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Success Stories: Policy Appraisal Brings Confidence to Planning

November 24th, 2020 No comments

Recently I was brought a situation by a family office through their attorney.  The family wants to transfer/sell two $10,000,000 survivor life policies to another trust for planning purposes.  The policy owner went to the two insurance carriers to ask for the 712 values or Interpolated Terminal Reserve (ITR).  Though the two policies w

ere the same death benefit on the same couple issued at the same time for the same kind of policy, the numbers came back very, very different from the two insurance carriers, each of which is one of the top rated and recognized carriers in the market.

The cash value of each policy was roughly $1,500,000 and one carrier came back with a number exactly the same as the cash value and even stated on their communication “Please note that ABC Life uses the Net Cash Value as a proxy for the ITR.”  However, the other carrier came back with a $3,000,000 number.

I’ve been involved in situations where the policy owner wants a number as high as possible and in others they are shooting for a low number.  In this case they wanted to play fair and have a “real” number but not any higher than necessary.  What makes things a bit difficult is that the traditional rules and historic rulings for policy valuations per t

he IRS were from a time where insurance was very different and the secondary market didn’t exist.  Also, I’ve seen insurance companies come back with objectively ridiculous numbers, like a value equal to the death benefit.

The situation I’m discussing today is proof that different insurance companies are taking different approaches so there isn’t an objectively “correct” way

to do this.  Clearly the values of these two almost identical policies don’t vary by such a margin.  This means we have to introduce some sanity into the situation.

While reasonable people will disagree about how this applies to life insurance, “Fair Market Value” is a relatively non-controversial term when it comes to many things commonly appraised.  In my opinion, and the opinion of many I’ve consulted with, life insurance shouldn’t be any different.  If we’re looking at a policy such as the one’s noted above, which are on two insured individuals in their sixties with no health issues (there is no value in the life settlement market), there is literally no entity on the face of the earth that would offer more than the cash surrender value in an arm’s length transaction.  The fact that one carrier has a statutory reserve of $3,000,000 is meaningless.  If they had $2,500,000 or $3,500,000 as a reserve amount would that change the fair market value of the policy?  Of course not.  Then why pay attention to that number?  It’s really quite silly.

This is where a formal appraisal comes in handy and that’s what we did in this case.  The appraisal brought some sanity to the process and provided legitimate rationale.

Though I’m not an accredited appraiser I am familiar with many appraisers around the country and know what they specialize in and which one to bring in for a given situation.  For example, you don’t use the same appraiser for a charitable donation of a life insurance policy as you would for an appraisal that accompanies a 706 or 709 tax return.  There’s no reason to pay top dollar for some purposes and you certainly don’t want to cheap out for others.

Paying for a policy appraisal has turned out to be one of the greater returns on investment I’ve seen in a number of situations.

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Comparing Term Life Insurance Policies

November 18th, 2020 No comments

Though the following piece I wrote on term insurance with Professor Gregg Dimkoff may seem very basic, sometimes it’s the basics that bear reviewing so we don’t miss something while focusing on the “high end” stuff.  In numerous recent situations clients have suffered significant harm because the basics weren’t a focus.  Also, the market is changing and we can’t take for granted our old assumptions are still accurate.  Enjoy.

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The Worst Life Insurance Deal Ever – Annual Renewable Term

October 27th, 2020 No comments

Why your client should never buy annual renewable term.

I’ve written about how expensive association term and group term is, how poor the policy features are and the tremendous amount of money that can be saved by going with a better underwritten product. But there’s another term insurance situation that’s even more insidious in my estimation. Annual renewable term (ART) or yearly renewable term (YRT) can take the cake.

Creeping Up Premiums

This was brought back to me vividly during a recent client conversation. An attorney had a $750,000 ART term policy, and his wife had one for $550,000. The premiums were only about $500 and $300, respectively, which isn’t much money for a couple making the income they do. However, let’s look forward a bit.

They’re in the seventh year of their policies, which already tells me a lot. By the second or third year, most ART policies already exceed the premium of a 10-year level term product. In 10 years the premiums on his and hers, respectively, are $1,200 and $700. In 20 years, they’re $2,900 and $1,700. In 30 years, the numbers are $6,800 and $3,400. Of course, almost no one plans on keeping an ART in force for many years, but plans don’t always pan out. What I see too often is that ART that was so cheap in the early years, like association term, has a premium that slowly creeps up without anyone noticing. It’s like the proverbial frog in the water on the stove. 

I’ve seen cases in which the ART had been in force for over 20 years. Even this one at seven years is a travesty. For this couple, a new 20-year level policy with a high-quality, well-respected insurance carrier issuing policies with very good contractual features would cost less every year for the next 20 years than the existing ART will cost this year. Ten years from now, the 20-year level term premium will be less than half the ART premium, and in 20 years, it will be less than 20% of the ART premium. The savings are ridiculous.

Strategies Behind Sale

This begs the question of why ART is ever sold. There may be the occasional situation in which the insurance is actually needed for only a year or two, but those situations are few and far between. I’ll tell you where I generally see this and why.

The ART I overwhelmingly run across is issued by a major mutual insurance company. Why? Their level term policies are rather expensive compared with competition in the market. ART looks inexpensive compared with their level term offerings, and this is often what’s necessary to pitch in order to win a deal. Of course, this is disingenuous, but all’s fair in love and war …  and sales. If true, this would be bad enough but doesn’t hold a candle to the more insidious strategy.

While not the predominant practice of this mutual carrier’s sales force, I’ve seen numerous examples of ART being sold so that when premiums increase, the agent goes back to the client to discuss avoiding the increasing premiums by converting to whole life coverage. Did you catch that? Purposely selling an uncompetitive, increasing premium product to drive expensive term conversions in the future? I’ve seen it a number of times and yes, it’s despicable. 

In this situation, even if the agent’s intent wasn’t nefarious, this couple is still seven years into a ridiculously expensive policy, and heaven knows how far they would go. After all, they trusted the agent and were starting to boil in the pan and didn’t know it. When was the agent ever going to let them know or was he going to stay quiet? Of course, now they’re pissed and changing directions regarding product, carrier and agent. 

With barely an exception, most clients should never move forward with an ART policy. Given the many ART contracts I’ve reviewed, I’ve never seen a single time it was in the client’s best interest. 

Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.comwww.BillBoersmaOnLifeInsurance.infowww.XpertLifeInsAdvice.com or email at bill@oc-lic.com.

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Beware… of Inforce Illustrations and Loans

October 22nd, 2020 No comments

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Insuring Life Insurance

October 13th, 2020 No comments

Clients should create their own disclaimers.

Consumers procure life insurance for protection, but do they need to be protected from it at the same time? Too often the answer is yes. Maybe it’s because I’m on the consulting side of the market that train wrecks disproportionately end up on my desk.

A lot of my work is picking up the pieces when the wheels fall off, and they fall off for a variety of reasons. Sometimes it’s a result of simple inattention, sometimes the product is working the way it’s supposed to but the policy owner never understood it enough to realize there was downside and sometimes it’s a result of misrepresentation or outright fraud. Many times, projections were too optimistic to be realistic and, given the complexity of modern products, this wasn’t apparent to consumers. Sometimes those on the sales side didn’t even understand what realistic outcomes looked like, and sometimes they did but showed maximum assumptions because more attractive projections are easier to sell.

Don’t Just Sign on the Dotted Line

I’ve seen too many situations in which the policy owner has no recourse, even in situations with much deleterious circumstantial evidence, because once clients sign the paperwork, they’re often stuck. Unless there’s supporting documentation, such as an email conversation, the situation involves clear and provable fraud, such as forgery, or there’s abundant evidence that it was an inappropriate transaction, the signatures become nails in the coffin for the situations in which someone has been taken advantage of.

The story could be that the agent was objectively mistaken, could simply be overly optimistic or could be knowingly and willfully lying but it doesn’t matter if the paperwork is signed. If things fall apart later, the insurance carrier will simply produce the signatures on the disclaimer pages and walk away. I see this all the time. Insurance companies that flood the market with advertising about being there for their clients, winning ethics awards, emphasizing relationships and family values and all of the other nauseating feelgoodery nonsense will turn on your client and fight like caged animals in a heartbeat. That company your client has a warm and fuzzy feeling about? Has the client ever crossed them? Trust me, much of the marketing is a facade. The internal workings of the product development teams, the sales and marketing forces and the legal defense department will tell you what a carrier is really about. And yes, this includes the biggest, most recognized and well respected companies in the market.ADVERTISING

Is this a reason for your client to not do business with them? Absolutely not. After all, you take those insurance carriers off the table who change their tune when things go wrong and you’d be hard pressed to find anyone to do business with. Is it a reason to avoid insurance? Definitely no. Insurance provides protections and planning opportunities not available in any other product.  Does your client move forward on a hope and a prayer? No. That would be irresponsible. So what’s there to do?

Clients Should Create Their Own Disclaimers

Advise your clients to create their own disclaimers, in plain English, that are universally understood and that have black and white answers. The paperwork policy owners sign off on isn’t for consumer protection. I repeat, if your clients think the signed ledgers, applications and so on are for their benefit, even though they may be required by regulators in the name of consumer protectionism, they’re sorely mistaken. I can’t recall one single time when I pulled paperwork out of a file and used it for proof against an insurance company to benefit a policy owner. But I’ve seen the insurance companies produce the same paperwork over and over again to turn their backs on policy owners.

I’m experienced and aware enough to realize that most he said/she said situations are honest misunderstandings, and policy owners are notorious for not listening and having selective recall. In fact, my guess is that most times, the insurance company is right in fighting back. It can’t roll over for everyone who doesn’t get what they want or didn’t understand the deal. But it also doesn’t winnow the wheat from the chaff; it doggedly attacks everything. The attorneys it employs have a job to minimize losses, and they get zealous about it. 

Be Willing to Walk

Numerous policy owners have worked with me to craft their own closing documents for signature by agents. It doesn’t really have to be that complicated or technical. It mostly has to be a summation of the facts as the policy owner understands them, signed off by the agent. It might not be much of a surprise that on a number of occasions, when presented with such a document, the agent hems and haws a bit and won’t sign. “Well, Mr. Client, you’ve misunderstood something” is a common comeback.  I’ll suggest that often a client may very well have misunderstood something and this is a great time to “un-misunderstand.”  I’ll also suggest that often it’s the agent who has mis-explained something.  Regardless, if an agent won’t sign your client’s disclaimer or tells you the insurance company won’t let him sign it, don’t move forward.  Maybe the wording technically needs to be changed up to make it more formally accurate but something assuredly can be crafted for there to be a meeting of the minds. 

There are proposed transactions that won’t go through when this process highlights previously unknown details. I won a couple million for a client who didn’t even know he was a victim of fraud when I found a smoking gun in an email conversation.  The problem is that the more ne’er do well agents are aware enough to not put things in writing just so this doesn’t come back to bite them.  That’s why it’s your client’s job to force the issue, but they need assistance. 

“Lying through omission” is a term you’re likely familiar with.  There doesn’t have to be outright lying for misrepresentation to be involved.  In fact, I’ll suggest this is more common.  Throwing less than full information out there and letting it hang so a prospective policy owner comes to his own (mistaken) conclusion results in the same end. 

Wouldn’t it be simple to put together questions that would root out any misunderstanding, inaccuracies or lies?  Try this; “My life insurance policy is guaranteed for life.”  Maybe it has to be more like “This policy has a guaranteed $1 million death benefit for life if I pay the premiums per the contract and don’t pull money out or take loans against the policy.”  For the guy whose policy wasn’t actually built to last for life but was going to lapse at age 85, this could be pretty powerful if things fell apart. 

If it was insinuated that your client’s Northwestern Mutual policy would earn the dividend rate on the premiums, (let alone the often referenced higher tax equivalent rate), then stating that in writing shouldn’t be an issue.  My contention is that the agent won’t sign, and this will kick off a larger conversation.  In the end, your client will realize that what he thought to be true is far from fact, and it’ll take a decade or more for his cash value to even equal his cumulative premiums and even many years down the line his internal rate of return on premium to cash value won’t be close to the stated dividend rate.  Wouldn’t that be nice to know now rather than having someone like me having to tell him years from now?

Document Everything

“When in doubt, write it out” should be the mantra.  Document everything and keep it.  Get explanations through email.  Follow up phone calls and in person meetings with emails and insist on written replies.  There are innumerable situations in which recourse would have been on the table if documentation existed.  Remember, the documentation that will exist without your additional mandate is largely documentation against you, not for you.

Finally, what’s very important to understand is that your clients don’t know what they don’t know.  An expert can help in creating consumer friendly documentation and reference contractual issues and real world problems and common misunderstandings that the client has no idea even exist.  If you understood the internal workings of the insurance companies then you’d realize there aren’t many more vulnerable constituencies than a life insurance policy owner.

Life insurance is one of the most complicated things that most people think is simple. A belief that retaining a consumer advocate isn’t necessary because of perceived simplicity or carrier reputation would be a mistake. 

Bill Boersma is a CLU, AEP and LIC.  He is the founder and principal of OC Consulting Group. More information can be found at www.OC-LIC.comwww.BillBoersmaOnLifeInsurance.info,www.XpertLifeInsAdvice.com or email at bill@oc-lic.com.

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The Most Important Thing to Understand Regarding Premium Financing: Are the Numbers Real? By Bill Boersma

September 16th, 2020 No comments

Given the number of premium financing cases that I review, in force and proposed, I’ve seen much of what’s out there and have a good grasp of the level of understanding in the consumer market. There’s one overriding commonality I see again and again, and until this is taken care of, there will continue to be problems: Are the numbers customers see real?

As I’ve written before, I’m not against premium financing. If I was, I wouldn’t have a mortgage on my house. I don’t pay off a 3% mortgage because I’m confident that I can do better over time in the market or invest that money back into my company, other real estate or whatever I believe I can invest in at better than 3%. Returns elsewhere that are better than my mortgage rate effectively discount the cost of the house.

The Appeal

Isn’t this often the communicated appeal of premium finance? If I can borrow at 1-year LIBOR plus 150 basis points today, let’s say that’s 2%, and I can make 5%, 6%, 7% or higher in a life insurance policy, why wouldn’t I if I’m shown that the spread will grow cash value to the point it can pay back the loan and I have significantly discounted, or even free, life insurance?

That would be great… if only it was true. Now wait a minute Bill, I can hear you saying, you’re not going to say that the gazillions of dollars of premium financed business aren’t real, are you? Well, kind of. Of the gazillions in premium financed business, some percentage is legitimate but I’ll suggest bazillions aren’t. (Sorry for the technical terms. I’ve defined them at the end of this piece.) How can I say that, you ask? Because I’ve seen the misrepresentation first hand.

This isn’t about the realism of the AG 49 regulations or the future performance of the stock market or legitimacy of proprietary indexes or performance of more realistic sequencing of returns or the efficacy of indexed loans or numerous other things we can argue about regarding modern life insurance and the financing of premiums. No, this is about something very simple… are the numbers consumers see real?

What Rates are Real?

This is where we can start getting into the area of Clintontonian parsing of language. Is that 6.2% whole life (WL) dividend rate or indexed universal life (IUL) crediting rate real? It depends on what the definition of “real” is. Is it an actual number that goes into the funnel along with all of the other contract variables? Yes. Does it bear much resemblance to the product coming out the other end? No. At least not in the sense that policy owners understand.

I’ve seen plenty of premium financed cases built around both traditional WL and IUL. In recent examples of each that I have analyzed, the internal rate of return on premium to cash value over 10 years was 0%. Let’s go back to the earlier question; Is the WL dividend rate or IUL crediting rate real? You tell me. If I’m supposedly being credited 6.2% and getting 0%, what’s real? Where’s that 6.2% going? Premium taxes and charges, policy fees, mortality charges, commission, etc. That’s to be expected because that’s how insurance works. A recent IUL case on my desk had $3.5 million of premium in the first decade and $3.7 million of expenses during the same period. That’s bound to put a dent in the returns.

That’s in the early years, so how about later? Over decades, the actual IRR on premium to cash value might be 3%, 4% or 5% based on current dividend rates and reasonable market returns, but we’re still not at the 6.2%. Is that a problem? It depends on how the deal was postured to the policy owner. What I can tell you is that over and over I see a deep misunderstanding on the part of the consumer that’s a result of misrepresentation. The arbitrage these deals are consistently built around is between the gross crediting rate and today’s borrowing rate. Moving into the arena of Trumpian language, there is almost no understanding that this is a fake spread.

It’s not real, people. It’s just not real. There, I said it. The gross WL dividend rate and the illustrated IUL crediting rate that so many consumers buy into, because that’s what they are sold, doesn’t mean much relative to the net rate after all expenses. I’m not saying this is typical of all cases, but one I’m working on right now, based on the actual original sales ledger, that has an IRR on premium to cash value that never exceeds one point something percent. I’m serious! The supposed arbitrage based on the original 6.25% projected crediting rate never even hits, under best case conditions, the borrowing rate. It’s a perpetual negative arbitrage that the client bought into because of how it was sold to him! It didn’t even have anything to do with the opportunity cost of any of his other assets.

What Can You Trust?

But what about the spreadsheets showing is all working out? Ask yourself how well you comprehend those spreadsheets. Do you really understand all the variables built into them? How realistic are the assumptions? Maybe it’s being built on an insurance carrier’s illustration system that’s being outlawed as we speak. Are you familiar with options pricing and how that affects cap rates and where they can go? When do you want to discover that? Maybe it was built off a baloney, nonetheless “real” dividend rate that someone who actually understands the markets, the industry and how life insurance works, would absolutely know is going down. Wouldn’t that be valuable and more so today than down the road after millions are sunk into it?

Let’s review. Does your client have needs and a risk tolerance profile that necessitates consideration of such a plan, or is this something “sophisticated” that rich people do? The advertised rate means almost nothing so your client should never make a decision based on the “arbitrage” or “spread” between the advertised dividend or crediting rate and the borrowing rate because it isn’t real; it’s a fake spread. Seek objective counsel from someone who understands the financial markets, the industry, the products, the programs, what’s driving these deals and who’s paid for advice.

Once again, I’m not saying premium finance is bad or can’t work, and I’m not saying to get out of what’s currently in force. What I’m trying to say clearly is that anyone who’s in a deal or considering a deal absolutely needs to understand what is real and what isn’t real. Is that so crazy an idea? The good news is that this is possible. All that’s needed is some objectivity and a calculator. If they move forward with something that isn’t as real as it’s understood to be, things fall apart, disillusionment prevails and they end up at my door. After I dive in and untangle things and show them what was real from the beginning, they tend to pay attention and get engaged. If only they were that engaged from the outset.

* Gazillion – A lot.
Bazillion – A lot but not quite as much.

Bill Boersma is a CLU, AEP and LIC and the founder and principal of OC Consulting Group. More information can be found at www.OC-LIC.com, BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com.

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Do Life Insurance Dividends and Crediting Rates Mean Anything?

September 8th, 2020 1 comment

It’s time to separate fact from fiction.

If I hear another policy owner touting the rate of return he’s getting on his policy cash value, I might scream.

Few policy owners have any idea what they’re talking about. All they’re saying is what the agent told them, and they haven’t even taken out a calculator to check the numbers.

Let’s look at a recently run traditional mutual whole life (WL) policy presented to me. The carrier is a big name and respected company with a

current dividend rate at better than 6%. The internal rate of return on the premium to the cash value at 10 years is negative 3.2%. At 15 years, it’s about 0%. At 25 years, or age 70, it’s 3.5%. It never hit 4%.

Expenses Need to Be Considered

There’s nothing wrong with this, and it’s a perfectly fine policy. However, don’t tell me you’re getting 6% on your cash value because you’re not. That’s not even how WL works. The cash value, let alone your premium, just doesn’t grow at the stated dividend rate. I mean, seriously, where do you think the expenses are paid from? Of course, not everyone thinks this and not every, or even most, agents misrepresent it, but enough do so it needs to be talked about. For full post, click here…

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Indexed Universal Life: Back Testing and Cap Rates and Averages, Oh My!

July 30th, 2020 1 comment

In a recent engagement, an agent trying to convince a client to enter a premium financed indexed universal life (IUL) transaction was touting returns on his own IUL policy over the past decade or so.  I found a number of aspects of this peculiar.  One was that he was touting the average interest rate on his own policy, which has happened to be in force during the longest bull market in U.S. history.  This was supposedly a reason the product was so great and could/might actually outperform the crediting rate of the sales ledger, which I already deem to be too aggressive based on significant objective data.

Another oddity is that he evidently doesn’t understand the difference between an average interest rate and the internal rate of return (IRR), which is the difference between an arithmetic mean and a geometric mean.  The geometric mean will generally be lower, and it’s the number any sensible person would use when evaluating an investment.  As an example, what if you get a 0% rate of return for three years and then a 40% return in the fourth year?  The average rate of return is 10% but the IRR is 8.78%.  It’s respectable but not accurate.  No one would reasonably look at the track record of this product as 10%.

Next, the agent was sharing past rates of return that are higher than currently possible due to falling cap rates.  In an IUL product, the cap rate is the highest crediting rate possible regardless of the actual index return.  On the flip side, there’s a minimum, often 0%.  Therefore the product is postured as having upside potential with downside protection.  This is not untrue but rather misleading without a full discussion of internal policy fees and charges and what’s going on with caps. For full post, click here…

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Video: Funding a Buy-Sell Agreement with Life Insurance

July 28th, 2020 No comments

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Woes of a Fee-Based Life Insurance Consultant

July 21st, 2020 1 comment

Why are policy owners so reluctant to pay for these services?

I’ll admit it.  I get frustrated at times.  I’m a fee-based consultant brought in by attorneys, CPAs, trustees, financial advisors and family offices to review, create, fix and do whatever else is needed regarding life insurance products and concepts.  I’m approached to analyze policies and programs already in force for years or even decades, and sometimes it’s new proposals that I’m retained to opine on.

History Can be a Guide

I’ve been around long enough to say “I told you so” a lot.  When I first started doing “policy audits” 20 years ago, which was already 15 years into declining interest rate markets, most policy owners and their advisors hadn’t seen many, if any, examples of underperforming whole life (WL), universal life (UL) and variable life policies.  Few people understood how modern life insurance worked and how the interest rate markets affected it, so few even looked to monitor, let alone manage, life insurance policies and portfolios. For full post, click here…

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