Success Stories: A Plain Jane Policy Analysis

November 28th, 2018 No comments

An estate planning attorney introduced me to a client of his who was the trustee of her parent’s irrevocable trust that owned a $4 million dollar second-to-die policy. As is typical in these scenarios, the trustee understood very little about the insurance and her father was the one “in charge” of the policy over the years but he didn’t under-stood it much better.

To anyone who does something every day, it may be bewildering that their respective specialty is so entirely misunderstood by others. So it is with life insurance. I understand it can be a mystery to many, and in some ways it is ridiculously complicated, but I am often reminded that I can take nothing for granted when working with consumers.

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This case was as typical as an engagement can be. The $4,000,000 in death benefit was not projected to last as long and Mom & Dad were expected to last and they wanted and needed guidance.

The policy had been put in force as a single pay 1035 exchange in 1999. Just knowing that date you might surmise the new policy was a securities based variable life contract. You would be correct. Unfortunately, too many agents and advisors were chasing stock market returns and in the late nineties it was easy to show attractive alternatives to the existing policies clients had. Generally, these policies were sold under ridiculously aggressive assumptions with no real world modeling or stress testing involved. Additionally, these policies were put in force at the absolute worst possible time for a securities based product, almost immediately before the tech bubble crash, when blind monkeys throwing darts could get attractive double digit returns.

Dad had this idea that he couldn’t pay anything into the contracts now and that some day there would be a reappearing and increasing premium due. What he was thinking of was basically the increasing mortality charges of the contract that would be required annually when the cash value ran dry. Who knows where this came from but it was his reality. Furthermore, he had no idea what these numbers would be.

My simple solution was to request multiple new in-force ledgers from the carrier under much more conservative and realistic assumed returns and run to last a variety of duration’s. We also asked for all of the same at various lower death benefits. All of these scenarios were independently modeled to give them a sense for the chance of success and I calculated the internal rate of return moving forward for each and every scenario so there was an ability to compare apples to apples and to judge what would be an acceptable “deal”.

While none of this is particularly complicated or much of an in-depth analysis, it gave the family an immense sense of relief just to know they had at least some control over the destiny of their policy. Before this they were just holding their breath and thinking they were at the mercy of decisions made a couple of decades ago, market returns and what the insurance carrier would “let” them do.

Effectively there has been a meaningful shift in their understanding of what this policy is and how it works, a shift in their realization that they have input control to affect outcome and an ability to understand the results of their decisions in a measurable and comparable format.

This contract and its performance in the big picture may still be somewhat of a disappointment but the outlook and the peace of mind moving forward are a refreshing change of pace.

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Saving Money on Life Insurance – Part 2

November 20th, 2018 No comments

The real-life effects of making certain money-saving changes to your policy.

My last piece was about life insurance and pricing and hopefully left people thinking that cheaper isn’t always better. I want to expand on that. We’ll keep looking at the 50-year-old preferred non-smoking male and a $1 million indexed universal life policy run with $7,842, $8,115 and $11,360 premiums.

The Conundrum: A tiny additional bit of premium can hypothetically reduce policy expenses dramatically and subsequently allow the policy to last longer and be less susceptible to market forces. However, the lower funded policies may have a hard time actually staying alive longer than the insured individual, even if the sales ledgers suggests otherwise. For full post, click here…

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Does Your Client Want to Save Money on His Life Insurance?

November 15th, 2018 No comments

Remember that cost and price are very different things.

Certainly, almost every industry deals with the same thing but the idea of saving a buck on insurance is an entrenched ideal. Independent agents who can bring multiple offerings from various insurance carriers are exceedingly valuable but only if they understand what they’re doing and aren’t playing the spreadsheet game.

Penny wise and pound foolish is an age old axiom but just because it’s been around for a long time doesn’t mean lessons are learned. For full post, click here…

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A Life Insurance Mystery: Underwriting

November 13th, 2018 No comments

At this point, I should really stop being surprised that consumers tend to focus more on issues that aren’t particularly consequential and often ignore the most important matters. This has been reinforced recently on a few engagements.

One of these issues is underwriting, maybe the least favorite part of the life insurance process. While it’s important to do business with a strong carrier—and no one wants to pay more for something than necessary—the details of the underwriting process are a mystery to most. For full post, click here…

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Premium Financing Life Insurance in Today’s Markets

October 25th, 2018 No comments

Our clients don’t understand insurance crediting.

In the past few weeks, I’ve received more calls than usual regarding consulting and analysis for existing or proposed premium financing transactions. They’re coming from attorneys and accountants as usual, but from more family offices than ever.

Some of these calls will involve deep analysis, and in some situations, I’ve been able to have the proposals emailed to me for a quick once-over. While I’m committed to entering every situation with an open mind and free of prejudice, sometimes, at a glance, the result is self-evident. For full post, click here…

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Time Bombs of Yesteryear and Today

October 16th, 2018 No comments

This past month, there was an article on the front page of a major publication about universal life (UL) insurance policies. The article included a statement that many people “… are sitting on a ticking time bomb, and most probably aren’t aware of it.”

This reminded me of another article that said, “Today, in this period of very low interest rates, many are sitting on time bombs… Yet many are unaware…” Guess when this period of very low interest rates was? 2002! How many times since then would someone have killed for a 2002 interest rate? For full post, click here…

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Life Insurance Analysis: an Art or a Science

October 8th, 2018 No comments

DECK: Is it worth taking an undue risk to save a few bucks? 

Earlier this year, I was introduced to a policy owner by his estate-planning attorney regarding the evaluation of a survivor life policy on himself and his wife.  It was a $1 million 1995 universal life contract that was underfunded due to decades of decreasing crediting rates.

Fundamentally, he wanted to know how the policy was doing, what it would take to firm it up and if the recommendations he’d received three years earlier from a nationally recognized life insurance consultant were correct. For full post, click here…

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Letters Of Explanation – Policy Funding Options

September 24th, 2018 No comments

Dear Mr. Client:

It was a pleasure to speak with you last week and I appreciate the opportunity to review your life insurance policy. Per our discussion, this note is intended to be a follow up summary of our conversation. If there is any additional information you were looking for which I have forgotten to include, or if you have questions about what I have written, please do not hesitate to get back with me.

Your $1,000,000 was originally an Alexander Hamilton policy which was acquired by Jefferson Pilot and subsequently merged with Lincoln Financial. Though I do not have the original sales ledgers, the original premium of $13,750 was likely calculated to maintain the policy indefinitely given the interest crediting and expenses assumption in play at the time the policy was issued in 1995.

Since that time interest rates have come down significantly; probably 300 basis points or more. For full post, click here…

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A Life Insurance Carrier Offer Your Client Can’t Refuse?

September 18th, 2018 No comments

Last week, I was contacted by an agent with whom I’ve had a long-term relationship regarding a question from a client. The client is a gentleman who’s the surviving insured on a $1 million second-to-die policy and he’s very old. His policy has little cash value and it may or may not last as long as he will without throwing a lot more money at it. In fact, next year the policy has no cash value and it’ll lapse in four years.

What initiated the call was something the client received from the carrier. It was an “Enhanced Cash Surrender Value” opportunity. The bottom line is that the insurance carrier is offering the policy owner a chance to surrender the contract for more money than the cash surrender value and, in this case, more than the gross policy cash value. For full post, click here…

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Letters of Explanation: Donating a Policy to Charity

August 16th, 2018 No comments

Good Afternoon:

It is my pleasure to be introduced to you.  Your accountant referred you to me because of the frustrating, yet required process when donating a life insurance policy to a non-profit.  I understand it is not pleasant to hear you won’t be getting the deduction you were expecting for your policy donation to the school but the process I will bring you through will get you everything you are entitled to.

Unfortunately, your cash value is not the number the IRS looks at when taking donations into account.  To think about it in a simplistic way, they aren’t eager to let you take a deduction for something you have never paid tax on.  In other words, the special rules which allow your life insurance cash value to grow tax free is what is preventing you from fully deducting that same cash value. For full post, click here…

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