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.

Why then would his policy be suffering?  The policy had an annually decreasing death benefit and would continue to decrease indefinitely.  The reason was that the loan and accumulated loan interest were compounding and outpacing any growth of the base policy.  Once again, he may have originally been shown that he could terminate premiums or take money out and not have to pay loan interest so why is the contract falling apart?

Back when he put the policy in force, the divided rate was 10% and the loan interest rate was 8%.  The arbitrage was positive and though the loan would grow, it could be managed by a growing policy.  However, by the time he brought the policy to me the dividend rate was less than 6% and the loan rate was still 8% so the positive arbitrage had disappeared.

The policy needed an infusion of cash to perform reasonably.  An evaluation of alternative polices was off the table due to his lack of insurability.  Where could we go?

I looked at the dividend options available in the policy and what dividend option was currently in effect.  It turns out it was on “Dividends Purchase Paid Up Additions”.  What this means is that any dividends from the policy would go to buying extra insurance while the premium continued to be paid by loans and increase the size of the loan.  But why buy insurance crediting less than 6% while increasing the size of an 8% loan?  It may have been reasonable to set the policy up like that at the point of inception but, with a significantly reduced dividend rate, it wasn’t anymore.

What we ended up doing, after ordering multiple in-force ledgers under a variety of funding parameters and dividend options, was to change the dividend option.  We changed it so that the dividend would be applied to premiums and paying loan interest and even reducing the loan principal if there was any leftover; anything to keep the loan from growing.  What we saw was amazing.  Rather than a deteriorating policy with a continuously decreasing death benefit and cash value and a growing loan, we turned it around into a healthy policy with a long term growing death benefit and cash value with a shrinking loan.

Make sense?  If you had a 5% home mortgage and were sure you could make 10% in the market, you may decide to take extra cash flow and invest it rather than pay down your tax deductible loan.   However, if you were in safety of principal investment making a percent or two on your money, you may choose to take extra cash flow and pay down your mortgage more quickly.

This was accomplished without a single dollar of cash flow being utilized for the policy.  It was an option there for the taking with no cost and a fantastic upside.  It may have even kept the policy from cratering with an income tax consequence on phantom gain.  Who knows why the agent never mentioned it.

That’s what I mean, in part, about managing a policy.

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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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Not an Expert on Life Insurance? Call One!

June 2nd, 2016 No comments

Through experience, an accountant relationship of mine has learned to pass just about anything related to life insurance by me when he sees any clients dealing with something.  Usually this is initially a simple phone call on a generic basis but sometimes includes shooting me documents with client information redacted.

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He had one older business owner who was in the process of selling out to other shareholders and a couple million of term insurance policy owned by the company was being transferred out to him.  His plan was to convert $500,000 and gift the policy to a charity.  He intended to let the remaining $1,500,000 lapse.

There is only one thing that should come to mind in a scenario like this: Life Settlement.  I had no idea if he would be interested but why would one ever choose to not pick up the phone to make a call to discuss? For full post, click here…

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StressTesting a Premium Financing Deal

May 10th, 2016 No comments

I have to admit I am sometimes cynical of the strategy du jour in the life insurance sales and marketing world. While the industry is incredibly innovative regarding ideas and strategies and brings amazing opportunity to many consumers, sometimes the original, sound idea is bastardized into something which bears little likeness to its namesake.

This is especially frustrating for those in the market who play on the straight & narrow, even those on the cutting edge who have their client’s best interests at heart. None-the-less, it is not difficult to understand the temptation to push an idea to its limits and to over market and even misposture what it is and can accomplish. For full post, click here…

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Life Insurance and Fidelity Charitable

April 14th, 2016 No comments

As is often the case, we learn the most when something goes wrong. Recently, I was working with an advisor who has a client with a foundation, or at least that is what we thought. The foundation is for all of the same purposes as most people who have a foundation; to further the goals of non-profit and charitable interests of the donor(s). For full post, click here…

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Success Story: “Shooting from the Hip” – Hit or Miss

April 5th, 2016 No comments

An attorney member of the Wealth Council posted a question on the list serve asking for referrals to a fee-based life insurance advisor.  Another member directed him to me and I ended up in an engagement with his client.

It turns out a woman in her eighties had recently lost her husband and someone had advised her and her family that the $1,500,000 of insurance in force on her life was “garbage” and they should get rid of it.

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Fortunately, the attorney recommended an independent analysis before any action was  taken.  It ended up that there were two policies, one for $500,000 and one for $1,000,000.  One was originally a survivor life policy.  The $500,000 policy was a well-funded Guaranteed UL policy with a highly rated and well respected carrier.  The $1,000,000 was with another decent carrier and was a current assumption UL contract which was modestly underfunded. For full post, click here…

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Success Story: The Importance of the “Second Opinion”

March 15th, 2016 No comments

After a presentation at Heckerling a few years ago, an attorney in the audience came up to me to introduce himself and let me know he may be calling me for help on a case.  A full year went by when he finally emailed me details of something he was working on.

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It turns out his client was the owner of a very successful global company and had a large existing life insurance portfolio.  The client and advisor was working with an agent who had a very long term and particularly close relationship to the family.

The reason the attorney brought me in was due to his skepticism regarding some work the agent was doing.  Something didn’t seem right but he couldn’t put his finger on it.  For full post, click here…

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