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Timing of Premium Payments

May 11th, 2017 No comments

AIn my May 12th, 2015 post, Why Paying Attention is Important, I referenced a hypothetical issue which has just come across my desk in real life. It has to do with a Guaranteed Universal Life (GUL) policy and the timing of premiums.

Much has been made of the sensitivity of GUL contracts to the timing of premiums, and for good reason.success-stories-logo Many policies do not have the grace periods of more traditional policies. A premium which comes in late, may slightly affect the internal formulas which determine the guarantees and, consequently, the policy may not last as long as expected.

One of the issues I wrote about in 2015 is when GUL premiums are paid too early. This is a real issue because given the sensitivity to late premiums, it is often beat in to GUL contract owners to pay the premiums on time, which generally means early.

However, no good deed goes unpunished. I order in-force ledgers every single year for every policy I am involved with, even single pay GUL contracts. Believe me, I have found more than a couple home office mistakes, let alone policy owner oversights and agent errors. The case I am referencing is a $3,000,000 second-to-die SGUL contract put in force on a guaranteed 20 pay of $18,978.36 a year.

Every year the ledger has shown what we expected and it goes in the file until next year. The policy date is February 1, 2007. This year the in-force ledger shows the death benefit lapsing at age 99 of the younger insured. That may still be decent and about four decades from now but it is not what was put in force, not what the clients are paying for and, given the joint life expectancy of two healthy individuals, the chances of one of them outliving the policy is real.

My first thought was that the premium was paid late last year so I referenced the annual statement and saw that it was paid and applied in January as would be expected. So, I have a ledger from the carrier from one year ago which shows it guaranteed for life and one this year that shows something different and the premium was paid on time. What gives?

The premium was paid too early.

Why is that an issue now and not in any of the other years the premium was paid in January? The internal mechanics and charges of the policy. Many contracts have a fixed premium charge for the first 10 years and another for years 11 and on. Let’s say the annual premium expense for years 1 through 10 is 10% and for years 11 and on it is 5%. If you pay the premium early in years 1 through 10 the charge is 10 percent regardless. However, the guarantee formula for this contract assumes that the year 11 premium is being charged at 5% and if it is paid in January, which is technically still in the first 10 years, a 10% charge is being taken out of the premium which is twice the anticipated charge. It’s like cutting a check for this year for $950 less than what is due (5% of $18,978). That difference is enough to violate the guarantee formula and cause the policy to lapse early. Seriously.

This was my assumption but I kept it quiet when approaching the carrier asking for an explanation. They confirmed it for me exactly. Furthermore, without even pushing, they reapplied the premiums as of 2/1/17 and re-ran the ledger showing a guarantee to 120. Good for them. Not every carrier may be this cooperative. I’ve been in fights where I had recorded proof a carrier screwed up and they wouldn’t come clean. Others have retroactively changed the formulas or instituted grace periods which gave a month leeway on either end. Some will change it if you catch it and call them on it and others will let it slide if no one says anything. The problem is, if a given carrier hasn’t made accommodations for this, it may be quite impossible to pay “on time” unless the check is delivered and applied on a single given day, which is effectively impossible to ensure, or the premium will either be early or late and there may be problems.

As an aside, this may be a reason to not put a policy in force for $18,978.36 rather than round up to $19,000 or even $19,500. Calculating something to the penny gives a contract no buffer and makes it more susceptible to the issues we are discussing. Is that premium difference worth risking the entire death benefit of a policy? Do you think it might not be significantly more difficult to go back 10 or 20 years and prove this to a carrier and get them to make amends? We’re not even talking about “wasting money” here. I’ve done this before where, before the 20th and final premium was due, we had the carrier calculate the exact premium to maintain the guarantee for life and then paid that exact amount which “got us back” our over payments with interest.

The bottom line is this is one more call for vigilance at a level which is unrealized to the consumer market, unpracticed by a vast majority of agents, unknown to even most professional trustees and clearly unreasonable except for the fact it is mandatory given the realities of the world.

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Insurance By The Numbers

May 4th, 2017 No comments

Help Your Clients Understand What They Are Really Getting For Their Money

Have you ever been talking with someone intelligent who says something which makes you do a double take? I’m talking about the kind of thing which makes you assume you have misheard them because no one could really think that.

Here’s a case in point I often hear in reference to funding a traditional whole life policy. “I keep paying the premium, even though I don’t have to, because it grows the cash value so much.” What’s so crazy about this comment? For full post, click here…

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Success Story: Life Settlement Saves the Day

April 18th, 2017 No comments

The life settlement market is clearly much different than it was 10 years ago but it is still alive and well. The target for finding a qualifying policy is much smaller today but the parameters were likely somewhat unrealistic back then anyway.

Settlements still tend to be success-stories-logosomewhat controversial but with a straight face I will say that I cannot understand why. A legitimate, well understood life settlement is arguably the most consumer beneficial concept I have ever been a part of in my history in the life insurance market. The many, many millions of dollars I have been able to secure for clients who otherwise would have lost millions is astounding. For full post, click here…

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Giving a Life Insurance Policy to Charity

April 11th, 2017 No comments

Over the past number of months I’ve had a handful of cases come across my desk involving life insurance and charity. As is so often the case, some of the transactions ended up as case stud-ies in what to watch out for.

I understand that not everyone is going to have the same attitude regarding the intersection of life insurance and the non-profit sector but I am somewhat surprised at the black and white policies of charitable organizations I encounter at times. Many charities and non-profits have a policy to simply cash out life insurance policies which are donated. I can’t think of a more short sighted stance. Of course each and every transaction should be evaluated on it’s own merits relative to required premiums, guarantees, life expectancy, use of money, etc. It also doesn’t help that so many non-profits have been burned by life insurance over the years the same as so many consumers have. For full post, click here…

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Managing Life Insurance Like a Pro

March 6th, 2017 No comments

I often talk about “managing life insurance” and advisors occasionally ask me what that means or looks like. Fair question. There are multiple ways to manage life insurance, depending on what type of contract we’re talking about. Today I have a very simplistic and obvious example which is often overlooked.

The bottom line idea behind managing life insurance is the same as managing anything. To manage something is to handle it in a certain way, typically to improve results. We all try to improve the results of financial transactions by managing them, or hiring professionals to manage them, appropriately. For full post, click here…

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Always Say Never

February 7th, 2017 No comments

Sometimes dealing with the details of life insurance can be overwhelming for professionals who lack expertise in this particular market. I’ve written over and over again that it is more complex than most people realize. I can talk until I’m blue in the face about bringing this up for conversation while highlighting the dramatic mutual benefit to advisors and their clients. Only a minority will get on board.

I can’t give up on trying to urge advisors to do something which is so easy and so benign that they won’t fight it; something with such an outsized benefit that it would be silly not to layer it into every conversation. I think I have settled on something with a threshold so low it is a non-issue. For full post, click here…

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Dealing with Potential Estate Tax Change from a Life Insurance Perspective

January 31st, 2017 No comments

I rarely see someone pass up an excuse to not buy or to drop life insurance.  The talk about possible estate tax repeal is certainly one of those current excuses.  Life insurance is something most consumers feel is a need more than a want.  Without being forced into it by responsibility, a contractual obligation, etc, people are not generally lining up to buy it.  It is clearly something which is usually sold.  Rational people will differ regarding this as a reasonable perspective. For full post, click here…

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An Understandable Life Insurance Analogy

December 22nd, 2016 1 comment

There is such a lack of understanding about how life insurance actually works, not conceptually, but really works, that sometimes it is difficult to have a meaningful conversation because you have to back up so far to establish a point of commonality that it is difficult to do so.  Even when people understand that they don’t fully understand it, they still think they have a fundamental, base level understanding but even that is generally wrong.  It is not easy to destroy a foundation that someone believes is sound. For full post, click here…

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“Salvaging Loss in a Life Insurance Policy” Update

November 16th, 2016 No comments

Last month I wrote about the possibilities of salvaging basis on underwater life insurance contracts by utilizing annuities. The discussion included two different aspects of potential planning opportunities.

The first is the common practice of doing a 1035 exchange from a life insurance contract to an annuity. For policies in a gain position, this allows the gain to be deferred. For policies in a loss position, this may allow the salvage of the basis rather than wasting it. The remaining cash value exchanged into an annuity may appreciate tax free. For full post, click here…

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Success Story: Salvaging Loss in a Life Insurance Policy

October 6th, 2016 No comments

An attorney brought a case to me which was typical in many respects.  There was a portfolio of policies on multiple family members.  Some policies had recently failed and, among the balance of them, some were holding their own and others were rapidly falling apart.

I want to focus on the two policies on Dad.  One policy was projected to lapse in a year and the other in about 5 years.  Thsuccess-stories-logoey are currently burning through roughly $5,000 a month in cash value.  If only I had been brought in a couple of years earlier I could have saved them six figures in lost dollars.  None-the-less, late is better than never.  One policy has surrender value of $157,000 and a basis of $14,000 so the gain is  $143,000.  Another has a surrender value of $46,000 but a basis of $167,000 so there is a “loss” of $121,000. For full post, click here…

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