Online Study Group Manual. Session 8

Step 8: Where would you like to put the money? The Personal Economic Model The calculators of the PEM Model Step 9: Life Insurance & Other Products Protection Shield - Three legged stool of selling life insurance Needs vs. Wants 10 Minute Lesson on Life Insurance 10 Minute Lesson on Life Insurance Script Rate of Return Homework: Have your accountability group follow along using the 10 Minute Lesson script as you give the talk with no notes. When you are done, have them review with you the areas you missed and give you any constructive criticism on how to improve. Reverse the process and you give the talk and have your partner take notes. Online Study Group Workbook Session 8 Page 2

Calculators of the Personal Economic Model Page # #1) Human Life Economic Value... #2) Wealth & Income Potential... #3) Budget Report... #4) History of Taxes... #5) Risk Taxation Accessibility - Allocation Mix... #6) Accounts Types... #7) Compounding vs. Speculation... #8) Accumulation vs. Distribution... #9) Account Types... #10) Convert Savings to Private Reserve Tank... #11) Protection Shield: Three Legged Stool... #12) Retirement Income Alternative... #13) Retirement: Ready or Not... #14) Lifestyle Illustrated... #15) House: Your House as an Investment... #16) Qualified Plan... #17) Collateral Capacity... #18) Structured Payments Coming Soon... Online Study Group Workbook Session 8 Page 3

#1) Earned Income: Human Life Economic Value Calculator Human Life Economic Value Calculator Online Study Group Workbook Session 8 Page 4

#2) Lifetime Capital Potential: Wealth& Income Potential Calculator Online Study Group Workbook Session 8 Page 5

Wealth and Income Potential Online Study Group Workbook Session 8 Page 6

#3) Monthly Cash Flow: Budget Report Monthly Budget Worksheet Online Study Group Workbook Session 8 Page 7

#4) Tax Filter: History of Taxes History of Taxes Online Study Group Workbook Session 8 Page 8

#5) Investment/Savings Diverter: Risk Taxation Accessibility - Allocation Mix Online Study Group Workbook Session 8 Page 9

Risk and Taxation Accessibility Allocation Mix Online Study Group Workbook Session 8 Page 10

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#6) Investments Tank: Top Half - Permanent Life Insurance Benefits Account Types Online Study Group Workbook Session 8 Page 15

401k Qualified Plan Certificate of Deposit Online Study Group Workbook Session 8 Page 16

Margin Account on Stock Portfolio Permanent Life Insurance Benefits Online Study Group Workbook Session 8 Page 17

Real Estate Equity w/heloc Savings Account / Money Market Online Study Group Workbook Session 8 Page 18

#7) Investments Tank: Risk Compounding vs. Speculation Compounding vs. Speculation Online Study Group Workbook Session 8 Page 19

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#8) Distribution Valve for Investments Tank: Accumulation vs. Distribution Accumulation vs. Distribution Calculator: Coming Soon Online Study Group Workbook Session 8 Page 21

#9) Savings Tank: Top Half Permanent Life Insurance Benefits Account Types Online Study Group Workbook Session 8 Page 22

401k Qualified Plan Certificate of Deposit Online Study Group Workbook Session 8 Page 23

Margin Account on Stock Portfolio Permanent Life Insurance Benefits Online Study Group Workbook Session 8 Page 24

Real Estate Equity w/heloc Savings Account / Money Market Online Study Group Workbook Session 8 Page 25

#10) Savings Tank: Safe / Emergency Fund to Private Reserve Tank with Protection Shield #11) Protection Shield: Three Legged Stool Online Study Group Workbook Session 8 Page 26

Three Legged Stool Online Study Group Workbook Session 8 Page 27

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#12) Distribution Valve for Savings Tank: Retirement Income Alternative Online Study Group Workbook Session 8 Page 31

Retirement Income Alternative Online Study Group Workbook Session 8 Page 32

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#13) Lifestyle Regulator: Retirement Ready or Not Calculator Online Study Group Workbook Session 8 Page 34

Retirement Ready or Not Calculator Online Study Group Workbook Session 8 Page 35

Lifestyle Regulator: Retirement Ready or Not (Screen 3 of 3) Retirement Ready or Not (Increased ROR) Online Study Group Workbook Session 8 Page 36

Retirement Ready or Not (Save More) Retirement Ready or Not (Work Longer) Online Study Group Workbook Session 8 Page 37

Retirement Ready or Not (Spend Less) #14) Current Lifestyle Life Style Online Study Group Workbook Session 8 Page 38

Lifestyle Expense Graphic: Lifestyle Illustrated #15) House: House as an Investment Calculator Online Study Group Workbook Session 8 Page 39

House as an Investment Calculator Online Study Group Workbook Session 8 Page 40

#16) Qualified Plans Discussion Online Study Group Workbook Session 8 Page 41

#17) Collateral Capacity Discussion Online Study Group Workbook Session 8 Page 42

#18) Structure Payments Discussion Online Study Group Workbook Session 8 Page 43

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Step 9: Life Insurance & Other Products - Protection Shield Click item #10 the Savings Tank: Safe / Emergency Fund to Private Reserve Tank w/protection Shield #11) Protection Shield: Three Legged Stool Online Study Group Workbook Session 8 Page 46

Three Legged Stool Online Study Group Workbook Session 8 Page 47

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See next page for 10 Minute Lesson on Life Insurance Script Online Study Group Workbook Session 8 Page 50

10-MINUTE LESSON ON LIFE INSURANCE SCRIPT ~ For Producers that have purchased the COW software only. ~ Online Study Group Workbook Session 8 Page 51

10-MINUTE LESSON ON LIFE INSURANCE SCRIPT ~ For Producers that have purchased the COW software only. ~ There is the minimum you can pay for a given amount of insurance coverage for a specific age and the maximum you can pay. Who determines the minimum? The insurance company. At the other end of the spectrum is the maximum one can pay for a given amount of coverage and who determines that besides you? The government. The fact that the government limits how much money one can put in a life insurance policy says what about it? It must be... goooood. Basically the government decided the upper limit of tax advantaged growth they would allow and still give the policy holder access to the cash value. Policies outside of this allowable corridor are determined to be a MEC (modified endowment contract). A MEC simply means the government will treat the insurance contract like they do qualified plans with all the rules, regulations and penalties. I am going to share with you some information that if you ever have to talk with an insurance agent again about life insurance you will probably know more than they do. At a minimum you will know more than they might tell you. There is almost an infinite amount of premiums that can be charged between the minimum and the maximum. The insurance companies determine the minimum. They have actuaries that calculate the least amount of premium they can charge and still make a profit. They understand opportunity cost. Their profit is already built into the product. In the 1980 s the line for the maximum amount of contributions for a given face amount of coverage was drawn. This is when the terrible twins were born, TAMRA and DEFRA. (Technical And Miscellaneous Revenue Act of 1988) (Deficit Reduction Act of 1984) The government said, wait just a minute. We cannot allow people to put unlimited contributions in a life insurance policy as is allowed currently because if we do they will not do what we want them to do. Online Study Group Workbook Session 8 Page 52

10-MINUTE LESSON ON LIFE INSURANCE SCRIPT ~ For Producers that have purchased the COW software only. ~ What do they want you to do besides pay your taxes? You can put your money in a qualified plan account and defer the taxes. Samples of these include 401(k) s, IRA s, SEP s and 403(b) plans just to name a few. Who came up with these plans? The government. What do qualified plans do? The number one response is that they defer taxes. If that is what you said they do you were only half correct. Let me tell you a little story: Let s say you wanted to borrow $10,000. You would ask two questions before you took the money. #1: The first question would be how much interest do you have to pay? #2: The second question would be when do you have to pay it back? If the lender responded by saying, We have enough money right now and do not need any payments from you at this time but there will come a time when we will need the money. When we know how much we need we will be able to determine how much interest we have to charge to get the amount we need. Would you cash that check? Absolutely not, but this is exactly what you are doing with the government in qualified accounts. They are not saying you do not owe the tax. They are saying you can pay the tax later. At what bracket? That is a good question. Again we are not saying qualified plans are bad. We do think however that it is important that you know and understand exactly what they do. Let s assume you could pay $500 for $500,000 of insurance coverage or you could pay $1,000. Which would you choose? Being Wal-mart shoppers most of us would probably say $500. Less is best when it comes to cost. Right? Online Study Group Workbook Session 8 Page 53

10-MINUTE LESSON ON LIFE INSURANCE SCRIPT ~ For Producers that have purchased the COW software only. ~ Let s say the $500 represents the lowest premium one can pay for $500,00 of coverage at a given age. The lowest premium is known as term insurance. It provides one benefit, death benefit. Tern insurance offers protection for the least expensive initial cost. The best day, financially, to own term insurance is which day? If you guessed the day you die you were not even close. The best day financially to own a term insurance policy is the first day. That s right, the first day you buy it. Had you purchased the policy today, received approval, signed the delivery receipt, paid PAC monthly and died on the way home from the agent s office, you cannot get better than that financially. To calculate the rate of return on such an event would be next to impossible. Granted it would be hard to get people to sign up for this type of financial windfall but you understand the point. If the best day to own a term insurance policy is the first day, it means that every day you own it: it becomes worth less and less, costing you more and more. How do you feel about owning things like this? When determining the cost of term insurance one must also factor in the opportunity cost of owning this product. Remember the cost is not just the amount you paid in premiums but what those dollars would have earned had you not bought the coverage and taken the risk yourself which we are not suggesting you do. An interesting calculation is to determine when the term premiums paid at interest will equal the face amount of the contract. You can be assured that the date will be after the increased premiums have caused you to drop the coverage and the contract has lapsed, but before your life expectancy. For an insurance company to talk you into putting $10,000 in a policy with a value at your death that you could get for $500 they would have to come up with some serious benefits... agreed? Let s forget about insurance for just a minute and talk about benefits. In any vehicle one would use to accumulate money over time a major desire would be to maximize benefits in addition to achieving an acceptable rate of return. Online Study Group Workbook Session 8 Page 54

10-MINUTE LESSON ON LIFE INSURANCE SCRIPT ~ For Producers that have purchased the COW software only. ~ If you could wave a magic wand what benefits would you desire? Tax Deferred: You would most likely want the money in the account to grow tax deferred as opposed to taxable? Tax-Free: You would want the money to come out tax-free? Competitive Rate of Return: You certainly want a competitive ROR. Guarantees: Would you like the interest guaranteed? Creditor Proof: In the event you get sued would you want it protected from creditors? Unlimited Contributions: Would you like to contribute as much in the account as you desire without restrictions? Unlimited Investment Options: Would you like to invest in anything you choose? Collateral: Would you like to be able to use this money as collateral? Estate Tax-Free: If possible would you want this money to be exempt from estate tax? Liquidity, Use and Control: Would you want access to this money while you are working, as well as during your retirement? Disability Protection: In the event of your disability would you want your contributions to the account to continue even though you can no longer make them yourself? Deductible: Would you want your contribution to this account deductible? You would want all these benefits if you could get them. Which of these benefits do you get from a Qualified Plan? Show the list and highlight: Tax deferral, Competitive ROR, Creditor proof and Deductible. Online Study Group Workbook Session 8 Page 55

10-MINUTE LESSON ON LIFE INSURANCE SCRIPT ~ For Producers that have purchased the COW software only. ~ There is only one product that offers the majority of the benefits on the list and it is permanent life insurance. However not just any type of contract will do. Life insurance policies that are minimally funded only provide minimum levels of benefits. Remember the government calls a life insurance policy that is funded with more than the allowable ratio between the contribution and the face amount of the contract a MEC. (Modified Endowment Contract) This is not a bad thing if you never plan on touching the cash in the contract. Don t forget the death benefit comes to the beneficiary income taxfree. (estate taxes may apply) Let me introduce you to another type of MEC life insurance contract. It is also a MEC. We call this a Maximum Efficient Contract. The government drew the MEC line. Contributions over this line create a Modified Endowment Contract, up to this lie is the Maximum Efficient Contract. Permanent life insurance contracts offer all the benefits we listed earlier except that the contributions to a life insurance contract outside of a qualified plan are not deductible. Tax deductible contributions that grow tax deferred and come out taxable are exactly the same as after tax contributions that grow tax deferred and come out tax free assuming the same tax brackets and investment interest rate. What you need to understand is that as you move from the highest possible premium to the lowest the value of the benefits decrease. The higher the premium the higher the level of each benefit received until you reach the MEC line. Up to that line but not over is the position that provides the greatest amount of benefits a life insurance contract has to offer while still allowing liquidity, use, and control of the money. There are circumstances where one needs simply death protection and a low level premium is desirable. Term coverage for a short period of time may also be the best immediate temporary solution. If however you are looking for a place to accumulate money that provides all the benefits mentioned at their maximum level, permanent life insurance is the product of choice. No other financial product offers these same benefits at these levels. Insurance companies limit the face amount one can purchase based on present age, mortality costs, current assets, and income. The government limits the contributions allowable to an insurance contract that still give the policy holder access to the cash value on a tax favored basis. Online Study Group Workbook Session 8 Page 56

10-MINUTE LESSON ON LIFE INSURANCE SCRIPT ~ For Producers that have purchased the COW software only. ~ How much insurance should you have? We believe this is a wants decision and not a needs decision. We do not believe there is anyone wise enough to determine what one needs since the very thought of need represents the least amount. To determine the least amount would be to assume that if one has this amount they will be fine. We do not believe this is possible. We believe life insurance is a want product. You tell us what you want to happen and we can help you determine how much coverage it will take to accomplish what you want. Life insurance is the only product that will provide the immediate funds to guarantee that what you want to happen will happen in the event of your death. The 10 Minute Lesson on Life Insurance gives you the information to determine what you want. Online Study Group Workbook Session 8 Page 57

Rate of Return Online Study Group Workbook Session 8 Page 58