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.

Definitionally this had to be the case and anyone with even a cursory understanding of life insurance could know this was happening even if they didn’t personally witness the carnage. If you left the top down on a convertible when you went inside and later you saw that it was pouring rain you could certainly infer that the seats were getting wet though you weren’t actually watching it happen. The problem is, often one doesn’t think about problems until they slap them in the face. When you slide into the seat later in the day you will instantly be made aware of the issue you now need to deal with.

People generally understand that your car interior will get wet in a rainstorm if the top is down. People haven’t always understood (nor do many today) that life insurance policies don’t work like they think they do and diving crediting rates will tank their policies without sufficient remedial action.

Today when I relate what is going on in the market and ask an audience about their experience, heads are nodding and hands are going up. It seems like we’ve started turning a corner regarding awareness, though decades late. A lot of people have been slapped int he face. Sometimes I’m tempted to think we’ll get to a point where this is universal knowledge and I won’t have to tell people to put their tops up if rain is in the forecast. Unfortunately I fear this will take more time than many people have and many will never get it. Too many will refuse to believe until their own cheek is stinging.

I get pessimistic when I experience what I have in the past month. Recently I have had a handful of cases which are nothing short of disastrous. I get this all the time but there has been a re-cent spike of spectacular meltdowns. Multiple insurance carriers were represented. These cases involved whole life, universal life and variable life. Some were single life and some were survivor life. In each of the situations the insured individual(s) were relatively old and in poor enough health to be uninsurable but any given one of them could live another decade or more. In each situation the policies were brought to me when they were on death’s doorstep and options were very limited. Each policy owner or grantor had committed tens of thousands, hundreds of thousands or even millions of dollars of premium to the contracts. In each situation not a soul understood what was happening until they were slapped in the face. These are people with top drawer counsel and it made not a lick of difference.

Not a one of the policies was reasonably salvageable by simply pouring money into the contracts as the numbers would be outrageous relative to resources and death benefits. The IRR on the transactions relative to reasonable life expectancy wasn’t attractive to even those who had the funds available. (This is absolutely not always the case.) Some carriers were prevented by tax & Insurance law from even creating projections which showed the policies even theoretically being salvaged. The bottom line was that some of the policies were so underfunded that they legally couldn’t accept enough money to keep them afloat to life expectancy or policy maturity. Most of these policies were so underwater that not even the life settlement market cared to make offers.

A few of these policies had huge loans on them; some created by actually borrowing significant funds from the contracts, some from internal automatic premium loan provisions and accumulated interest for covering premiums which weren’t paid out of pocket.

Some simply lost everything they put into the contracts and everything they expected the death benefit to ultimately accomplish. Some are losing a whole lot more. One took maximum loans from the policy because that was the only source of funds for needed expenses. The result is a collapsing policy with massive phantom gain tax consequences. For those not familiar with how this works, when a policy with a loan collapses, the loan is considered forgiven debt which is taxed as ordinary income… phantom income. How is the couple who cleaned out their policy values because they needed the money now going to pay the taxes due as a result of the calamity? All they remember is that the policy was sold on this very concept. And it was. But some-one was supposed to be minding the store.

Why is this still happening at least at the rate it always has been happening? I’ve been predicting it for years (which is about as savant-like as predicting getting wet in a rainstorm). Why is there no better education of consumers and advisors? Why aren’t the salespeople’s feet held to the fire? The answer is multifaceted but simple. There isn’t money to be made in keeping people out of trouble. In fact, there is money to be made in allowing, if not encouraging, people to find themselves in these situations.

As always, there are certainly great advisors and great agents who do a great job keeping their clients in the clear. It takes no stretch of the imagination, however, to understand these great advisors with well-educated clients are too few and far between. In the meantime, the dregs of the balance will be deposited on my doorstep in a last ditch effort to salvage something out of the train wrecks. Sometimes I can perform miracles and sometimes I have to look someone in the eyes and tell them they are hosed. It’s not pleasant.

Please, please, pay attention if you aren’t already. Please bring talent to the table if you don’t have it. Please be proactive while something can be done about it. Please don’t listen to the agent who categorically says it can’t happen to the policies he sells. Please be the advisor your client expects you to be.

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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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Regulatory Changes re: Planning with Captives

March 11th, 2016 No comments

TOPIC: Has the PATH Act Muddied the Way for Planning with Small Captives?

MARKET TREND: The use of small captive insurance companies primarily for estate planning purposes may be a thing of the past.

SYNOPSIS: Captive insurance companies can allow businesses to obtain insurance protection against a wide variety of property and casualty (“P&C”) losses more affordabily and are taxed under many of the same rules applicable to traditional insurance companies. Internal Revenue Code (“Code”) § 831(b) provides small and mid-sized businesses with access to this important insurance market, encouraging these businesses to build up reserves that could protect against losses and thus support overall business longevity. However, the IRS had become concerned that the special tax rules under Code §831(b) were being used in “micro captive” arrangements primarily to accumulate wealth in these smaller captives for wealth transfer and estate planning purposes, not for insurance protection. The PATH Act attempts to both enhance the business benefits of small captives and address the perceived estate planning abuse by making two major changes to Code §831(b): (1) increasing the amount of premium income a captive can receive while still qualifying for Code §831(b) treatment, and (2) imposing two new tests, a risk diversification test and an ownership diversification test, one of which a captive must meet to qualify under Code § 831(b). These changes are effective for all existing and new small captives beginning in 2017 and after.

TAKE AWAYS: While the new diversification tests potentially limit the possible estate planning benefits attributable to small captive arrangements, 831(b) captives created primarily to provide P&C insurance coverage to businesses should not be greatly impacted. However, as there are no “grandfathering” provisions in the new legislation, non-compliant existing small captives must be restructured before 2017 to meet one of the required tests. Owners of these existing captives should contact their insurance and legal advisors now to review their current ownership structures for compliance. Owners of closely-held businesses have shown increasing interest in captive insurance arrangements and a way to reduce the costs of their P&C insurance and take advantage of certain tax rules applicable to small captive insurance companies. While the recent legislation has increased certain benefits with regard to small captives, it also may limit the ability of captive owners to use the captives for ancillary estate planning benefits.

For full post, click here…

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Are Life Settlements Back?

February 3rd, 2016 No comments

It’s been a while since I’ve discussed life settlements but, then again, it’s been a while since there has been a lot of activity in the market. The market wasn’t dead; it just seemed that way.

As a reminder, the life settlement industry is a secondary market for existing life insurance policies and it is an outgrowth of the vatical market. A viatical settlement is the sale to a third party of a life insurance policy on the life of a terminally ill individual, defined as someone with less than a 24 month life expectancy. Fundamentally, a life settlement is the sale of a life insurance policy to the secondary market on the life of an individual who isn’t terminally ill. For full post, click here…

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