Always Say Never

February 7th, 2017 No comments

Sometimes dealing with the details of life insurance can be overwhelming for professionals who lack expertise in this particular market. I’ve written over and over again that it is more complex than most people realize. I can talk until I’m blue in the face about bringing this up for conversation while highlighting the dramatic mutual benefit to advisors and their clients. Only a minority will get on board.

I can’t give up on trying to urge advisors to do something which is so easy and so benign that they won’t fight it; something with such an outsized benefit that it would be silly not to layer it into every conversation. I think I have settled on something with a threshold so low it is a non-issue.

When you have the opportunity to do so, don’t ever, ever, ever let a client surrender or lapse a life insurance policy without talking to you first. I don’t care if you are the estate planning or business attorney, the CPA, the trustee, the family office, the non-profit of choice, the financial advisor or the neighbor across the street. There is too much at stake and very few people realize it.

What do the numbers look like? I have found statistics which state there are roughly 280,000,000 policies in force in the US. The annual lapse/surrender rate is historically around 4% (a little lower for permanent polices and higher for term policies). That’s over 10,000,000 policies a year which fall off the books one way or another. Other statistics state that over a million of them are on seniors 65 years or older. Purportedly, over $100 Billion of face amount lapses on just the seniors. Given this, I will simply say millions of policies lapse annually with billions of dollars of death benefit and trust no one argues with me.

Why does this matter and why should you never ever let a client lapse or surrender a policy without running it by you? Here’s why:

  • for your senior clients, many of these policies could qualify for a life settlement
  • for the millions of permanent, cash value policies, essentially every one of them is in either a gain or a loss position

Why does this matter?

  • for those qualifying for a life settlement, meaningfully more money may be available than by simply surrendering or lapsing, sometimes dramatically more
  • for the permanent polices in a gain position, your clients need to understand the tax consequences before surrendering or lapsing as there may be ways to reduce, eliminate or defer the taxes
  • for permanent policies in a loss position, though a “loss” in a life insurance policy is not generally deductible, there are effective ways to salvage the loss, shelter gain or take future loss

I have been involved first hand with bringing millions of dollars of value to clients who were on the verge of throwing the value out the window. This is all cleanly above board with no games or risk whatsoever. It follows all legislation and tax code. Not taking advantage of what is plainly offered is like selling an investment at a loss or paying thousands of dollars in mortgage interest and not telling your accountant. It’s like throwing artwork in the garbage and not realizing it was worth thousands, if not millions, of dollars.

You would never do any of these things. You would never let any of your clients do these things if you had any ability to make them aware. If you did, your clients would be pissed at you. In the meantime, your clients are slowly becoming aware of these issues and opportunities one way or another and they are crediting their advisors who are keeping them in the loop and delivering the value.

Untold millions of dollars in tax savings alone are being flushed down the crapper every year. Many millions more are lost in unrealized settlement opportunities. When I try to get people to listen, they think I am being “salesy”. Damn my predecessors in this industry! I understand the knee jerk reaction and I’m guilty of it myself. There have been a number of times I reflexively rejected a “sales pitch”, whether on the phone, through an email or in a store, only to eventually listen and realize it was objectively a better deal and I’ve been needlessly wasting money or inconveniencing myself for who knows how long.

Once again, never ever surrender or lapse without examining the details. I can bring you the details and examine them for you. If it’s a settlement candidate, we’ll talk process and numbers. If the policy is in a gain or loss position I will clearly detail the numbers and the options.

It’s so simple. Why wouldn’t you? Seriously!

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Dealing with Potential Estate Tax Change from a Life Insurance Perspective

January 31st, 2017 No comments

I rarely see someone pass up an excuse to not buy or to drop life insurance.  The talk about possible estate tax repeal is certainly one of those current excuses.  Life insurance is something most consumers feel is a need more than a want.  Without being forced into it by responsibility, a contractual obligation, etc, people are not generally lining up to buy it.  It is clearly something which is usually sold.  Rational people will differ regarding this as a reasonable perspective. For full post, click here…

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An Understandable Life Insurance Analogy

December 22nd, 2016 1 comment

There is such a lack of understanding about how life insurance actually works, not conceptually, but really works, that sometimes it is difficult to have a meaningful conversation because you have to back up so far to establish a point of commonality that it is difficult to do so.  Even when people understand that they don’t fully understand it, they still think they have a fundamental, base level understanding but even that is generally wrong.  It is not easy to destroy a foundation that someone believes is sound. For full post, click here…

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“Salvaging Loss in a Life Insurance Policy” Update

November 16th, 2016 No comments

Last month I wrote about the possibilities of salvaging basis on underwater life insurance contracts by utilizing annuities. The discussion included two different aspects of potential planning opportunities.

The first is the common practice of doing a 1035 exchange from a life insurance contract to an annuity. For policies in a gain position, this allows the gain to be deferred. For policies in a loss position, this may allow the salvage of the basis rather than wasting it. The remaining cash value exchanged into an annuity may appreciate tax free. For full post, click here…

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Success Story: Salvaging Loss in a Life Insurance Policy

October 6th, 2016 No comments

An attorney brought a case to me which was typical in many respects.  There was a portfolio of policies on multiple family members.  Some policies had recently failed and, among the balance of them, some were holding their own and others were rapidly falling apart.

I want to focus on the two policies on Dad.  One policy was projected to lapse in a year and the other in about 5 years.  Thsuccess-stories-logoey are currently burning through roughly $5,000 a month in cash value.  If only I had been brought in a couple of years earlier I could have saved them six figures in lost dollars.  None-the-less, late is better than never.  One policy has surrender value of $157,000 and a basis of $14,000 so the gain is  $143,000.  Another has a surrender value of $46,000 but a basis of $167,000 so there is a “loss” of $121,000. For full post, click here…

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Success Story: Managing Life Insurance – What does that mean?

September 21st, 2016 No comments

Sometimes people ask me what I mean when I say life insurance needs to be managed over the duration of the contract.  Most think that means making sure the premiums are paid but, while obviously important, that’s not really it.

Making sure contributions to a policy are sufficient given a decades long reduction in the interest market is something I talk about incessantly but there is so much more to it.  Here is a very simple example:success-stories-logo

An advisor I work with brought me the policy on his own life. It turned out to be a traditional whole life contract with a well-known carrier.  There was no issue with the company but the policy was deteriorating due to the loan it was carrying.  I don’t recall if the loan was a result of actually pulling money out of the contract or if the loan was created by the policy “auto loaning” itself money to pay premiums which weren’t paid out of pocket.  It doesn’t really matter.  We can even assume the policy owner funded the contract as originally proposed and a sales ledgers might have even shown he could withdraw money with no ill effect. For full post, click here…

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Skyrocketing Premiums

September 7th, 2016 No comments

Recently I read the August 13, 2016 New York Times on-line article “Why Some Life Insurance Premiums are Skyrocketing”. It sounded sensational enough to get my attention and there was a glint of a good message and it made a number of valid points but, based on what I understand about the market, it was also somewhat misleading. The misleading aspect of it centers on the purported cause of the skyrocketing premium increases. For full post, click here…

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Oh, the Humanity…

August 11th, 2016 No comments

It’s time for another telling of an old story. Over the course of my career I have seen an evolution in awareness relative to issues with life insurance policies. Even though life insurance policies have been “under performing” since the interest rates started falling in the eighties, during presentations a decade or more ago (twenty years into sinking interest rate markets and dividends) when I asked an audience of professionals how many of them had dealt with clients facing these issues, very few hands went up, often times none. Of course their clients’ policies were suffering but they and the policy owners simply weren’t aware of it at that point. For full post, click here…

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Recent Ruling Underscores Old Issue

July 7th, 2016 No comments

In my never ending attempt to convince people of facts regarding life insurance products and management, I do not hesitate to pull in firepower from those more recognized and influential than me. Recently I received an update from Leimberg Information Services which opened with the following quote from Howard Zaritsky, lead author of Zaritsky and Leimberg – Tax Planning with Life Insurance: Analysis and Forms 2nd Edition, (800 950 1216):

“This issue keeps coming before the courts; there are numerous cases in which the insured has surrendered or cancelled an insurance policy or it has been terminated by the insurer, and the difference between the insured’s investment in the contract and the amount of the discharged loans has been realized as income. For full post, click here…

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Sleight of Hand?

June 24th, 2016 No comments

A love / hate relationship.  That’s basically how I describe my relationship with the life insurance industry.  One day I witness the unduplicable benefits of a well designed and astutely managed life insurance portfolio and the next I’m called in to salvage what I can of the most recent train wreck my advisor network has stumbled across.

In an industry which has struggled for years to gain a sense of trust and credibility, I get frustrated that it continues to shoot itself in the foot on a regular basis.  Here’s a quick example of something which isn’t new but is simply what came across my desk today. For full post, click here…

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