Kelm Financial Services – Example Case


Mr. Smith, a 48 year old business attorney with an annual income of $280K, had recently become a partner in his law firm. The partnership bonus was expected to pay him an additional $20 – $25K per quarter (after tax) above his $300,000 salary. He was in the process of deciding on the best place to invest these funds. He was contributing the maximum amount to his 401(k) plan and was setting aside $4K-$5K per month into a brokerage account. He was referred to Kelm Financial Services by another partner in the firm.

Retirement Planning / Needs Analysis: In a meeting with Mr. Smith, the following topics were discussed:

  1. He needed an investment vehicle for $80K – $1000K per year in partnership bonus income.
  2. He wanted to be in a position to retire at age 62 without reducing his current lifestyle
  3. He was concerned about the high amount of income taxes and capital gains taxes that he was paying and needed a tax advantaged financial vehicle where he could put his money. He was also concerned about the possibility of higher tax rates in the future
  4. He was concerned about asset protection for his personal assets.
  5. He was concerned about how another stock market downturn could affect his retirement plans.
  6. He needed to be able to access funds before age 59 ½ so he could pay for his kids’ college education.

Insurance Planning

Mr. Smith had a term life insurance policy in the amount of $1.5 M. However, a needs analysis revealed that his $1.5M term policy was not adequate to meet the needs of his family after his death. In the event of his death, it was determined that Mr. Smith’s family would need an annual income of $175K per year plus enough to pay for college expenses for their three (3) children. In addition to an inadequate death benefit, his current insurance policy provided none of the living benefits that permanent insurance contracts can provide.

Tax Bracket Planning: A review of Mr. Smith’s assets revealed the following – summarized by ‘bucket’.

  1. Taxable bucket: Mr. Smith’s assets included a total of $425K in brokerage accounts, mutual funds, managed accounts, and other taxable accounts. These taxable accounts generated a 1099 each year and added to Mr. Smith’s income tax bill.
  2. Tax Deferred bucket: The total value of his 401(k) and rollover IRA was $380K. No current taxes are due, however based on historical growth rates, the account will grow to over a million dollars which will become taxable income when withdrawn for retirement.
  3. Tax Free bucket: Mr. Smith did not have a Roth IRA or any investments in income tax free accounts, so he had zero dollars in this bucket.

The Solution – Funding the Tax Free Bucket

Kelm Financial Services proposed a tax advantaged solution designed to meet the Smiths’ retirement cash flow needs, provide protection against a stock market downturn, provide an investment vehicle for the partnership bonus dollars, and increase his death benefit. Rather than adding to investments in taxable accounts which could not meet Mr. Smith’s needs, an Indexed Universal Life contract was used as the investment vehicle and provided the follow benefit

Indexed Universal Life – A Summary of the Living Benefits

  • Tax Free Withdrawals – Properly Structured Life Insurance Products allow for Tax Free Withdrawals
    • Access to your money on an income tax-free basis – Supplemental Retirement Plan
    • Tax-Deferred Growth with no capital gains or taxes on growth, 1099 Never!
  • No Age Restrictions
    • Liquidity, access to account values at any age – even before 59 ½
    • No mandatory distributions – at age 70 1/2
  • Upside Potential with Downside Protection
    • Returns are Indexed to S&P 500
    • If the market goes UP – you can ‘lock in’ a portion of the gain
    • If the market goes DOWN – You do not suffer losses!
  • Long Term Care Type Benefits – Accelerated Death Benefit. For no additional costs, a portion of the death benefits can be accessed in the following circumstances:
    • Terminal Illness
    • Critical Illness
    • Chronic Illness
  • Protection from Lawsuits – In Texas, life insurance policies are protected from creditors!
  • Peace of Mind – Guaranteed rate of return from highly rated insurance companies provide Peace of Mind!
  • Indexed Universal Life – No other retirement or investment product can provide Tax Advantages with a Death Benefit!