financial advisor newsletter

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S S E E N N I I O O R R F F I I N N A A N N C C E E S S SPECIALIZING IN INVESTMENT MANAGEMENT AND ASSET PRESERVATION FOR MATURE INVESTORS AUGUST 2004 Don't Let Being Single Jeopardize Your Financial Plans re you single because of divorce, your spouse died, or you just never married? If so, you have a lot of company. The U.S. Census Bureau reported that in 2000, 82 million people in this country were unmarried. This included nearly 20 million who were divorced, 13.6 million who were widowed, and more than 48 million who had never married. And that number is expected to increase to 106 million by 2010. 1 Couples often have the benefit of one of the partners keeping them both on sound financial footing. But as a single person, the burden is on you to prepare for your financial future. Life insurance is generally used to provide for one’s survivors. Single individuals may feel that since they don’t have any dependents, they can ignore this type of protection. But did you know that a life insurance policy can be designed to pay medical expenses, cover funeral costs, or leave a gift to your favorite charity? Long-term care is an area that should be of special concern to singles who cannot count on family support. Nursing homes cost an average of $142 per day 2 and a typical stay is 892 days. 3 How would you pay this $126,664 bill? A long-term care insurance policy could be structured around your financial and personal situation. Is your will up-to-date? Talk to your attorney to make sure that your money and personal treasures go to those whom you care about. If you don’t have an attorney, I can refer you to several in our community who will be glad to help you. For a no-obligation quote on a life insurance or long-term care policy that can meet your unique needs, please check below 1 http://www.singlesrights.com/Census%202000/marital-status-adults- trends.htm 2 http://www.ltcfeds.com/ltc_basics/costofcare.html 3 http://www.cdc.gov/nchs/fastats/nursingh.htm How Should You Receive a Life Insurance Payout? eciding how to take a life insurance benefit is a difficult choice. The size of a death proceed is usually substantial, and the timing of having to make such an important financial decision couldn’t be worse. Therefore, you should regroup emotionally and understand your options before you do anything. You have three basic alternatives: You can accept the lump sum, leave the money with the insurance company, or arrange for the insurance company to pay you a regular income. The lump-sum payout is the simplest concept. You’d get a check to invest any way you wish. The second method is to set up a retained-asset account with the insurance company. You would earn a rate of return on the death benefit that is similar to that of a bank checking account and could access the funds by writing a check. But if you are retired and concerned about outliving your assets, you may want to look into one of the fixed-payment options. Lifetime-only annuity: Pays you a lifetime income. Joint-and-survivor annuity: Pays you and any other dependent a lifetime income. Period-certain annuity: Pays you an income for a specified period. If you die during that time, the payments will continue to your beneficiary for the remainder of the term. Life with period-certain annuity: Pays you a lifetime income and guarantees the payments for a minimum term. If you die during that term, your beneficiary will receive payments for the balance of the term. A D YOUR NAME, PUBLISHER

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Financial Advisor newsletter for life insurance agents and financial advisors. The newsletter helps generate more business from clients and convert prospects to clients. You can create a personalized version here http://www.advisor-newsletter.com/ - check it out!

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Page 1: Financial Advisor Newsletter

SSEENNIIOORRFFIINNAANNCCEESSSPECIALIZING IN INVESTMENT MANAGEMENT AND ASSET PRESERVATION

FOR MATURE INVESTORS

AUGUST 2004

Don't Let Being Single Jeopardize Your Financial Plans

re you single because of divorce, your spouse died, or you just never married? If so, you have a

lot of company. The U.S. Census Bureau reported that in 2000, 82 million people in this country were unmarried. This included nearly 20 million who were divorced, 13.6 million who were widowed, and more than 48 million who had never married. And that number is expected to increase to 106 million by 2010.1

Couples often have the benefit of one of the partners keeping them both on sound financial footing. But as a single person, the burden is on you to prepare for your financial future.

Life insurance is generally used to provide for one’s survivors. Single individuals may feel that since they don’t have any dependents, they can ignore this type of protection. But did you know that a life insurance policy can be designed to pay medical expenses, cover funeral costs, or leave a gift to your favorite charity?

Long-term care is an area that should be of special concern to singles who cannot count on family support. Nursing homes cost an average of $142 per day2 and a typical stay is 892 days.3 How would you pay this $126,664 bill? A long-term care insurance policy could be structured around your financial and personal situation.

Is your will up-to-date? Talk to your attorney to make sure that your money and personal treasures go to those whom you care about. If you don’t have an attorney, I can refer you to several in our community who will be glad to help you.

For a no-obligation quote on a life insurance or long-term care policy that can meet your unique needs, please check below

1 http://www.singlesrights.com/Census%202000/marital-status-adults-trends.htm

2 http://www.ltcfeds.com/ltc_basics/costofcare.html

3 http://www.cdc.gov/nchs/fastats/nursingh.htm

How Should You Receive a Life Insurance Payout?

eciding how to take a life insurance benefit is a difficult choice. The size of a death proceed is

usually substantial, and the timing of having to make such an important financial decision couldn’t be worse. Therefore, you should regroup emotionally and understand your options before you do anything.

You have three basic alternatives: You can accept the lump sum, leave the money with the insurance company, or arrange for the insurance company to pay you a regular income.

The lump-sum payout is the simplest concept. You’d get a check to invest any way you wish.

The second method is to set up a retained-asset account with the insurance company. You would earn a rate of return on the death benefit that is similar to that of a bank checking account and could access the funds by writing a check.

But if you are retired and concerned about outliving your assets, you may want to look into one of the fixed-payment options.

Lifetime-only annuity: Pays you a lifetime income.

Joint-and-survivor annuity: Pays you and any other dependent a lifetime income.

Period-certain annuity: Pays you an income for a specified period. If you die during that time, the payments will continue to your beneficiary for the remainder of the term.

Life with period-certain annuity: Pays you a lifetime income and guarantees the payments for a minimum term. If you die during that term, your beneficiary will receive payments for the balance of the term.

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Page 2: Financial Advisor Newsletter

The size of the payments will depend on the amount of the death benefit, your age and that of any joint-income beneficiary, and the payment term.

If you would like to learn more about how to establish a guaranteed1 income stream, as well as your other options, from your life insurance proceeds, please check off below.

1. Guarantee issued by the claims paying ability of the life insurance company.

Identity Theft

ver 700,000 people, just like you, are victims of identity theft each year. Thieves can easily steal

your personal information, for example, your credit card account number, Social Security number, or driver’s license number. And it can happen while you are going about your everyday affairs of buying groceries, receiving medical care, or making cellular phone calls. Once they have this information they can open accounts in your name, use your existing accounts, or even work or get arrested while pretending to be you.

Your liability to banks and credit card companies is generally no more than $50. The real harm, however, may come when you try to straighten out the mess and repair the damage to your credit ratings. Victims of identity theft have reported spending an average of 175 hours to correct the problem and $800 in out-of-pocket expenses1.

If you discover that you are a victim, immediately file a police report and notify the fraud department of each of the three major credit bureaus:

• Equifax: 800-525-6285 • Experian: 888-397-3742 • Trans Union: 800-680-7289

Call your credit card companies, banks, the Social Security Administration (800-772-1213), the IRS, the passport agency, and all organizations you belong to.

You may also want to report the theft to the ID Theft Clearinghouse (877-438-4338 or www.consumer.gov/idtheft)2. This division of the Federal Trade Commission has counselors who will

1 Thieves Who Pretend to Be You , Kiplinger's

Retirement Report, August 2000

2 http://www.ftc.gov/bcp/conline/pubs/general/idtheftfact.htm

take your complaint and tell you how to deal with the problems that you might confront.

There are some ways you can reduce the chance of a thief getting your personal information or cut down on the damage if the crime has already occurred. Your Social Security number is all that many thieves need to assume your identity. Don’t carry the card with you or causally give out the number to sales clerks or other strangers.

But if you have Medicare, your ID card includes your name and Social Security number. Consider making a copy of the original Medicare or health insurance card, black out your Social Security number, and carry that copy with you. Just make sure that you and someone you trust knows where to find the original card.

Beware of what you throw in the trash. Carefully go through your junk mail and look for anything that includes your name, address, phone number, and other personal information. Consider purchasing a shredder to properly destroy all sensitive information so that dumpster divers will have a difficult time piecing together anything about you. Look into picking up your mail from a P.O. Box. This would eliminate how some identity theft is done—by the thief pulling mail out of the box in front of your house.

According to the FTC, an average of 12.3 months elapses between the time of initial misuse of the victim’s identity and when the victim first discovers the crime3. Check your credit record annually. Order reports from the three major credit bureaus and make sure all the information is correct. Also, follow up with creditors if your bills do not arrive on time. A missing credit card bill could mean an identity thief has taken over your credit card account and changed your billing address to cover his or her tracks.

Nothing is 100% foolproof. And a determined thief can accomplish anything if given enough time. But if you make his or her job more difficult, the odds will be in your favor against becoming an identity-theft victim. If any of your financial information has been compromised, contact us and we can explain how to protect your investment.

3 http://www.ftc.gov/bcp/workshops/idtheft/trends-

update_2001.pdf

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Page 3: Financial Advisor Newsletter

AANNNNUUIITTYY OOPPPPOORRTTUUNNIITTIIEESSA MONTHLY RESOURCE FOR NEW AND EXISTING ANNUITY OWNERS

AUGUST 2004

Use Those Old Life Insurance Policies to Increase Your Return

o you own any old life insurance policies that have outlived their usefulness? Maybe you

have a universal life policy that has very little cash value. Or perhaps your term policy is about to renew, but you know that the new premiums will be out of reach. And of course, there’s always the possibility that you no longer need the insurance. How would you like to get some tax benefits from those policies that could possibly translate into more income for you or your beneficiaries?

The IRS will allow you to make tax-free transfers of life insurance policies into an annuity. You may think that there couldn’t be much of a benefit if there’s not much cash value in the policies. But for tax purposes, the amount transferred is actually your cost basis less dividends and cash value.

For example, let’s say that you are considering investing $100,000 in an annuity. And you own a life insurance policy that you have paid $25,000 into over the years that now has a $2,000 cash value. You want the annuity to provide income sometime in the future and no longer need the life insurance.

A 1035 exchange on the life insurance to the annuity could increase the annuity’s cost basis from $100,000 to $123,000 ($100,000 + $25,000-$2,000). This means that when you or your beneficiaries make withdrawals, an additional $23,000 of growth will come out tax-free.

For a free analysis to determine if transferring a life insurance policy into an annuity can provide a higher income for you or your beneficiaries, please

check off the coupon below to schedule an appointment.

Note: Loans against the life insurance policies could make part of the exchange taxable. Surrender charges, fees, and other expenses may be applicable. Read the prospectus and contract carefully before making an exchange or investing money.

Fixed Immediate Annuities Can Offer Flexibility for Your Future

tability and safety are important to many seniors. And these are only two of the reasons why

immediate annuities are popular investments. A check arrives every month and part of the income is considered a tax-free return of your principal. Additionally, as long as the annuity company is financially sound, the payments will continue for the life of the contract. (Annuities are guaranteed by the claims paying ability of the annuity company.) However, consumers sometimes believe that immediate annuities are illiquid, irreversible investments and cannot provide for future lifestyle changes. Nonetheless there are some immediate annuities with options that may add flexibility to your financial plan.

Immediate annuities can possibly include an option that would allow you to receive extra cash at specific anniversary dates. For example, this might be at the 5th, 10th, or 15th anniversary of your investment. Exercising this option will reduce your future payments. (The distribution may be fully taxable, so consult with your tax professional.)

And suppose you needed money to cover an emergency, for instance paying for caregivers or a home repair? Some annuity companies will let you

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Page 4: Financial Advisor Newsletter

take up to up to six payments all at once. You would not, however, receive checks for the following six months. (Payments may be fully taxable so consult with your tax professional.)

You may also have the ability to provide a cash benefit from your immediate annuity to your heirs. This would be a predetermined percentage, such as 25% or 50%, of the amount of your initial investment. Selecting this option though, will reduce your monthly annuity checks, and may have tax consequences.

I represent several annuity companies that offer a wide range of choices to fit your present needs while allowing you to plan for the future. If you would like to learn more about receiving an income that you cannot outlive1, as well preparing for life’s unexpected turns, please return the enclosed coupon.

1 Guarantee is based on the claims paying ability of the issuing annuity company.

Can You Afford to Wait for the Jackpot?

ave you spent years or possibly decades accumulating money for retirement? Perhaps

you diligently put part of your paycheck into a variable annuity, mutual funds, or stocks every month. (Please note both Mutual Funds and Variable Annuities are sold by Prospectus only. Please carefully consider investment objectives, risks, charges, and expenses involved in Mutual Funds or the underlying sub accounts of variable annuities before investing. For this and other information about any Mutual Fund or Variable Annuity investment please obtain a prospectus and read it carefully before you invest.)

Or maybe you built up some wealth by increasing the equity in your home and now you are ready to scale down and cash out. Regardless of how you got to where you are today, you have probably seen the value of your investments fluctuate widely over the years. But now it’s time to think about how much risk you are willing to take with your future.

Annuitizing an investment is the equivalent of getting out of the game and cashing in your chips. Generally this means looking for a steady income and in return giving up the chance of hitting the jackpot in the future. But should you accept the risk of losing an opportunity in exchange for a secure return? The best way to start to answer that question is to look at what is going on around you.

People are living longer. The most recent figures put out by the Centers for Disease Control state that a 65-year-old person is expected to live 17.9 years. Fifty years ago that number was 13.9 years. Thus the possibility of you outliving your savings is greater now than ever. And further medical advances will only improve your chances of living a long, active life. A fixed immediate annuity may provide a steady income that you cannot outlive. (Guarantee is based on the claims-paying ability of the annuity company. The purchase of an annuity will incur fees and charges.)

Additionally, income from annuitization may possibly be taxed more efficiently and thus may give you more money to spend when compared to other ways of generating revenue. This is because part of the proceeds from an immediate annuity is considered a return of your initial investment. Therefore, it is tax-free. The “exclusion ratio” is determined by your age and the length of the payout schedule you select. (IRAs and other retirement plans might not qualify for the exclusion. Consult with your tax professional.)

Now may be the time to focus less on accumulation and more on income. For a free illustration of how an annuity may provide a lifetime of tax-favored income for you and your spouse, check off and return the enclosed coupon.

H

Space here for:

1. advertising booklets you have to give out OR

2. announce your next seminar OR

3. announce something about your business—a new service or some new growth or added personnel OR

4. other communications you might want to deliver to your prospects and clients

Page 5: Financial Advisor Newsletter

PPrrootteeccttiinngg YYoouurr HHeeaalltthh aanndd WWeeaalltthhA MONTHLY RESOURCE FOR PROTECTING YOUR ASSETS

AUGUST 2004

Homecare Service Contracts are Not LTCI

iving in your home while recovering from an illness or injury is certainly preferable to

sitting in a nursing home. And homecare service companies can often provide the care needed. Unfortunately, there have been cases where homecare firms offered contracts that caused some seniors with poor health to think that they were getting much more.

A homecare provider’s services may include visiting aides who cook, clean, bathe, and help with other activities. Or the company might give you access to special care by a registered nurse or physical therapist. And for an upfront fee, the contracts promise discounted, quality care when you need it without any medical underwriting.

The contracts do not, however, include provisions for care in a nursing facility. And when the agreements are sold by insurance agents, seniors may get the wrong impression that they are buying long-term care insurance policies. Then by the time they need nursing home care, it’s too late to obtain the proper protection.

If you or your spouse has been turned down for long-term care insurance because of advanced age or poor health, I might be able to help find a policy. In addition, there may be alternative solutions, such as a medically-underwritten annuity that could possibly provide higher than normal payouts, to meet your long-term care needs.

For an appointment to review your options on how to plan for the cost of long-term care, please check off and return the enclosed coupon or call my office.

Nursing Home Expenses Can Haunt Your Heirs

edicaid is the federal program that pays for specific nursing home expenses when a

patient’s assets are depleted and they can no longer afford to pay for their care. However, with the aging population and skyrocketing health care claims, Medicaid has cost more than Congress ever anticipated, and they want to recover their expenses. Consequently, the states that administer the program must make an effort to recover the money spent. And the families of individuals who have benefited from Medicaid may find the government knocking on their doors looking to recover its money. At the very least, a claim could be filed against the estate. Each state can use whatever means its legislature declares appropriate to collect the money owed. And some have become very aggressive. For instance at least one state can now put a lien on a surviving spouse’s home that was owned jointly with a deceased Medicaid recipient. When the survivor dies (or sells the home), the state would take its share of the proceeds first. In addition, the same state can immediately go after the life insurance proceeds that were intended to benefit a surviving spouse. And to assure that the decedents’ debts are paid, insurance companies must notify the state before death benefits are sent to the beneficiaries. What are the chances that the government will dig out from its budget problems and ease up on chasing after Medicaid money? Nobody can predict this. Therefore, you need to explore how to provide the money that you may need for long-

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Page 6: Financial Advisor Newsletter

term care expenses so that your bills don’t come back to haunt your family. There’s a good possibility that I can come up with a long-term care insurance plan that will meet your budget and future needs. All you have to do is include your age on the enclosed coupon and drop it in the mail. Then I will send you a free illustration based on the long-term costs in our community.

One Check for Long-Term Care Insurance

he need in favor of planning for long-term care becomes more evident with each

government report. One, by the U.S. General Accounting Office, says that nearly 40 percent of people age 65 will spend some time in a nursing home. Furthermore, additional studies claim that costs continue to rise and now average $55,000 a year.1

To offset the effect of these potentially devastating expenses and protect their assets, many seniors have purchased long-term care insurance policies. Some people though, have postponed making plans because they don’t like the thought of paying premiums for the rest of their lives, or they feel that the money will be wasted if they don’t go to a nursing home. If you are in this latter group, there are some alternatives for you to consider.

Pre-Funded Plan You could make a one-time payment and the

long-term care policy would be paid up for life. Or you could buy a policy that would be paid up for a specified term, such as 10 years, with no additional payments required.

Combination Life/Long-Term Care Plan Life insurance policies with long-term care

insurance built in will let you make tax-free withdrawals from the death benefit to pay for your long-term care. (Note that withdrawals will decrease the policy’s cash value and death benefit). Any portion of the death benefit that is not used would be left to your heirs. The plan can cover you or you and your spouse. Generally, a

1 http://moneycentral.msn.com/articles/insure/basics/6181.asp

single premium is used to fund the policy, and once inside the life insurance policy, the cash will grow tax-deferred.

And with additional planning, the death benefit can be removed from your taxable estate.

You Might Not Need Any Cash Do you have an older life insurance policy

with a substantial cash value? You might be able to do a tax-free exchange (section 1035) into a life/long-term care policy without spending any money out-of-pocket. But be sure to understand the surrender charges on your old policy and the new one. Another choice would be a partial, tax-free surrender for the amount of money that you had put into your old life insurance policy. You could then use that cash to buy a standard long-term care plan.

You don’t need to pay annual premiums to have long-term care protection. For more information on the alternatives to writing one check, or even many checks, and have coverage for life, check the enclosed coupon.

T

Space here for:

1. advertising booklets you have to give out OR 2. announce your next seminar OR 3. announce something about your business—a

new service or some new growth or added personnel OR

4. other communications you might want to deliver to your prospects and clients

Page 7: Financial Advisor Newsletter

SSeenniioorr IInnvveessttmmeenntt SSttrraatteeggiieessA MONTHLY RESOURCE FOR THE SENIOR INVESTOR

AUGUST 2004

Are Subadvised Funds Eating Into Your Returns?

hen you invested in your mutual fund, you may have assumed that the company you gave

your money to would actually manage your hard-earned dollars. But that may not be the case.

Fund managers can either be in-house employees or subadvisors who sell their services to one or more mutual fund companies. One approach isn’t necessarily any better than the other; however, you should know which one you have and what the differences are.

Fund companies hire subadvisors with the intention of getting top talent without having to pay big salaries. And if the subadvisors’ performance lags, they’re easier to replace than a whole in-house team. Nonetheless, a firm might be too quick to dump poor-performing subadvisors, thereby missing out on managers’ expertise.

Subadvisors are often used to fill a special niche for a fund company. For example, a company that wants to offer a new international mutual fund may hire a well-known subadvisor who has experience in world markets to run the fund.

The downside is that fees can possibly increase when subadvisors are used since the company has to pay the subadvisor and make money for itself. And there have been cases in which investors could have avoided paying more for the capabilities of a subadvisor by investing directly in that manager’s own fund. On the other hand, not all subadvised funds are overpriced. [1]

Some fund companies use their own managers to oversee actively managed funds but hire subadvisors to run their index funds. Other firms do the opposite. Overall though, the use of subadvisors has increased in recent years and that trend is expected to continue.

Every extra percentage point of expenses can make a large difference in your fund’s return, so it’s important to compare costs. For a free evaluation of your mutual funds to see if any are run by subadvisors who also manage similar, lower-cost funds, please check below and include the names of your mutual funds. (Mutual funds are sold by prospectus. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about any mutual fund investment please obtain a prospectus and read it carefully before you invest.)

[1]

http://news.morningstar.com/doc/article/0,,5202,00.html

Is Your Mutual Fund Giving You the Full Story?

our mutual fund company sends you statements every quarter that may include your account’s

1-year, 5-year, and 10-year average annual returns. But do they actually tell you how much your account has earned, or lost, since the day you opened it? And if they don’t, should you even care?

Personalized account performances are a rarity. In fact, only about 10% of the financial institutions that manage retirement plans give investors lifetime return data for their accounts (WSJ, January 17, 2003, Missing Link for Mutual Funds?). And without this information, it is almost impossible to figure out if you are making money or not.

Personal rates of return take into consideration: Redemptions Asset allocation Fund performance The effect of exchanges between funds

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Page 8: Financial Advisor Newsletter

Additional contributions (including reinvested dividends)

Why shouldn’t fund companies make it easier for you to see how your accounts have done since you invested your first dollar? Maybe they’re worried that investors will become frustrated and sell their funds. Or maybe it comes down to the expense and effort of providing such important information.

If you would like to understand how your mutual funds have performed since you’ve opened the accounts, please check below to schedule an appointment.

Mutual Funds are sold only by prospectus. Please consider investment objectives, risks, charges, and expenses before investing. For this and other information about any mutual fund investment please obtain a prospectus from your investment representative or from the fund provider free of charge. Please read it carefully before you invest.

How to Leverage Your Annuity for Your Beneficiaries

f you own stocks or mutual funds that have stocks, there’s a good chance that the values are less than

they were a few years ago. And your choice is to either sell or hold onto them. But if you have a variable annuity that has been hit by the market’s downturn, you may have another option that could benefit your heirs.

Your annuity company promises to pay your beneficiaries at least the amount you have invested in the contract, even if that is greater than the contract’s value when you die. Some issuers also offer a death benefit that goes up each year by a specified percentage. Others fix the death benefit at the highest value the account reaches on any contract anniversary date.

For instance, suppose you had invested $100,000 in a variable annuity with an escalating death benefit tied to anniversary dates. And at one such date the account had risen to $125,000, but now is worth $75,000. Your beneficiaries would receive at least $125,000. There is, however, a way to possibly increase that amount.

A tax-free, partial exchange from one annuity to another will let you lock in some of the death benefit on the first contract and obtain an additional death benefit with the second.

In the above example, if you removed $70,000 from the original contract, you would still have $55,000 in life insurance ($125,000 less $70,000). Next, you invest the $70,000 in a second annuity, which includes a $70,000 death benefit.

If both accounts grow by 6% per year for five years, the death benefit for the first annuity will remain at $55,000 since its cash value will have risen to only $6,700. However, the second annuity’s cash value and death benefit will have increased to $93,676. And your beneficiaries would receive $148,676; $23,676 more than if you had left the money in only one account.

This concept may not work for all individuals and might not be allowed with some annuity contracts. Also surrender charges and other restrictions need to be considered. Nevertheless, it could possibly be an ideal method to substantially increase the amount of money your heirs will receive.

To determine if this strategy is suitable for you, click below to schedule an appointment. Please include the name of your annuity company, date of the contract, amount invested, current value, and your date of birth.

Both Mutual Funds and Variable Annuities are sold only by prospectus; please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about any investment in Mutual Funds or Variable annuities and its underlying sub accounts please contact your investment professional or the fund / insurance company to receive a prospectus free of charge and read it carefully before you invest. Funds must go directly from one annuity to another to receive tax-free treatment.

I

Space here for:

1. advertising booklets you have to give out OR 2. announce your next seminar OR 3. announce something about your business—a

new service or some new growth or added personnel OR

4. other communications you might want to deliver to your prospects and clients

Page 9: Financial Advisor Newsletter

PPrrootteeccttiinngg YYoouurr IIRRAAA MONTHLY RESOURCE FOR IRA OWNERS

AUGUST 2004

Use a CRUT to Keep Peace in Your Family and Help Your Favorite

Charity

ost people generally leave their IRA directly to their spouse. The surviving spouse can roll

it over into his or her IRA, take distributions, and leave the balance to the children. The kids will then have the opportunity to stretch out the required payments, as well as the tax deferral, over their own lifetimes. But what if you have children from a previous marriage who don’t get along with your new spouse? Would the children get cut off after you die, thereby upsetting your intention to pass whatever remains of your IRA to them?

One way to solve this problem is to leave part or all of your IRA to a charitable remainder unitrust (CRUT). The CRUT would make pre-determined payments (a minimum of 5%) to your surviving spouse for his or her life span. After your spouse dies, your children would receive payments for the rest of their lives. When they die, whatever remains in the CRUT would pass to your favorite charity.

There is no income tax liability as long as the CRUT is funded after your death. Nor are the earnings within the CRUT taxable. However, the payments made to your surviving spouse and children will be taxed to them as ordinary income.

The CRUT must allow for at least 10% of the trust’s present value to pass to the charity. The number is calculated as if your beneficiaries were to live an average life span. For some heirs, this may be a modest price to pay for the benefits of longer tax deferral and an estate tax reduction.

After the last income beneficiary dies, the CRUT ends and the remaining funds transfer to the charity. Some investors have used an irrevocable wealth replacement trust to replace the assets that

would go to the charity and provide a tax-free bequest to other beneficiaries.

If you would like to learn more about how to provide for your beneficiaries and make a gift to charity, please check below for more information.

Missed Your RMD? Better Get Out Your Checkbook

very so often bills don’t get paid or paperwork is overlooked. Statements can get lost in the

mail, you might be on an extended trip when the payment is due, or you may have forgotten to send in the forms. Generally the company will just tack on a late fee or overlook the delay. However, the IRS is not so generous, especially when it comes to your required minimum distributions (RMD).

IRA owners must start taking RMDs no later than April 1 of the year after they turn 70½. And by each December 31 thereafter, they must do the same. Failure to follow these rules can be very expensive.

IRA custodians are obliged to tell the treasury department if they are subject to RMD, they do not, however, have to report the amount. If you miss taking a distribution or take one that is less than required, you must take the missed distribution and pay a 50% penalty on that amount. And since distributions do not get special consideration as dividends or capital gains, they are considered ordinary income. Therefore, they are assessed at your highest federal and state tax rate. This means that the penalty and income tax could possibly total more than 85% (assuming a combined federal and state tax of 35% plus the 50% penalty).

I can help you sort through the complex RMD regulations and calculate the amount that you must withdraw from your IRAs this year. Just check off below, or call my office.

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YOUR NAME, PUBLISHER

Page 10: Financial Advisor Newsletter

Precautions to Take if You Live in a Community Property State

f you live in a community property state, your spouse is generally entitled to half of the assets

that you accumulate during the marriage. And it does not matter who earned them. What’s more, this right can even continue after your spouse’s death and impact the ultimate beneficiary of your IRA.

Each of the nine community property states has regulations that could determine what you need to do to safeguard your IRA beneficiary designations. For example, you might need to obtain your spouse’s written consent to pass more than half of your IRA to someone other than him or her. And in some states, if he or she were to die before you, the situation could become more complex.

For instance suppose that a married couple decides to name their son as the beneficiary of the husband’s IRA. The wife dies first, and the husband wants to remove the son as the beneficiary. It’s quite possible that he may only be allowed to change the beneficiary on his half of the account, and his deceased wife’s portion must retain the original designation.

On the other hand, the community property state’s law could require that the nonparticipating spouse’s half of an IRA pass by the provisions in his or her will. Thereby overturning the beneficiary designation listed on the account.

Depending on your state’s laws, you and your spouse can take steps to avoid such problems. One possibility is to give each other the power as the survivor to change IRA beneficiaries. Another potential idea is to include a provision in your wills that specify that your IRA is to pass according to the account beneficiary designations and not under the will.

There are many scenarios that you and your attorney should consider when naming IRA beneficiaries, particularly when residing in a community property state. If you would like to review or update the beneficiaries on your accounts, check below.

Note: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.

Are Subadvised Funds Eating Into Your Returns?

hen you invested in your mutual fund, you may have assumed that the company you gave your

money to would actually manage your hard-earned dollars. But that may not be the case.

Fund managers can either be in-house employees or subadvisors who sell their services to one or more mutual fund companies. One approach isn’t necessarily any better than the other; however, you should know which one you have and what the differences are.

Fund companies hire subadvisors with the intention of getting top talent without having to pay big salaries. And if the subadvisors’ performance lags, they’re easier to replace than a whole in-house team. Nonetheless, a firm might be too quick to dump poor-performing subadvisors, thereby missing out on managers’ expertise.

Subadvisors are often used to fill a special niche for a fund company. For example, a company that wants to offer a new international mutual fund may hire a well-known subadvisor who has experience in world markets to run the fund.

The downside is that fees can possibly increase when subadvisors are used since the company has to pay the subadvisor and make money for itself. And there have been cases in which investors could have avoided paying more for the capabilities of a subadvisor by investing directly in that manager’s own fund. On the other hand, not all subadvised funds are overpriced. [1]

Some fund companies use their own managers to oversee actively managed funds but hire subadvisors to run their index funds. Other firms do the opposite. Overall though, the use of subadvisors has increased in recent years and that trend is expected to continue.

Every extra percentage point of expenses can make a large difference in your fund’s return, so it’s important to compare costs. For a free evaluation of your mutual funds to see if any are run by subadvisors who also manage similar, lower-cost funds, please check below and include the names of your mutual funds. (Mutual funds are sold by prospectus. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about any mutual fund investment please obtain a prospectus and read it carefully before you invest.)

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Page 11: Financial Advisor Newsletter

IInnccoommee iinn RReettiirreemmeennttA MONTHLY RESOURCE FOR PROTECTING YOUR INCOME

AUGUST 2004

Use Bond Downgrades to Increase Your Income

nterest rates on bonds are the lowest they’ve been in decades (http://research.stlouisfed.org fred/

data/irates/gs10). Ten-year Treasuries are paying about 4.5% and new 10-year AAA corporates are down to less than 5.5%. As a result, some bond investors are reluctant to buy long-term for fear that potential rising interest rates might reduce their returns. But if you’re willing to look at corporate bonds that may get downgraded by one of the major rating agencies, you might earn some extra money for taking the additional risk.

Corporate step-ups are bonds that include a hedge against a ratings downgrade by an agency such as Standard & Poor’s, Moody’s, or Fitch. If a rating reduction should occur, it will trigger anywhere from one-quarter to a full percentage point of additional income for bond investors. (Watch Your Step, Forbes November 11, 2002.)

And it’s not just the companies that issue junk-bonds that offer investors these incentives. Many investment-grade companies have experienced decreasing earnings as well and are having difficulty selling new bonds. Therefore, they’re also looking for ways to raise cash.

Just as you should with any other bond, you will want to make sure that the issuer of a step-up will be able to meet its obligations and not go into a default or bankruptcy. Furthermore, there is always the concern that the extra interest expense from a downgrade could cause the borrower additional financial problems at exactly the time when they are least able to deal with an associated loss of investor confidence.

For information on corporate step-ups and how they might increase your income, please check off below.

Even with the New Tax Law, Munis Can Still Look Good

ongress recently reduced the Federal income tax rates, and with an election coming up there’s

always the possibility that other tax breaks may surface. So does this mean that you should forget about investing in tax-free municipal bonds? Before you answer that question, understand the budget problems facing state and local governments throughout the country. If you look close, there may be a silver lining for you hiding in their dark cloud.

Various states and municipalities have had to issue more bonds in order to generate badly needed revenue. This additional supply of new bonds has caused many prices to drop. Furthermore, some issuers have had their credit quality downgraded, which forced them to offer higher yields. The increased supply, lower prices, and higher coupon rates have reduced the before-tax spread between municipal bonds and equivalent maturity Treasury bonds.

For example, in 1997, the average ten-year, AAA muni yielded 75% of that of a similar Treasury bond.1 As of November 2003, the muni/treasury ratio had risen to 85%.2 And when you consider the after-tax returns, individuals in higher tax brackets may find that tax-free municipal bonds may possibly be an attractive alternative to Treasury bonds.

I can send you a complementary evaluation of how a tax-free municipal investment might possibly provide you with a higher yield than a Treasury bond. Please indicate your tax bracket on the enclosed coupon and return to my office.

1 Forbes, October 13, 2003, page 134 2 WSJ, 11/05/03

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YOUR NAME, PUBLISHER

Page 12: Financial Advisor Newsletter

How to Build a Future Income Stream and Leave a Tax-Free

Legacy

aving enough money to live comfortably for the rest of their lives is the number one concern of

some seniors. And many also want to leave something significant to their children and grandchildren. But with life expectancies going up each year, some investors are fearful that they might have to sacrifice one goal for the other. There may, however, be a solution with universal life insurance (UL). (Ability to pay is based on the claims-paying capacity of the life insurance company. Fees, such as surrender and loan charges will apply. Not government or FDIC insured.)

First, you loan money to a new or existing UL policy for a series of years. The amount and the number of years required will depend on your age, health, and how much you want to leave to your family. Thereafter, depending on the policy’s returns, you might not have to contribute any additional money.

You would then be able to withdraw your contributions without paying any income tax since it is considered a repayment of the loan you made earlier. Furthermore, the cash left in the policy will continue to grow tax-free and could be taken out as a tax-free loan in the future. The money will not have to be repaid until you die. It and any accrued interest will be deducted from the death benefit which will pass income-tax free to your family.

The strategy can vary based on how many years you want to pay into the policy and the end result you choose: either maximum possible income in the future or the highest death benefit. Nevertheless, it is a unique method to provide retirement income and leave a meaningful bequest to your family.

For a personalized illustration of how a life insurance policy can be built around your individual needs, please check off and return the enclosed coupon to schedule an appointment.

Use Those Old Life Insurance Policies to Increase Your Return

o you own any old life insurance policies that have outlived their usefulness? Maybe you

have a universal life policy that has very little cash value. Or perhaps your term policy is about to

renew, but you know that the new premiums will be out of reach. And of course, there’s always the possibility that you no longer need the insurance. How would you like to get some tax benefits from those policies that could possibly translate into more income for you or your beneficiaries?

The IRS will allow you to make tax-free transfers of life insurance policies into an annuity. You may think that there couldn’t be much of a benefit if there’s not much cash value in the policies. But for tax purposes, the amount transferred is actually your cost basis less dividends and cash value.

For example, let’s say that you are considering investing $100,000 in an annuity. And you own a life insurance policy that you have paid $25,000 into over the years that now has a $2,000 cash value. You want the annuity to provide income sometime in the future and no longer need the life insurance.

A 1035 exchange on the life insurance to the annuity could increase the annuity’s cost basis from $100,000 to $123,000 ($100,000 + $25,000-$2,000). This means that when you or your beneficiaries make withdrawals, an additional $23,000 of growth will come out tax-free.

For a free analysis to determine if transferring a life insurance policy into an annuity can provide a higher income for you or your beneficiaries, please return the enclosed coupon.

Note: Loans against the life insurance policies could make part of the exchange taxable. Surrender charges, fees, and other expenses may be applicable. Read the prospectus and contract carefully before making an exchange or investing money.

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Space here for:

1. advertising booklets you have to give out OR 2. announce your next seminar OR 3. announce something about your business—a

new service or some new growth or added personnel OR

4. other communications you might want to deliver to your prospects and clients