Date:

128 EVA Economic Value Added Defined (Screen 1 of 6) What you should say: Mentor Session 3 Workbook Revision Date:

129 EVA (Business Decisions Before EVA ( Screen 2 of 6) What you should say: Mentor Session 3 Workbook Revision Date:

130 EVA (Example of Investment Decision Acceptable (Screen 3 of 6) What you should say: Mentor Session 3 Workbook Revision Date:

131 EVA (Opportunity Cost Applied (Screen 4 of 6) What you should say: Mentor Session 3 Workbook Revision Date:

132 EVA (Investment Decision Unacceptable Screen 5 of 6) What you should say: Mentor Session 3 Workbook Revision Date:

133 EVA (Concepts you can Apply Screen 6 of 6) What you should say: Mentor Session 3 Workbook Revision Date:

134 Three Legged Stool 9 Screens At-A-Glance Mentor Session 3 Workbook Revision Date:

135 Three Legged Stool Script Outline 1. Screen 1 a. The first question you should ask yourself when thinking about life insurance is not how much does it cost but rather how much coverage should I have. 2. Screen 2 a. Life insurance is a want product not a need product b. Let me explain. c. Would you say the car you drive is closer to needs transportation, just one step up from having to take a bus, or would you say it is more about wants? d. Now there may be nicer cars than the one you drive, but is that needs decision or a wants decision. And for most it will be wants. e. How about your house? Would you say all you are willing to put your money in on a house is HUD housing, what the government says, hey that qualifies. Or again is it a wants decision? Very much a wants decision. f. And then finally, when it comes to your children s education, is all your willing to spend is what the government in your state dictates meets needs educational requirements or are you going to send them to schools of choice? g. Certainly schools of choice h. Let me get this straight as long as you're here, your kids are going to go to the finest schools. They're going to ride in the safest cars, and when they come home, they are going to come home to the finest homes in the neighborhood. i. But in the event you're not here, we should do a needs analysis to try to figure out what's the least amount you can leave them... does that make any sense what so ever? No it doesn t. 3. Screen 3 a. If they had $1,714,000 plus the $88,000 earning 6% it would kick out $102,000 but we ve got to calculate how long that s going to last with inflation. b. If we calculate their inflation rate we will use 1972 to today. We ll use that result and hit calculate. c. What this says is that if I had $1,714,000, plus $88,000 in accumulated savings, and I could earn 6%... because of inflation, my money is going to run out at the end of 21 years. *Clicking the Documentation button shows a spreadsheet proving the math. 4. Screen 4 a. So how much insurance is enough? Ok, let s calculate that b. In this example let s say you are making $102,000 a year, you have $88,000 saved, and let s assume a 6% rate of return, hit calculate. c. What this tells us is that you are going to need $1,714,000 in insurance, plus the $88,000 you already have in an account that s paying 6% to kick out $102, Screen 5 a. On the last screen we looked at what it was going to take, and it s $2,464,000. However, if we go back to our Human Life Value calculator the company was only going to issue you 2.1 million and change, but that s it. That s all they are going to be able to issue, and with the guidelines on mortality the figure may even be less than that depending on your age. The figure is usually somewhere around 20 times their income if they are in their 40 s, and obviously the older they get the less it is so keep that in mind. b. Let s plug in what we think they would issue (2.1 million). We want all they will give us, but that s probably going to be the upper end, hit calculate. Mentor Session 3 Workbook Revision Date:

136 c. That amount is going to be depleted in 21 years. Obviously, the beneficiaries are going to need to save some of that money or it will all be depleted. So again, we are back to the question Life insurance is a want product. It s the only product that will guarantee what you want to happen will happen. d. Now, you have $500,000 in coverage currently, and the maximum amount the insurance company will issue to you is 2.1 million. That s it, you can t have any more. So, how much do you want? (And, most clients will respond with As much as I can get. ) 6. Screen 6 a. Now that you know how much coverage you actually want, the next question is How much does it cost? 7. Screen 7 a. Everything in the 10-Minute Lesson on Life Insurance happens on this screen, and you will just use your spacebar to toggle through every step of the way. (See 10-Minute Lesson on Life Insurance Script.) 8. Screen 8 a. The first question was How much coverage do I want? The second question was How much does it cost? And now the third question we need to answer is What about rate of return? 9. Screen 9 a. This tool is designed to help you illustrate the concept to your client about the difference between the club versus the swing or the product versus the process. These circles represent a particular product, and you ll notice that the arrows go out and then back. That represents a very important part of the process of the swing. It s really not the product that is the issue, it s how you manage that product, and the process that goes along with that. b. So let s talk about that. Let s assume that your client is putting money in qualified plans, and let s first take a look at the benefits. Up will pop a list of benefits on the right and you will see the account you want to talk about in the center. Does a qualified plan grow tax deferred? Yes. Tax Fee Distributions? No. Competitive Return? Yes. Can you put a lot in? No, you are limited. Any additional benefits? Not really. Can you use it as collateral? No. Is it safe? Well, it could be depending on the investment accounts that you choose. No loss provisions? No. Guaranteed loan options? No. Unstructured loan payments? No. Liquidity, use and control? Not until you are 59 and a half. Deductible contributions? It is deductible. c. So what we want to do here is illustrate the particular benefits that go along with the club if you will that the client is most interested in. Once you go through the list, and eventually put Permanent Life Insurance in the center now let s talk about that. What are the benefits? As you know all of the benefits are available with permanent life insurance except the last one which is Deductible Contributions. Just for your information, you can change the names of these if you wish by simply clicking on Rename and changing those asset types. Once permanent insurance is in the center, if you would like to compare that to another particular account, we can do that simply by clicking on that. So I m in permanent insurance now in the center, and now I m going to go to let s say Real Estate. This will bring you to Understanding Policy Loans. (See Understanding Policy Loans Script). Mentor Session 3 Workbook Revision Date:

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