Kennedy Advisory Group
3109 Woodcliff Cr.
Birmingham, Alabama 35243
Definition of 'Arbitrage' from Investopedia
"The simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods."
Legacy Arbitrage is a system to maximize asset transfer while at the same time removing 100% of market risk. It is simple, and it requires low maintenance in the future. Prospects for this program are everywhere, but like those who have pitched sales ideas without knowing the need of the prospect (split-dollar), failure will be the result. Legacy Arbitrage is only a vehicle to help the prospect achieve their desired goals, nothing more.
When the Legacy Arbitrage strategy is designed, the benefits correctly can be substantial. The annuity income is guaranteed; the insurance premiums are guaranteed; the ultimate death benefit is guaranteed and fully guaranteed and removing all risk.
Legacy Arbitrage could provide the prospect benefits to solve both incomes (if needed and desired) and legacy needs (assets to heirs).
In the financial world, arbitrage means buying and selling the same asset from two different sources. The reasoning behind doing such a thing is profit, and it is legal. It is legal to buy an asset from one source and sell it via a second source for a higher price. The benefit to the general public is that it keeps prices and fair value in balance internationally. For the past 100 years, this has been an accepted and used process by Wall Street and many investors. Typically, the trade would involve stocks and bonds, but occasionally it could be commodities or any asset where the price moves based on market conditions.
In the insurance industry, arbitrage means something slightly different, but it does involve capturing one segment to maximize benefits in another. Legacy Arbitrage can accomplish the same goal with the simultaneous purchase of a life insurance policy and a particular type of annuity with the same person as the annuitant and the insured. The arbitrage spin is that two different companies are used commonly, one specializing in annuities and one specializing in life insurance.
The life insurance company underwrites the risk of the person dying before their life expectancy, while the carrier issuing the annuity assumes the risk of the person living beyond life expectancy.
Remember, insurance companies are risk bearers and price these contingencies into their premiums and rates of returns. While your use of Legacy Arbitrage as a solution to needs may be just one life, the insurance company looks at a large pool of people and knows some will live longer than others.
Because the annuity provides "lifetime" income (through the income rider) and the life insurance policy provides death benefits, we know at some future date, one will cease, and one will fund. That is Legacy Arbitrage.
How can this concept be used?
The prospect has accumulated funds intended for inheritance. In my practice, this is a common occurrence; maybe you have heard these answers during a fact finder:
· My portfolio is for my daughter so she can have a nice retirement
· I don't want to touch my IRA so my son can inherit it
· My church needs to build a new chapel when I die I am going to leave it to them
The answers go on and on.
Consider these questions that may help find a use for Legacy Arbitrage:
"Mrs. Jones, I know you are saving your stock account for your daughter. Have you ever heard of Legacy Arbitrage?"
"Did you know that you can remove all risk of how much she will receive and, at the same time, know the benefit she will receive is far greater than the current value of your portfolio?"
"Mrs. Jones, if I could show you a system where you could stabilize the assets in your portfolio, create a tax-free gift to your daughter and still be able to have control over your funds should you need them, would you be interested?"
It doesn't have to be just one insured; it can be a husband and wife, and the ultimate beneficiary can be more than one person.
Example One: Mrs. Jones, age 70, has $500,000 in an account and wants to leave it to her daughter and granddaughters. $500,000 on deposit in a FIA with an income rider would provide an annual income of $32,000 in one year.
Mrs. Jones is just an average or slightly less than average health. (many companies are now rating up to table 4 as standard). She will say she couldn't qualify because of health issues, which is generally not true; the possibilities available now are enormous.
"Mrs. Jones, one of the wonderful things about Legacy Arbitrage, is it is a contract and fully guaranteed. And you do not have to make any final decision until the benefits are presented to you in writing. Obtaining rates and information to make the offer to you will take about 30 days; I will come back and discuss it all with you then."
The $32,000 removed from the annuity via the income rider, at standard rates, provides a life insurance death benefit of $1,116,279. (at standard rates, preferred would be even more death benefit) This benefit is paid tax-free and without the need for probate (named beneficiary).
Example Two: Mrs. Jones, age 70, Mr. Jones, age 70, has $500,000 in an account and wants to leave it to their daughter and granddaughters. $500,000 on deposit in a FIA with an income rider would provide an annual income of $28,000 in one year.
The policy used would be a second to die, which pays at the death of the second insured. If health issues are a concern, 2nd to die is easier to obtain in some instances because it is based on two lives instead of just one.
The $28,000 removed from the annuity via the income rider, at standard rates, provides a life insurance death benefit of $1,497,288. (standard rates) This benefit is paid tax-free and without the need for probate (named beneficiary).
By changing the asset allocation from risk to guarantees puts in place the plan to add guarantees for the prospect, but.
Q. What is the tax liability of removing the income from the annuity?
A. The income may be taxable; after completing the fact-finder, it can be determined whether to withhold the taxes; I like to use the term "at the source," which means the annuity company will withhold and send to the IRS for the benefit of the annuitant. Also, the current asset being converted to Legacy Arbitrage could be generating a taxable event, such as buying and selling in a mutual fund or capital gains on stock dividends.
Also, if the funds are now invested in mutual funds, there could be fees and other expenses (expense ratio), which have reduced the net return on the investment.
Q. What happens if the annuitant decides to stop paying premiums?
A. Almost all life insurance policies sold in America have settlement options. These options allow for contractual changes in an existing policy. One of the settlement options is "reduced paid-up," which provides for the policy to be changed from a premium paying contract to a fully paid-up policy. The face amount is adjusted based on the age of the insured and the amount of cash value.
To make the point more directly, in Example One above, if the insured paid premiums ($32,000) for 5 years, a total investment of $160,000 and stopped and took the policy as reduced paid up, the paid-up death benefit would be approximately $216,000. Still far more than the total of premiums paid.
Q. Can the life insurance policy be cashed in before death if the funds are needed?
A. Yes, the owner of the policy has direct access to the policy's available cash value. The owner of the policy may also borrow against the available cash value under most contracts.
Q. Can an IRA be used to fund Legacy Arbitrage?
A. Yes! The only issue is a tax liability for removing the funds, determining the overall tax liability of the prospect, and having the tax withheld at the "source."
Q. Why wouldn't I make a single premium deposit into the life policy instead of the annuity making annual payments?
A. You can, but the reason you do not want to do this is to make sure you have maximized the benefit to the beneficiary. In the event of death, any remaining balance in the annuity is also inherited by the beneficiary; this allows for the possibility of more funds being received by the heirs. This is how you maximize Legacy Arbitrage and show your clients that they still have complete control.
Q. How do I get the premiums paid each year?
A. It can be automatic if your prospect chooses. The annuity company will send the funds directly to the life company and send the receipt to your client. If taxes are withheld, the company will also send the receipt to the client. It can be completely automatic.
A word about the legal side: it is not in your best interest to practice law or give tax advice unless you are licensed and authorized to do so. You can, however, explain the benefits of this level of planning and how Legacy Arbitrage can benefit your prospect. Never proceed unless you have conducted a complete fact finder. The best way to uncover prospects who could benefit from Legacy Arbitrage is to ask this simple question when you are discussing the prospect's assets and goals.
"Ask yourself, have you ever heard of Legacy Arbitrage? It is a guaranteed risk-free method of maximizing the asset transfer to your daughter, and at the same time, it is tax-free while avoiding all probate expense."
Legacy Arbitrage is not for the wealthy; they are for your ordinary everyday person. They are everywhere, and people want to buy this concept because:
· It provides a tax-free transfer
· It is probate expense-free
· It allows for risk to be removed from the equation
· It is simple
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