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Time Bombs of Yesteryear and Today

October 16th, 2018 No comments

This past month, there was an article on the front page of a major publication about universal life (UL) insurance policies. The article included a statement that many people “… are sitting on a ticking time bomb, and most probably aren’t aware of it.”

This reminded me of another article that said, “Today, in this period of very low interest rates, many are sitting on time bombs… Yet many are unaware…” Guess when this period of very low interest rates was? 2002! How many times since then would someone have killed for a 2002 interest rate?

Effect of Lower Interest Rates

Both of these articles, separated by 16 years, attempt to warn advisors and consumers about how the lower interest rates are wreaking havoc on their life insurance policies. These pieces, and most articles in between, are focusing on UL but the same decrease in interest rates is affecting whole life (WL) policies in the same manner, sometimes with more spectacular and devastating results. Since 2002, the average decrease in dividend rates for major WL carriers is about 300 basis points and over 600 basis points since their peaks in the mid eighties. For both UL and WL, these even lower rates for a very extended period of time mean even more policies are doing worse than ever. At least the ones that haven’t already exploded.

If I asked a room of advisors in 2002 how many of them have dealt with these issues with their clients, a few, if any, hands would go up. The same talk today would result in many nodding heads and commiserating. Back then, I think many in my audience sincerely thought I was exaggerating the issue and often didn’t believe me. “After all, if what Bill is saying was true, certainly I’d have heard about it.” But if they were paying attention, they would’ve been seeing the effects and been reading about in their respective professional journals. Simply because they missed it or weren’t paying attention doesn’t mean it wasn’t happening.

Are the time bombs of 2002 and 2018 the same? Some are and some aren’t. Some of these bombs have very long fuses but many time bombs have already exploded and most of you have probably seen the effects. Premiums wasted, death benefits lost, estate and business succession plans built around life insurance destroyed, catastrophic income tax consequences in the worst cases. It’s all fund and games until someone loses a million bucks.

Detonation and Destruction

Countless bombs are still out there with fuses getting shorter by the day, including bombs that weren’t even built until after 2002. Some will blow before this piece is published. A fuse on some 60 year old might not run out until he’s 85, but if he doesn’t cooperate and die on time, the result will be the same… detonation and destruction.

Don’t let the promise of interest rate increases allow your clients to think everything will be fine. While they might ease the pressure on contracts suffering marginally, the lower rates and the lost time value of money will make even a rising interest market meaningless in most situations.

Why?

Why is this still happening? The industry won’t educate and manage, consumers won’t listen and pay attention and most advisors won’t get involved unless they are forced to. I see it over and over again. Too many advisors don’t want to step on anyone’s toes, and they don’t want to jeopardize referral sources. Besides, this isn’t “their thing.” Few people want to jump into something that isn’t their thing, including me. But… if you know this is happening, do everyone a favor and find a way to bring it up. If you knew your client was driving a car with an active recall for faulty brakes or catching on fire, that’s not your thing either, but I imagine you might at least mention it when they’re in your office. If it was serious enough you’d likely pick up the phone. Last week I told a friend about a great new restaurant. Restaurants aren’t my thing, but I shared anyway.

I urge you to do yourself and your client a favor and join the bomb squad to help deactivate these bombs.

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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Life Insurance Analysis: an Art or a Science

October 8th, 2018 No comments

DECK: Is it worth taking an undue risk to save a few bucks? 

Earlier this year, I was introduced to a policy owner by his estate-planning attorney regarding the evaluation of a survivor life policy on himself and his wife.  It was a $1 million 1995 universal life contract that was underfunded due to decades of decreasing crediting rates.

Fundamentally, he wanted to know how the policy was doing, what it would take to firm it up and if the recommendations he’d received three years earlier from a nationally recognized life insurance consultant were correct. For full post, click here…

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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. For full post, click here…

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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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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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Life Insurance with an Infinite Return?

April 9th, 2018 No comments

Warn clients not to bail on policies.

An advisor recently called me regarding a client who has a $2.5 million second-to-die guaranteed universal life policy. The contract was put in force in 2012, so those who are familiar with the market understand that was near the bottom of the pricing curve. Nonetheless, the clients want to bail on this policy, purportedly due to the change in estate tax laws.

Given the fact that this policy is an unduplicable contract with a premium so relatively modest they probably can’t notice it, and noting the sunset provision and probable estate tax uncertainty moving forward, I’m not sure this is a wise choice, but it’s not for me to say. Maybe the kids have been ticking them off lately. For full post, click here…

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Life Insurance in Today’s Estate Tax World

March 22nd, 2018 1 comment

What to do with existing policies
By Bill Boersma

As might be expected, I’m getting more calls lately from advisors, on behalf of their clients, asking what should be done about life insurance no longer needed for estate liquidity purposes.

I generally answer the same way every time; “Let’s evaluate the policy and then talk about options.”  Depending on the client situation, the first issues I discuss with the advisor is what happens when the current estate tax law sunsets, and does your client really want to bank on what the tax laws will be, 17, 28 or 42 years from today?  With life insurance, it seems many people will jump on a reason to walk away. For full post, click here…