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Per Wikipedia, KISS is an acronym for “Keep It Simple, Stupid” as a design principle noted by the U.S. Navy in 1960. The KISS principle states that most systems work best if they are kept simple rather than made complicated; therefore simplicity should be a key goal in design and unnecessary complexity should be avoided.

In my practice, “Keep INSURANCE Simple, Stupid” is often the name of the game and the order of the day.  The definition above succinctly explains why and my real life experience in the trenches on a daily basis reinforces this on a regular basis.

Though I would not reflexively advise against any life insurance planning involving complexity or sophistication, I am going to strongly advise that you think twice, get a second opinion and be purposely cynical before pulling the trigger.  Cutting edge isn’t always necessary and sophisticated isn’t always smart.  Sometimes complicated is not fancy… it’s just complicated.

There is clearly an element on the sales & marketing side of the market which perpetuates the idea that complexity is beneficial because it insinuates something special.  After all, who wants to come to the table with the same old thing as the agent down the street?  If it’s not new and innovative then it can’t be exciting and there is no edge.

As with many clichés and axioms, there are no shortage of exceptions and contradictions.  However, I have built a thriving life insurance consulting practice on cleaning up messes and I understand why the messes are so abundant.

I have written repeatedly about the lack of understanding on the part of consumers and advisors, and even agents, regarding life insurance.  Even the simple stuff, the very simplest stuff, is commonly misunderstood by policy owners and decision makers.  Layering in complexity, either in policy design or planning, is generally a solicitation of inevitable disappointment.

The number of times I have had to help people unwind premium financing deals, split dollar transactions, private placement policies, deferred comp plans, etc, is shocking.  Again, it’s not that any one of these ideas, nor many others, is fundamentally bad, it’s that they substantively increase the chances of something going wrong.   I understand that sometimes a particular strategy is critical to a goal and, when this is the case, there is often a more straight forward way to do it and a more complicated way to do it.  Too often I see “bleeding edge” evolutions of ideas implemented when the traditional method would have been just as good.  I see complicated policy gyrations needlessly add to the complexity of a transaction when a straight forward policy would have been fine.  Sometimes it is legitimate and sometimes it is a game but it is always important to be able to differentiate.

Additionally, these transactions often get pushed through quickly because “your insurance medicals are going to expire and you don’t want to go through underwriting again” when the ultimate potentially negative impact of the plan is clearly not understood until it is too late.

I have seen the CEO of an organization sign on as party to a complicated split dollar version of a deferred comp plan where he was personally liable for all of the premium paid and he had no idea of the ramifications.  As soon as it was implemented it started going off the rails.  Another agent got involved and brought the mess to another level before I was brought in.  At a certain point, things can be so screwed up that the best I can do it to analyze and help them choose the best of the unattractive options.  Once the transaction was actually understood, the deal was terminated but the CEO was on the hook for hundreds of thousands of dollars!

One wants to believe a private placement insurance transaction put in place through a Manhattan firm with the contracts owned in an Alaska LLC would be well vetted and sound.  It might have been a good idea based on all that was understood at the time but by the time I was brought in the policies were failing miserably and had little chance of paying a death benefit without a dramatic increase in funding.  We eventually bailed on them in favour of more attractive alternatives but two years later some of the hedge fund investments in the policy are still not liquidated!  The fanciness of the deal may have had some initial benefit but it didn’t ultimately work out and made the eventual solutions unnecessarily cumbersome.

What’s simpler than utilizing a life insurance policy for supplemental retirement funding?  After all, it’s a commonplace recommendation.  Ask the policy owner who sought my help how simple it was to petition the IRS for leniency when the policy collapsed and the tax consequence was greater than his entire net worth (Real case!)

I’ve seen decisions based on the assumption arbitrage would exist indefinitely.  Isn’t arbitrage almost definitionally temporary?  Decisions I see in the marketplace often assume current conditions will pretty much stay the same over time when we intellectually understand that is realistically impossible.  Then market forces, business conditions and/or personal issues change, the wheels start falling off and no flexibility was layered into the planning.  These are decisions made by otherwise quite smart people with usually competent advisors.  There is a reason Dick Weber is fond of saying “Consumers are drawn to the attractive impossibility rather than the more likely probability.”  I see it all the time.

As a consumer, here is a recommended mindset to have before pulling the trigger; assume the agent and all of the advisors involved in the transaction have disappeared for a variety of reasons; retired, left the business, moved away, died, irresponsible, etc.  Maybe you even fired them.  Now you are on your own to decipher and manage something you barely understood when it was fresh in your mind years ago.  Could you do that and/or capably relate all of the details to a new set of advisors who could understand it and be willing to run with it?

Once again, sometimes these ideas and strategies are beneficial and even necessary, but whenever possible, try hard to simplify and to eliminate any extraneous intricacies or risk having to call me in later to pick up the pieces.  That is simply what happens too often.

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