Bill Boersma: On Life Insurance

1. When your client is asking you questions and you are not sure you’re the one with all the answers.
2. When the client isn’t asking questions but you think he should be.
3. When your clients says “I have a paid up policy”.
4. When your client has a policy with a loan on it or is planning to make a loan.
5. When your client clearly had no understanding of life insurance.

6. When your client claims to know a lot about life insurance.
7. When your Client is being sold new insurance and you want an independent second opinion.
8. When your client is considering getting rid of an existing life insurance policy.
9. When your client is party to an insurance funded Deferred Comp plan or any insurance funded executive benefit plan.
10. When your client is being sold permanent, cash value life insurance when you think all they need is term insurance.

11. When your client is being sold term insurance and you think they need permanent insurance.
12. When your client owns a policy or is being presented with a policy with performance depending on stock market returns.
13. When your client doesn’t have a relationship with an agent.
14. When your client has a particularly close relationship with an agent.
15. When your client has never had anyone but the agent look at his policies.

16. When your client seems to be paying too much for life insurance.
17. When your client seems to be paying too little for life insurance.
18. When your client is gifting a policy to a trust or distributing a policy from a company.
19. When your client is being urged to do a 1035 exchange and you want an independent second opinion.
20. When your client is being presented with a life settlement offer and you want an independent second opinion.

21. When your client has a Split $ plan in place.
22. When your client is using a policy predominantly as an accumulation/supplemental savings instrument.
23. When your client is telling you their life insurance in guaranteed
24. When your client is a party to a premium financing insurance plan.
25. When your client is thinking about gifting a policy to a non-profit.

26. When your client is planning on paying back a policy loan.
27. When something about your clients life insurance policy just doesn’t feel right.
28. When you want to make a decision based more on facts than on emotion.
29. When competing agents are telling your clients different stories.
30. When the only product your client is being sold is the product from the company the agent works for.

Whether anyone likes it or not, we are all used to paying fees for services.  In the investment management world, where it has largely gone from commission based to fee based, fees are a fact of life, the only question being, how much?

In the life insurance world, the idea of fee-based consulting, while gaining traction, is still a bit novel.  Though tremendous benefit may be attained through a sophisticated, methodical, nuanced consulting and management process, it is still met with industry and market skepticism as it is “not the way we have done it in the past”.

Assume there is a $5,000,000 trust owned life insurance policy and its performance and ultimate payout was crucial to estate tax and business succession planning? What would it be worth to ensure it was managed as effectively and efficiently as possible?  To make sure it performed as projected or even paid a death benefit at all?  I’d like to put this into context.

Let’s say you give an investment manager $500,000.  Let’s further say she will invest it over 30 years and we assume an 8% return over time and a 1% annual investment fee. Keeping this simple and ignoring taxes, at 8% the $500,000 grows to $5,000,000.  What would you think the gross fees are over the 30 years?  It’s surprising to most, but the answer is over $600,000, or more than the original amount given to the investment manager!  Even on a discounted basis, the net present value of the fees represent a significant percentage of the entire initial investment.  In the real world, the management fees would not be paid out of pocket but taken out of assets under management.  In this case, if the assets grew at a net 7%, the end value would be $3,800,000 which means the fees have a $1,200,000 impact on the ending account balance.

I am not going to argue about how much work it would be to manage a $5,000,000 life insurance portfolio relative to a investment portfolio, but it is not uncommon that a modest $2,500 one time fee, or even less, raises eyebrows, let alone an ongoing management fee.

Interestingly, even if an investment manager doesn’t do a great job, there will likely always be some value to the investment portfolio.  On the other hand, if the life insurance policy is mismanaged, or even just unmanaged, the entire policy could be lost, including all contributed premiums, cash value and death benefit.  In some situations, a catastrophic phantom gain on collapsing policies can generate devastating tax results.  What is it worth to make sure that doesn’t happen?

It isn’t uncommon for a good insurance management specialist to bring sophisticated strategies to the table which increase the internal rate of return on premium to death benefit by a couple hundred basis points.  I have documented cases where our work has increased end values of policies literally by millions of dollars and/or saved tens of thousands, hundreds of thousands or even seven figures in cash flow.  What would that be worth in a corresponding investment portfolio?

Life insurance is such a vital piece of so many financial, estate planning, business succession and charitable plans, it’s clearly time it is put on the same footing as other financial tools in regard to acquisition, strategy, management, divestiture, etc.

I continue to be amazed at the willingness of consumers in the market to put life insurance transactions in force with no outside analysis and no evident level of sophistication. Here is a very simple example.

Recently I was involved in some planning where the annual premium was $150,000 a year on a full pay basis for the desired death benefit. At least 99 out of 100 situations I get brought into involve a level premium scenario because when one hits the button on the computer, this is what comes out and little further thought or analysis is brought to the table.

In this situation we have a 77 year old individual and we played around with the premium flow. We put together a scenario where we started the contract with $100,000 a year for the first five years and increased it to $125,000 for the next 5 years. So at age 87 we have saved $375,000 of cash flow or a 25% reduction in premiums from the typical approach. In the eleventh year we start paying $150,000 for five years. Now we’re at age 92 (life expectancy). From that point we pay $200,000 and the policy is guaranteed past age 100.

What is the result? Better than a 200 basis point increase in internal rate of return (IRR) at life expectancy. The break even on an IRR basis, ignoring time value of money, is age 100. Also, given inflation, the “increasing” premium schedule is really more of a level premium than the traditional level premium schedule which is more of a decreasing premium when you think about it.

Add in time value of money and it is a whole other ball game. If one takes the spread between the level premium and the increasing premium and puts it in a side fund at a reasonable return assumption, say 7 percent, the side fund is $820,000 by age 92 when any premium is due above the $150,000. The interest alone from the side fund can pay for the increase, resulting in a total amount available (death benefit plus side fund) which is 20% greater. This works well at much more conservative return assumptions and sings at better than return assumptions.

If your client is like many, they think they can do better than the insurance company anyway so why not give them the chance. I would clearly bring this strategy to the table only for clients with the appropriate financial resources and who you trust to manage it correctly.

The bottom line is that policy owners deserve a little more sophistication than they have traditionally been exposed too. They may not choose to go that route but I feel it is important to bring options to the table. They have gotten where they are by making astute financial decisions so why not help them to continue the track record?

As the founder and principal of Opportunity Concepts, LLC, a life insurance consulting and management practice, my days are filled working with policy owners and their advisors regarding many aspects of life insurance, from simple front-end, second opinions to in-depth, actuarially defensible analysis of portfolios of policies. This is the story of a “typical” engagement.

Clients and advisors seek me out for my fee-based approach to life insurance consulting. While there are great life insurance professionals who do a good job and bring tremendous value on a commission basis, some policy owners and advisors in the market have had experiences which leave them cynical. One answer is to pay a consultant for analysis and advice.

Not long ago I was brought into a situation by a respected estate planning attorney who was acting as the trustee for his business owner client. He told me that after years of hearing me preach the importance of policy analysis and management, he realized that as trustee he had a fiduciary duty to fulfill and he couldn’t lean solely on the work and advice of the agents involved, regardless of how well intended they were and how much he trusted them.

As always, we first had to introduce the fee-based concept to the client. The idea of paying for something which has historically been “free” sometimes takes a little getting used to. A little reflection produces the realization that this practice would be normal in many other consultations and the magnitude of the investment into the insurance portfolio at hand warrants such an expenditure.

The client’s existing portfolio consisted of roughly twenty policies from a handful of carriers sold by as many agents over the years. After spending time with the stakeholders to understand the nature and the goals of the planning, we reviewed the performance of the existing policies relative to earlier projections and relative to each other and we put this into perspective by exploring market alternatives. Diversification by carrier and by policy type was deemed important with the ultimate goal to maximize death benefit for estate planning purposes with cash value accumulation a secondary consideration.

At the end of the day, a relatively simplistic analysis determined that despite a multi-year drop in crediting rates across the board which resulted in more out of pocket premiums than originally anticipated, most of the policies were sound. A few of the policies would need some sort of remediation strategy in order to have any faith they would persist until policy maturity or even actuarial life expectancy and some of the policies simply didn’t fit the estate plan moving forward.

It became apparent that for this client in this situation, maintaining each of the existing contracts was not optimizing resources. Alternate policies available in the market offered greater death benefits both today and beyond life expectancy, granted more assurance that the death benefit would be there when needed and guaranteed that there would be no additional outlay of cash. Read more…

As a part of our insurance consulting and audit work, we generally review the financial strength of the current and any proposed insurance carriers.  Most people are familiar with the names of at least some of the ratings agencies, especially given recent news accounts.  However, we rarely talk about the ratings that individual agencies give insurance carriers.  We prefer to discuss the Comdex Score.  So, what is it and why do we prefer to use it? Read more…

Years ago I was brought into a case for some Second Opinion work by an advisor for his client.  The client had a proposal on the table for a cash value policy and the accumulating cash value was a major point of the presentation.  The advisor wanted to know that the client was getting the full story and asked me to put together some considerations.  Once I did, I found that it was handy to have it at arms reach as I have been asked the same question in some way many times since.  I thought I would share it in this blog posting. Read more…

It seems like my team and I are regularly answering questions regarding policy ownership and beneficiary designations.

Here are a few situations from the past month or so:

Agent: My client wants to buy a $1,000,000 policy in the company on a key man and have the company pay for it and make his family the beneficiary of half of it as a perk.

Bill: Key man isn’t claiming any of the premium as income?

Agent: No.

Bill: Who told you that was a good idea?
Read more…

I regularly get asked about the “Insurance Triangle”, what it is and how it plays into things.  This is a reference to the “Goodman Triangle” Goodman V. Commissioner, 156 F.2d 218

In this case Mrs. Goodman transferred five existing policies insuring her husband’s life to a Revocable life insurance trust.  Beneficiaries of the trust were her three children and her sister-in-law.  About a decade later her husband died and the trust became irrevocable.
Read more…

While those who know me understand that I can be critical of some aspects of the life insurance industry, I don’t throw carriers and agents under the bus for the fun of it.  However sometimes I just have to shake my head.

In previous writings I have referenced the fact that some agents are Read more…

I was in Orlando at the Heckerling Conference when the January Issue of Trusts & Estates came out. Richard Harris came by to see me and made a comment on my piece in the magazine and let me know he had an article in the same issue that I might like to read. At my first opportunity I read it and then tracked him down and told him that I was upset by what he wrote. Why? Because I was in the process of writing essentially the same article and he beat me to it. Of course I had some fun with that but now I am relegated to commenting about his article which may actually be a bit easier than completing my own. Read more…