Asset Maximization
WHAT IS ASSET MAXIMIZATION?
It is an investment strategy designed
to maximize current lifetime after-tax income from an existing asset,
while at the same time increasing the after-tax value of that asset
to the next generation. It is a conservative strategy that enables
a client to convert a low interest-producing asset into a guaranteed*
lifetime income stream.
HOW DOES ASSET MAXIMIZATION
WORK?
Asset Maximization utilizes an Immediate
Annuity to provide a lifetime income stream. The lump sum used to
purchase the annuity comes from the sale of an existing low interest
asset. The after-tax income provided by the annuity is typically
higher than the after-tax income stream from the asset sold. A portion
of that higher income stream is used to purchase a life insurance
policy that is structured to maximize the value of the life insurance
to heirs. When the strategy is successful, the guaranteed* after-tax
income, even after the purchase of the life insurance, will be higher
than the income provided by the replaced asset.
WHAT TYPES OF ASSETS ARE
REPLACED TO INITIATE THE STRATEGY?
CDs and Municipal Bonds are the
typical assets replaced. But other assets that could be replaced
include: corporate bonds, government issues, preferred stock, or
other low interest-bearing assets. Because the after-tax income
stream with the Asset Maximization Strategy is guaranteed*, it works
well for any client who is conservative in nature but wishes to
maximize the benefits of an asset.
HOW IS THE INCOME STREAM
GUARANTEED*?
By purchasing an Immediate Annuity
with the proceeds of the asset sale. An Immediate Annuity begins
paying out after a selected period of time, one month or one year
for example, after purchase. One of the great things about annuities
is their ability to provide the Annuitant income for the rest of
their days - in effect, a lifetime stream of income that they can
never outlive. Even if they live to a ripe old age of 110, they're
still going to be paid. The income stream remains fixed and is guaranteed*
by the insurance company issuing the annuity. Obviously the health
of the company issuing the annuity should be researched. Only top
ranked annuity providers should be used for this strategy.
IF
I AM MARRIED, WILL THE INCOME STREAM BE GUARANTEED* FOR MY SPOUSE
ALSO?
Yes, it can be. When an annuity
is purchased, the payout can be based on a lifetime income stream
that will last for the life of one person, or two (called a Joint
Annuity). The amount of the income stream will be less, all other
items the same, if the payout will be for the lifetime of two people,
since the payout will probably last for a longer period of time.
Asset Maximization utilizes
an Immediate Annuity to guarantee* a lifetime income stream. The
lump sum used to purchase the annuity comes from the sale of an
existing low interest asset. The guaranteed* after-tax income provided
by the annuity is typically higher than the after-tax income stream
from the asset sold. A portion of that higher income stream is used
to purchase a life insurance policy that is structured to maximize
the value of the life insurance to heirs.
WHAT OTHER ITEMS AFFECT
THE INCOME STREAM FROM AN ANNUITY?
The income stream, also called the
payout, is based partially on the interest that the insurance company
can expect to receive on the lump sum; but another major factor
is the age and sex of the person(s) receiving the income stream.
The older someone is, the greater the income stream will be. Women
won't receive as high a payment as their male, same-age counterparts,
simply because women generally live longer than men. The payout
can also be guaranteed* to last a specific period of time, for example
10 years, even if the person(s) purchasing the annuity die(s) before
the 10 year period is up. This will lower the payout slightly.
IS THE INCOME STREAM TAXABLE?
Yes, the income stream will be taxable. However,
not all of the payout may be subject to federal income tax. A percentage
of each payment will be non-taxable for federal income tax purposes
when an Immediate Annuity is bought with non-qualified after-tax
dollars. This "Exclusion Ratio" represents the return of one's investment
over the life of the contract and will vary depending upon the age
of the Annuitant and the payment option. State income taxes vary
widely and exclusions for state income tax purposes may not be applicable.
DO
I NEED TO PURCHASE LIFE INSURANCE WHEN UTILIZING THE ASSET MAXIMIZATION
STRATEGY?
Part of the reason why an Immediate
Annuity can possibly provide a greater income stream than the asset
replaced is the fact that at death, not only the income stream but
the value of the asset goes away. For those people who are interested
simply in maximum lifetime income, the purchase of the Immediate
Annuity, with its guaranteed* income stream, may be a wise choice.
But for those who also wish to pass the value of the asset on to
heirs, the strategy must include the purchase of life insurance.
WHAT
PORTION OF THE INCOME STREAM WILL BE NEEDED TO PURCHASE THE LIFE
INSURANCE TO REPLACE THE ASSET SOLD?
The life insurance premium expense
will depend on a number of factors, including your health, as well
as the assumptions that will be made concerning the performance
of the life insurance policy. Another big factor is whether the
policy is a single life policy or a survivorship policy (pays at
the second death of two people.) The policy type will depend on
whether the Annuity purchased is a single life or Joint Annuity.
For the strategy to be successful, the after tax lifetime income,
even after purchasing the life insurance policy, will be greater
than the income received from the asset sold.
WHAT
TYPE OF LIFE INSURANCE IS PURCHASED WHEN UTILIZING THE ASSET MAXIMIZATION
STRATEGY?
The type of life insurance will
depend on the particular situation. Single life or survivorship
insurance is used, depending on the nature of the Annuity payout.
Fixed interest products are usually used. Universal Life is more
flexible than Whole Life and can be purchased with the same type
of death benefit guarantees normally associated with Whole Life
contracts. Variable Life policies with their underlying equity investments
are usually not used and are not included as a recommended product
for this concept.
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*Subject to the terms of the
specific annuity contract purchased and the insurer's ability to
pay.
For use with non-registered products only.
The annuity and insurance products described may be issued by various
companies and may not be available in all states. All comments about
such products are subject to the terms and conditions of the annuity
and/or insurance contract issued by the carrier. These materials
are provided for educational purposes only. West Financial Services
makes no representation regarding the suitability of this concept
or the product(s) for an individual nor is West Financial Services
providing tax or legal advice. You should consult your own tax,
legal or other professional advisor before purchasing these products.
To ensure compliance with requirements imposed by the IRS, we inform
you that, unless expressly stated otherwise, any U.S. federal tax
advice contained in this communication (including any attachments)
is not intended or written to be used, and cannot be used, for the
purpose of (i) avoiding penalties under the Internal Revenue Code
or (ii) promoting, marketing or recommending to another party any
transaction or matter addressed herein.