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.

Why Offer?

There’s absolutely nothing untoward about this offer. The same company has offered clients an opportunity to exchange into different policies with significantly higher death benefits for no additional money and greater guarantees. Of course, the first thing to cross any reasonable person’s mind is “Why?”

Clearly, it’s in the insurance company’s best interest to get the existing policy off the books by cashing it out or into another contract. Crediting rates, calculated liability, reserving requirements and who knows what else is going into the formula, but if the company can entice favorable activity to its balance sheet, it’s the company’s prerogative to make such offers as long as people aren’t tricked in any way. I was reasonably impressed with the letter sent to the agent of record giving a heads up regarding what some clients would be receiving, and it made clear a policyholder didn’t need to do anything.

In the case at hand, the enhanced offer was meaningfully greater than policy values; about three and a half times cash value and over five times surrender value. If the client was thinking about bailing anyway, this would be a welcome opportunity for free money.

A Closer Look

Seeing that this client isn’t willing to put more money into his contract, and it will likely lapse before he will, I would be surprised if he didn’t take advantage of it. But wait! Let’s look a little closer at the company letter.

“The letter is being sent to Survivorship Universal Life policy owners whose financial goals or needs may have changed due to the continually evolving economic and tax environments (including estate tax revisions), or a new focus on liquidity, retirement or long term care needs. Life changes. Is their policy still a good fit?”

Where might you have seen that verbiage before? Why, it’s virtually word for word out of a life settlement advertisement. So, the question now changes from “Should I take the enhanced offer?” to “Should I evaluate the life settlement market and compare that to the enhanced offer?”

Answer: of course! In fact, without getting into details, this policy is about as close to a slam dunk life settlement as one is ever going to get, likely garnering an offer meaningfully in excess of the enhanced cash value offer.

The Best Exit Strategy

This is a good reminder that many, many policies out there are candidates for life settlements and may offer very advantageous opportunities for your clients. Take it from the insurance company directly, some policyholders financial needs may have changed due to continually evolving economic and tax environments or a new focus on liquidity, retirement or long-term care needs. Or maybe their policy is simply in its death throes, and a life settlement is the best exit strategy.

Bill Boersma is a CLU, AEP and LIC. More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com or email bill@oc-lic.com.

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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.

The tax rules state that the deduction is for the cash value or your basis in the contract, whichever is lower.  Even though your cash value is $100,000, the premiums paid into your policy total $22,000.  The $78,000 of tax free growth is not deductible.  On the other hand, if your cash value was only $10,000 then that would be your limit.

Additionally, the rules say that if your donation exceeds $5,000 you must also have an appraisal.  The purpose of this is to prove that the policy is not worth less than the cash value and the basis, though that is almost never the case.  Life insurance simply got caught up in the appraisal rules for everything else.  Because of the nature of your policy, I already know off the top of my head what the fair market value of your policy is but we still have to go through the formal process.

Fortunately, I have relationships with multiple life insurance appraisers around the country and I know which ones to go to for which purposes.  You don’t want to pay more than you need to but you also definitely don’t want to cheap out when you shouldn’t.  For a case like this, there is a specialist I work with who charges a very modest flat fee.  It is my responsibility to collect all of the forms and paperwork, get them to him, coordinate with the non-profit and bring this all together for you to hand to your CPA.

Again, sorry for the disappointment but probably better to deal with this now than have the IRS come back next year with tax and penalties for an improper deduction.

I look forward to the process and please don’t hesitate to call or email my with any questions.



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Life Insurance Premium Financing

August 15th, 2018 No comments

It’s too often improperly presented, implemented and managed.

I’ll start out by saying that I’m not opposed to premium financing. I’m simply a strong advocate for making sure it’s understood and done right. That being said, many of these proposals are not understood and can be misleading.

Fundamentals of Financing

First, it’s a good idea to look back to the general fundamentals of financing. Financing comes into play when someone needs or wants to purchase an asset of something but doesn’t have the money or the liquidity to pay the entire purchase price. Financing fills this void, not to get something that’s otherwise unaffordable.

We do this day in and day out. We finance our homes, cars, businesses, equipment and more. Generally, we can afford these things but the money isn’t readily available. Additionally, we often finance things we do have the money for if the financing provides a positive arbitrage to be taken advantage of. For full post, click here…

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Letters of Explanation – Trustee Liability

July 31st, 2018 No comments

This letter is to the management of a law firm.  Multiple attorneys act as trustees for clients.  There has been no program of management regarding these policies and I was called in to suggest a plan.  I was also able to look at redacted policy information and could see at a glance that many policies are underperforming and headed towards failure.  A decision was made that the attorneys deal with it on a case by case basis as they see fit.  I see this as a grave mistake.

Dear Firm Management:

It’s been a while since we’ve talked and the last time we did you mentioned the attorneys who are acting as trustees will be deciding independently on how to proceed.

I understand this but as we discussed earlier, if things go wrong (which they have and will) and result in a lawsuit, case law has shown that an independent third party is critical to a successful defense.  I am currently involved in four litigation support and expert witness cases, some going after trustees and some defending trustees. For full post, click here…

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Letters of Explanation: Whole Life Term Blend

July 25th, 2018 No comments

This letter is to a client explaining why the term blended whole life policy on his mother is failing:

Dear Mr. Client:

Unfortunately I still do not have what I requested from XYZ Life but I was able to do some work anyway.  Also, what I requested may end up being sent directly to the policy owner, which is you as trustee, at the address of record.

You had asked about potential income tax consequences regarding this policy and I believe there would be none as it looks like the gross cash value is less than what I calculate the basis to be in the contract.  I am waiting on a formal basis and gain calc from the company. For full post, click here…

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Success Story: Another Second Opinion

July 20th, 2018 2 comments

The attorney for a billionaire family called me one day at the behest of a mutual acquaintance. The clients were looking to procure $100,000,000 of new coverage and simply wanted a second opinion.

The couple worked closely with a large bank and their advisor had brought in the bank insurance specialist. I went in with no preconceived notion as I have seen many similar situations and in some I supported the transaction and others I stopped it. success-stories-logo

In this case the existing advisors had been doing a very good job. They seemed sincere and had looked at many angles. I am not sure how excited they were that I was brought in but they had to deal with me. I quickly realized they are among the “good guys” and all I did, after understanding the goals and objectives, was to challenge a few things, brought a couple of ideas to the table and offer some opinions. In the end, what they moved forward with was substantively what they had planned before I was in the picture. For full post, click here…

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Giving Life Insurance to a Charity

June 13th, 2018 No comments

Make sure clients understand rules before taking action.

Life Insurance and associated tax issues are complicated. When you throw charity into the mix, it can get downright diabolical. It’s not as much that the rules are so complex, it’s that they don’t make sense to the typical taxpayer/donor.

Recently, I had another call about appraising a life insurance policy donated to charity. The one thing these calls have in common is that the policy in question was donated a number of months ago and only well after the fact did the policy owner understand the “special rules.” Very few people understand the tax and deduction rules before they make the gift. This also leads me to believe that whomever the donor is dealing with at the nonprofit in question doesn’t really know the rules either. For full post, click here…

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Is Working For One Life Insurance Carrier Ethical?

May 23rd, 2018 1 comment

In some cases, agents may be crossing the line.

The life insurance world is certainly a lot different today than it was decades ago. Rather than just whole life and term insurance, there’s a wide menu of products available. Some products are driven by interest rates, some by market returns and some by indexes. Some are guaranteed while other aren’t.

Distribution models vary widely. There are internet marketing models, traditional agencies and independents who work though brokerage general agencies (BGA) that represent multiple insurance carriers, among others. One can get life insurance from financial advisors, banks, those predominantly in the property and casualty and health insurance market, traditional agents, etc. It seems the most unique way to get insurance today is through a dedicated life insurance agent. Times change. For full post, click here…

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Why Fund a Buy-Sell Agreement?

May 14th, 2018 No comments

Let’s take a look at the numbers.

Occasionally, I run into the business owner who questions the merit of funding a buy-sell agreement with life insurance. Some people are so anti-insurance they’ll say no regardless of what’s put in front of them.

I understand this sentiment. We’re sold on so many things so regularly that our automatic defense mechanism is often to say no. I’ve been there. However, there have been a number of times when I caught myself doing this and then challenged myself to listen, and every once in a while I came away with a different mindset. For example, this happened when I discovered that a commercial lawn service would treat my lawn several times a season for less than I was paying for the product to do it myself. For full post, click here…

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Defined Benefit Life Insurance

April 17th, 2018 No comments

Clients need to pay attention, as the world has changed
By Bill Boersma

In my ongoing effort to educate people on how life insurance works, I seek out new analogies and examples on a regular basis.

Along with others, I’ve written exhaustively about underperformance and management of life insurance. Charlie Ratner is fond of saying it isn’t underperforming, it’s under-explained. I completely agree. If your car runs out of gas and stops along the side of the road, is it really underperforming? Life insurance policies need gas, and if they don’t get it, they stop too. Fortunately no one at the dealership needs to explain this to society because a critical mass of people understand this and help educate others as they come along. For full post, click here…

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