SHAFER FINANCIAL INC
LYME, NH

The typical 40-year-old man does not really think about the possibility of not making it to retirement. Maybe he should. In fact a full 20% or 1 out of every 5 40-year-old men will die before reaching retirement. And 11% will be dead before age 60. On the other end, 16% of 40-year-old men will still be alive at age 90. There is a lot of uncertainty in how long we live that needs to be planned for. As you can see more than one out of every three of our 40 year-old-men will either die early or live to 90! For women, the odds are different, but the problem the same [13% of 40 year olds will die before retirement while 27% will still be alive at 90]. One of the common misunderstandings about EIULs is that they invest your funds into a group of stocks that mimic an index. This is wrong. Your money is not invested in the stock market. The insurance company invests in a combination of fixed rate bonds and treasuries to provide the reserves to cover the guarantees on the policies [usually 2-3%]. With the balance they invest in European style options on the index, which pay only if the index goes up. If the index goes down there is no payment and the premium paid remains with the seller of the option. The salient point is that the strategy is completely different than the one followed by index mutual funds and cannot be compared directly. But we can compare the results. And over the last 5-10-15-20-30 year time periods the EIUL index strategy beats the index funds strategy. I think that Wall Street interests have perpetuated this fear, because it makes little sense if you understand the products. Mutual funds have all sorts of �moving parts� that never get discussed. Trading costs and the large amounts of cash that must be kept on hand to account for people taking money out of their funds are a couple that come to mind. And if the mutual fund is an index fund they must rebalance to the index every year as some companies fall out of the index while others are included. But lets talk about the main two moving parts in EIULs. The participation rate is the percentage of participation you are given on an index. Typically this is 100% but it can be more or less. For example, one index that is popular allows for a 140% participation rate with a lower cap rate. These are not fixed percentages by contract. However, in the history of the EIULs I sell, they have never changed from their initial mark. The insurance companies need the flexibility to change these to make sure their reserves are adequate compared to the payouts they are making. The fact is that we just went through a terrible economic time period and participation rates in these products remained the same for the entire industry. Stay with financially sound companies and this should not be an issue. The second main moving part is cap rates. These are the maximum percentage you can receive during each leg of your index [typically one year]. These do move around as different interest rate environments present themselves. Basically, the insurance companies cover the product guarantees with fixed rate products. When the interest rate environment is low [like it is now], then you need to use more of the premium to cover this. That leaves less for the options and requires the cap rates to be lower. In fact, that has happened in the last couple years. When the interest rate environment goes back up, then cap rate will increase too. Historically that is what happened in these products. I tend to think of the �moving parts� as an advantage rather than a disadvantage because it enables the product to maximize its performance at the same time protect the companies from disaster. I have heard that there are huge expenses involved in life insurance products. Is this true? There are significant expenses and they are for the most part taken out in the first few years. All financial products have expenses that provide a nice profit for the companies and individuals that sell them. OVERALL expenses are comparable between insurance products and mutual funds. In fact, many of the mutual fund companies, even some known for low expenses, have recently increased the amount of charges to customers because of the amount of people who have withdrawn dollars from their mutual funds. There is a wide range of expenses between individual mutual fund companies as well as insurance companies. It is wise to keep an eye on total expenses in these products. It is not wise to let that one item be the primary reason for choosing a particular product. Once again, expenses are taken out largely in the first 10-15 years of an EIUL so this is not a good product for folks with a short time period in mind. In fact, anyone that is not interested in keeping an EIUL long-term should not ever consider it. That is worth repeating, this product is for people who plan on keeping it long-term and would not be a product for folks with a short-term horizon. The income rider provides high guarantees. In a fixed indexed annuity with this rider [rider has a small cost attached to it], you have a mirroring account called an income account. The purpose of this account is to simply determine how much annual income you will receive. On this account you sometimes receive an initial bonus and always have a minimum return guarantee that is currently between 5-7.5%. So each year you either receive the minimum guarantee or the actual index interest credit whichever is higher. The minimum guarantee interest credit lasts between 10 and 20 years depending on which product you choose. You also know the factor that will be used to determine your annual income. The factor is the multiplier applied to your total income value, which determines guarantee annual income. This factor gets larger the older you are when you start income. But you know what this will be in advance. So you know the minimum amount of lifetime income you will receive when you purchase this annuity. So imagine how it would change your stress level if you take your savings and put it into a product that has a substantial minimum guarantee and the ability to create retirement income that is guaranteed to last your life or you and your spouses life?