The sprint, the marathon and the maximum efficient contract
By Rich Jarvis
When it comes to making a great difference, we have a choice. Choosing to do what is best for the client is one of the real keys to success and what makes us all winners.
The first time I ran a half marathon was in a 70.3 Ironman triathlon. In this particular race, you swim 1.2 miles, bike 56 and run 13.1. It truly was an incredible feeling crossing that finish line after five long, grueling hours. The accomplishment required consistent preparation and dedication. I am not sure if it was because of the effort put into it, the triumph over my circumstances, or sheer insanity, but I fell in love with the sport. Today, four of my five children are triathletes and train throughout the week. It has become a wonderful family activity in which we participate regularly.
In 2009, Jamaica's Usain Bolt broke the world record in the 100 meter sprint, crossing the finish line at 9.58 seconds and becoming the fastest man on the planet. The power and speed he displayed is absolutely amazing and inspiring.
Both of these sports have rules and strategies. Both sports can be awe-inspiring and produce extraordinary accomplishments. However, the strategies of running these different races are not the same. The sprint is about getting off the blocks and gaining the fastest speed in the shortest amount of time. The marathon is not necessarily about who gets started the fastest, but rather who can maintain the fastest pace for the longest amount of time.
When it comes to finances, which mentality do most of our clients have? Sprint money or marathon money? The reality is that they can have a combination of them both.
Several years ago, a colleague shared with me an analogy using the sprint and the marathon as it related to money and the financial world that he received from a close friend. He said he had found a way they could easily win the marathon every single year. "It's a mathematical equation," he said. He took the 26 miles of a marathon and divided that by the 100 meters. Using the most recent data, if Usain Bolt can run 100 meters in 9.58 seconds, we can just have him run the marathon. He would be finished in no time. In fact, by running his 100 meter pace, he could actually cut the current marathon world record time almost in half.
Although this idea looks good mathematically and may even make sense on paper, the reality is that it would be impossible. After 100 or 200 meters, the runner is done ... spent ... finished. They would have to recover for some time before they could obtain that level of performance again. There is so much more at work than what appears on the surface. The same is true in the world of finance. Math is not money, and money is not math — there is so much more than a linear projection forward when it comes to the reality of how our money works.
Many times, people look at their retirement money as though it is sprint money. With this mentality, they focus primarily on the rate of return they can get right now and they constantly look to see how they are doing in relation to those around them. The question becomes how they can get out of the gates as fast as possible and cross the finish line in the least amount of time. Keeping with the analogy, if they can do 100 meters in under 10 seconds, it won't take long at all to run the 26 miles of retirement — or so they think.
In contrast, the marathon mentality is a long-term commitment and approach. Running this race is going to take a long time — hours versus seconds. Using the Olympics as an example, you can't determine the winner of the race by who leaves the stadium first. In addition, the strategies in running the race are much different than that of a sprint. You must manage your resources wisely if you want them to last to get across that finish line healthy and strong.
The maximum efficient contract
Many people in the life insurance industry are familiar with a MEC, or modified endowment contract. Don Blanton introduced me to another type of MEC, sometimes known as a "maximum efficient contract." This type of contract is a properly structured permanent life insurance policy with the maximum amount of premium for the least amount of face, or death benefit. This contract is funded up to but not over the MEC limit. It isn't as much about the type of permanent life insurance as it is funding the contract to this maximum limit.
Conflicts of interest
When structuring such a contract, I believe it's important to realize that there is a conflict of interest in the industry. As a life insurance producer, I am compensated directly by how much insurance I sell. If this is the case, I will be compensated at the highest level when 100 percent of the premium is paying for insurance.
However, if I structure a maximum efficient contract, it is quite different. I am actually creating a policy that has the least amount of insurance for the most amount of premium without crossing the MEC line. In this case, a much smaller percentage is paying for insurance with the difference going towards paid up additions, which is reflected in cash values. With this type of contract design, in comparison to straight life insurance, it is the least amount of commission for the amount of premium contribution. The marathon and the maximum efficient contract
Although several financial vehicles can work, a maximum efficient contract would be a great example of marathon money. With the marathon, it's about the steady athlete, the one who does the right thing over and over for long periods of time. They are conscious about wasting resources and spending energy in areas that are unproductive. The athletes maintain their pace and steadily increase their speed while protecting the finish. If the client wants to be the first out of the stadium, this type of strategy simply isn't going to be the right fit. Many other financial vehicles are surely built to come out of the stadium first during those initial years. However, this marathon is not won during the first mile, nor the first year. It's not how you leave the gate, it's how you finish.
What benefits do you want?
The benefits of properly structured permanent life insurance may include tax deferred growth, tax free distributions, competitive returns, ability to make high contributions, disability protection, potential creditor protections, ability to use money as collateral, no loss provisions, guaranteed loan options with unstructured loan payments (meaning we set the terms, when and if we pay it back), liquidity, use and control of the money. In addition, there is no other financial vehicle that guarantees that what the client wants to happen will happen.
A maximum efficient contract is structured in a way to get the most of all these benefits to the maximum limit allowable by law. The question then becomes, "How much marathon money do you want to put into a position that would get all of these benefits to the maximum limit allowable by law?" The answer: As much as you possibly can.
Structured properly, there is no other financial vehicle that provides the same level of benefits as does permanent life insurance. The maximum efficient structure gives the contract the ability to reach the fastest speed possible while protecting its endurance until the finish.
When it comes to making a great difference, we do have a choice. Whether it is sprint money, marathon money, or a combination of the two, there are many options available. Choosing to do what is best for the client is one of the real keys to success and what makes us all winners. What do you think?