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Policy Design

“Favorable” Tax Treatment

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I was talking with an advisor and he said the commonly used term “Favorable Tax Treatment” about Life Insurance. I stopped him and asked, “What makes it favorable?”

He mentioned the Death Benefit not being taxable. I stopped him. “Why would the Death Benefit be taxable?”

He answered, “Well, it could be a windfall if the client buys Term tomorrow and dies next week”. My answer was that it was not a windfall, it was capital indemnifying future earning potential, a mortgage, a stake in a business, etc, and if you want need more capital you can use indices trading in the United Kingdom to improve your finances. I asked him if health insurance, homeowners, and auto insurance should be taxable and his response was that they were linked to “real objects”. I pressed on whether the loss of earnings was “real” to a family?

We moved to discussing the taxation of the cash value. “Why are the taxes on growth deferred and why are you able to get your money out tax free?” he asked. “You aren’t”, I responded and went further into drawing down cost basis and loans. “Are you be taxed on a mortgage or when you finance a car?”.

Finally, the last real sticking point was that cash is distributed First In, First Out. To which I conceded that there is preferential treatment but isn’t that one of the means the government has of making Insurance more palatable to the everyday citizen? How many fewer people would purchase insurance if they had to pay a 1099 at the end of every year? How many cash value policies would be sold if they were taxed like annuities?

As a society we have agreed that people dying with Life Insurance is preferable to them dying without it. If every time a young earner was killed and their spouse was left with nothing but children, it would tear apart the community. If every business that lacked the capital to maintain operations when an owner died, our corporations would be in shambles. You can do business with the us gold bureau with confidence, knowing that you will be prioritized and that they are looking out for your best interests.

One of the best ways for businesses to be resourceful is by using tax credits. And one of the valuable tax credits out there is the Research and Development tax credit. The right r&d tax credit softwarec can help you save money on your payroll taxes, thereby saving money to invest back into your company while building a profitable business.

Personally, I think the trade-off is far skewed towards the benefits society receives from our products than in Life Insurance contract’s ability to defer taxes and distribute FIFO. Which is why I do not consider our products Taxed Favorably. I consider them Taxed Appropriately.

Chaos Closing Out 2019

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In the November 2018 issue of Broker World, I predicted chaos for the end of 2019.

Could we see a massive logjam for product approvals? Could we start off the era of PBR compliance with a very limited set of products? Could an extension be filed to alleviate the increased load the state insurance departments will receive?

I am upset that it now seems that I was correct. How could I see this coming, but a trillion-dollar industry did not? Or did they see it, and just did not care? Any way, it is looking to be worse than I expected. Just over two months out and there are only two carriers that we work with on a regular basis that have their full line-up of products compliant in and out of New York. And there is no discussion of an extension whatsoever.

 

For those unaware, there are new reserve requirements that all Life Insurance products must adhere to come January 1st, 2020. It is forcing all carriers to rework their old products or start from scratch with new products.

While fascinating from an analytical point of view, this is wildly disturbing.

As you can see in our weekly Newsletter – The “Algren Life Line” – we are doing our best to keep tabs on the current landscape. When asking carriers for the latest on their products, the answer I receive fall into three camps:

1) We have product(s) approved but haven’t started selling them yet
2) We are working on getting product(s) approved
3) We are discontinuing product(s)

I am now at the point where I do not feel comfortable suggesting any product that is not currently PBR compliant. The consequences of receiving an application today that cannot get placed before Christmas are too high to chance it.

Please make sure you are taking that into account when speaking with your clients.

We will keep you apprised.

Case Study: Customized Coverage

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Imagine you are shopping for clothes and you find something you like in your size. You take it to the fitting room and it just does not fit. You have two choices; you could place it back on the rack and continue shopping until you find something else that fits you or you can have it tailored to you.

It comes naturally to us when we are shopping for items everyday items. Clothes, food, home goods, etc. However, when it comes to anything we do not purchase often (homes, cars, insurances, etc.) we tend to not understand our options, or even that we have options.

One of the outcomes we at Algren pride ourselves on is when an Advisor or their clients says, “I did not know you could do that”.

We recently had an advisor come to us with a client who wanted to do Extended Care planning. After illustrating several solutions, the client decided they were interested in Lincoln Moneyguard. The client was declined in Underwriting. We shopped the case to Nationwide and Securian (CareMatters and SecureCare respectively), but neither would insure the client either.

We then proposed single-paying a Universal Life contract with a Long-Term Care Rider. Yes, the contract will be a MEC – as are all products including MoneyGuard, CareMatters, and SecureCare when single-paid – however, all benefits paid for Long-Term Care purposes are tax-free.

The advisor said, “I did not know you could do that”, brought it to the client and they agreed it was worth a shot.

A Standard offer was tendered, which meant the cost was nearly identical to the original option we had shown.

We may not always be able to get the pants off the rack to fit your clients, but we will do everything we can to make sure they leave the store with pants they want and that fit!

Close More Cases

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Like many firms, Algren’s internal systems track our productivity as a staff. How many quotes were requested, how many illustrations were created, how many phone calls made, how long since we have looked at certain cases, how often we speak to advisors, and much more.

Since our dealings are tracked by advisor as well, we can extrapolate a good deal of information on advisor activity too.

Historically, if an advisor asked for anything, it was their closing ratio. We can figure that out quickly and are happy to oblige. Recently we received a few in-depth requests (I blame it on sabermetrics). While the process is far more intensive – to get stats like “Illustrations per sale” – it is interesting to see what we come up with.

One of the most obvious findings was, the less illustrations run, the higher the placement ratio. We have all heard of “paralysis by analysis”. It was almost comical how strong it applied across the seven advisors we researched.

The advisor with the least amount of illustrations per sale had an average 4.9 (including revised illustrations) over 17 cases the last 6 months. His closing ratio was second highest at 88.2% (15 of the 17 placed). Most impressive (in my opinion) is that 5 cases came back “worse than applied for” and he placed all 5.

The advisor that requested the most illustrations per sale had an average of 13.3 over 24 cases the last 6 months. His closing ratio was the worst, at 71% (17 of the 24 placed). He placed 2 of the 6 cases that came back worse than applied for.

This is powerful even though it is a very small sample size. While discussing this with a colleague of mine who works on the competition team at a carrier, we came to the agreement that it is not just paralysis by analysis of the client and the advisor, it is also lack of conviction. When we must go through a dozen different illustrations for different products and different carriers, the planning process takes a back seat and even the smallest discrepancy between two perfectly appropriate and acceptable products can cast a shadow on them. This leads the advisor to question internally the solutions and ultimately lacks the conviction to make the sale to the client.

Inevitably, we end up hearing that the client purchased another product from another advisor. While I have no data on this, I feel very confident that the advisor that did make the sale, went in with only a few solutions.

I implore you, if you want to improve your business, do not ask for a million illustrations. Instead, present us with the specific plan you and your client discussed. We are very familiar with the competitive landscape and will make sure your client is presented with the right solution and explain to you why we presented it as such.

Universal Life or Whole Life

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Have you ever had anyone ask you which product is better? Universal Life or Whole Life?

I get that question all the time. My answer is usually the same: Neither is better. Each product line offers some outstanding features that can greatly benefit consumers.

Let’s take a few minutes to break down what each product is and where they best fit in a clients’ plan.

Policy Duration
Both products are considered “Permanent”. While either can lapse prior to death under several circumstances, they are generally purchased for Lifetime coverage.

Premiums
Both products will include factors such as Mortality and Expenses into their pricing models.

Whole Life will levelize the expected mortality costs so that you are paying more early on and less later on.

Universal Life will use an increasing Cost of Insurance schedule with the internal invested funds leveraged to pay higher costs later on.

Investment Options
Whole Life will generally include a guaranteed interest rate and credit policy holders on a non-guaranteed basis based on overall carrier performance. This is called the Dividend. There are some Whole Life policies that utilize Variable Accounts, Indexed Accounts, and other methods for crediting policies holders but these are by far the minority.

Universal Life has an array of methods for crediting policy holders.

Current Assumption products will credit interest based on the carrier’s performance. This performance can include anything from the general account, to mortality experience, to other investment holdings the carrier might have.

Secondary Guarantee products usually will not show any cash value, however, they have “Shadow Accounts” that are credited similar to Current Assumption products for Lapse-Protection purposes.

Variable Universal products will offer a dozen to a few dozen Sub-Accounts that are similar to Mutual Funds. The performance of the Sub-Accounts determines the growth of funds inside the policy.

Indexed Universal products have many different interest crediting strategies. At their very core though, they nearly all offer participation in an Index’s gains through the purchase of options. Some stop there, others offer everything from guaranteed interest bonuses to charging additional fees for greater leverage.

Distributions
Paid Up Additions may be surrendered for their cash value, however, the base face amount of a Whole Life policy cannot be reduced. It can only be loaned against.

The base face of a Universal Life policy can be reduced. As such, a client can choose to withdraw as much as they like, loan as much as they like, or use a strategy that includes withdrawals and loans.

Taxes
Generally speaking, both types of policies can be set up to distribute income on a tax-free basis. Client’s should consult with their tax professionals to make sure they are owning, funding, and taking distributions appropriately.

Riders/Features/Etc.
Whole Life and Universal offer dozens of different riders depending on the carrier and product. Some carriers have riders that sound identical but operate differently. Take Waiver of Premium for instance. Some carriers will waive the entire billed premium, other will only waive the Cost of Insurance, others may choose a different amount to waive.

So, instead of asking which type of policy is best, challenge us to help you to find which type of policy fits each of your clients’ needs best.

What Do I Do?

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I started in the insurance industry almost 10 years ago. From my first day on the job I was told I needed a 2-Minute Speech or an Elevator Speech about what I do.

In the early years it was a canned speech about growing and protecting people’s wealth. It was general enough and vague enough that it every now and then someone would ask me more in-depth questions.

As I grew in the industry, my speeches became more reflective of who I am as a person. At one point I even started my speech with, “I am young enough to believe that I can change the world”. While the sentiment may have been true then (and is still true today), I would not call it the most effective introduction.

In the past few years I have come to a point that I can no longer rely on one Elevator Speech to fully encompass the value I can bring an advisor because my value is complimented by the diverse set of talents each employee of Algren Associates brings to the table. How do I succinctly convey the dozens of services Algren and I can provide to advisors and their clients, especially in areas that are not my expertise?

And that brings me to why I am writing this article.

Around 8PM last night I was recounting my day.

I started off the day talking to an advisor who had gone straight to a carrier instead of to my office to ask for an in-force illustration. The carrier sent him an inforce showing the monthly premium as the annual premium, but no one noticed that and it sent him into a panic. I got Bryon in our office involved and we were able to get him corrected in-force illustrations.

My next stop was to a Starbucks with one of our advisors who just happened to be an old colleague of mine. We were discussing a case he currently has in underwriting, his current prospecting techniques, and how we could assist him grow his business.

From there I went to the office of an agency we are trying to grow our Disability Insurance platform with. We discussed their business model and how both of our agencies can continue to synergize together.

I then had a lunch appointment with an advisor who focuses on high-net worth clients. We specifically discussed the current opportunity C-Corps have in purchasing policies under the new tax-law.

From there I started working with one of our newer advisors to show him how Life Insurance can be utilized in Retirement Planning.

I then received a phone call asking about an overweight client and which carrier we should apply for. That call was directed to Charles who advised us on the three carriers he believes would make the best offer.

I ended the day making a connection between one of our advisors and a specialist that I believe can really help him add value to his clientele.

After tallying my day I asked myself, “What Do I Do?”

What I came up with was the following:

I work to make the sales and service processes of Life Insurance, LTC Insurance, Disability Insurance, and Annuity products as seamless as possible for advisors and their clients. My goal is introduce these additional solutions to an advisor or enhance their experience utilizing them in their practice.

And that is what I do.

You Should Consider Using Protection

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I get it. In the 1980’s Current Assumption and Variable products were illustrated using wild and crazy interest rates. The backlash is still felt all over the industry in the form of “Well what are the guarantees?” anytime someone is discussing permanent products.

This led to an overwhelming reliance on Guaranteed Universal Life and Whole Life as the default permanent product lines for many agents.

The problem is, many clients would likely fare better – with either lower premiums, greater cash buildup, or both – with one of the many other permanent products available.

Let’s not go off the deep end today though. I am going to stick to just discussing the basic need for Life Insurance.

PROTECTION

We just placed a case for a 57-year old woman. She wanted $350,000 of permanent coverage. The advisor asked us to illustrate a GUL and a Whole Life product. After a brief discussion, the advisor agreed to look at an IUL geared towards protection.

We presented three options focusing on Death Benefit Protection:

IUL (geared towards protection)

This option came in as the least expensive but also had the shortest Death Benefit guarantee, ending at the insured’s age 90.

GUL

This premium came in 3.13% more expensive than the IUL but the Death Benefit is guaranteed to Lifetime.

Whole Life

This premium came in 124% more expensive than the IUL. However, the Death Benefit is guaranteed to Lifetime.

We then got a little more granular.

The IUL illustrated decent cash buildup. We explained that the guarantee is a worst-case scenario should the market return less than or equal to 0% for the next 23 years along with the carrier increasing their internal charges to the max level allowed. This product is projected to well outperform that scenario, even by staunch IUL skeptics.

The GUL does have an opt-out benefit at years 15, 20, and 25, but unlike the IUL, if you take the cash, you lose the coverage. We also discussed the dangers in early, late, and missed premiums.

The Whole Life contract illustrated tons of cash and a healthily increasing Death Benefit. However, the guaranteed and non-guaranteed aspects came with a hefty price.

In the end, the advisor took all three options to the client and the client chose to go with the IUL focused on protection due to the flexibility. She understood the difference in guarantees but felt more comfortable with the flexibility and price point that the IUL afforded her.

After the policy was issued, she asked if there was anyway we could set up the policy so she would not have to pay forever. An increase in premium of under 20% allows her to have the IUL policy paid-up in 19 years. That ended up being what was placed.

When you have conversations with clients about permanent products, Death Benefit Guarantees may be very important to them, but flexibility is likely to be up there as well. However, the flexibility conversation does not seem to be had as often.

Irresponsible illustrations made us look bad and left us leery of non-guaranteed products. However, there are current products that “bridge” the divide. We are happy to talk you and your clients through these products, how they work, and to find out if they may be the right fit for your clients.

Where Does IUL Go From Here?

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Love it or hate it, not only is IUL is here to stay, it is currently buoying our industry. Don’t believe me? According to LIMRA, in Q2 2018, new annualized premiums from Indexed Life products increased 14% over Q2 2017. In contrast, during the same quarter, the total annualized premiums from new policies sold only increased 2%. IUL products now account for 64% of UL product premiums and without them, new annualized premiums in Q2 would have looked atrocious.

This news is welcomed for someone who thinks, “The consumer base is getting more comfortable with this product and I can call my clients and tell them about my favorite one”.

On the contrary, this news is terrifying for someone who thinks, “This product is incredibly complicated, agents have no idea what they’re selling, they’re selling it improperly, and clients have no idea what they’re buying”.

In my opinion, there is some merit to both sides. However, the curveballs that have been hurtling towards us since 2016 are starting to hit the catcher’s mitt. And that is the far bigger issue.

Principles Based Reserving (PBR) brings one of the most significant changes in the laws regarding how insurers are supposed to hold reserves for claims purposes. In addition to new reserve requirements, every product that adheres to PBR must use the most current Commissioners Standard Ordinary (CSO Mortality) tables. Every product is required to adhere to this standard by January 1st, 2020.

Without getting too into the weeds, this regulation should usher in decreases in premiums for most products with an increase in Secondary Guarantee premiums. However, the largest impact it will have is in driving down Cash Values.

A quick refresher on cash values. To determine whether a policy qualifies as Life Insurance and not a Modified Endowment Contract (MEC), the contract cannot accept more premiums in the first seven years than what would be required to have the policy paid-up over that time (7-Pay Test). This is over simplified, but it is enough for this conversation.

In many scenarios, PBR will allow carriers to carry lower reserves on products than they are currently required to (which would lead to a decrease in premiums) and the longer Life Expectancy on the new CSO tables means that mortality costs should also see a decrease.

So, with the expectation that premiums and mortality are decreasing, it stands to reason that less premiums would be required to pay up a policy in seven years.

This is what we have been expecting. It took carriers longer to put out PBR compliant products than we anticipated, but we are finally seeing them rear their faces as time ticks down. One carrier just updated their line of products and for a 55-year-old preferred client the Max Non MEC premium dropped by 21% and the IRR over 30 years dropped by .92% sitting in the same exact account.

This decrease in performance above is due to the forced premium reductions from lowered reserve requirements and mortality (Think 7-pay premium) while operational costs to the carriers did not decrease. This leaves a greater percentage of a reduced premium being consumed by charges than had been before so less funds are allocated to the investment account.

One positive about the carrier mentioned above is that their new PBR compliant IUL contract does seem to be more transparent than their current line. If this is a trend that other carriers follow, we consider this a positive consequence.

If you are like us, then you are likely asking yourself the question posed in the title. Where does IUL go from here?

Your guess is as good as our but here are some of the ideas we have come up with:

  • Higher early internal charges could be withheld and utilized to boost performance in later years
  • Greater emphasis on later year Cash Values through different bonus crediting or multiplier strategies
  • Increased use of Term Riders

Whatever the future holds, it is very uncertain right now. If your clients are looking to dump as much premium as possible for cash value growth, there is no longer time to sit on the sidelines.

We would also be remiss to remind you that, we all have a rough idea of what IRRs are for most products and how they work. Most clients do not. While a product may not look as good to us, it might look great to them, especially in a level playing field where all products must adhere to the same standard.

Call our office to see what the difference could mean to your clients.

Reimbursement or Indemnification

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We spend a good deal of time presenting Long-Term Care solutions to our advisors. Often, we are asked, “Which do you prefer, Reimbursement or Indemnification?”.

The answer is not as simple as one or the other. Here are some points we discuss with advisors to see which structure might be more appropriate for their clients.

First, to clarify the main differences.

Indemnification provides a check every single month for the set amount. This is regardless of whether the actual claim amount for the month is less than, equal, or more than the indemnification amount. Due to this schedule, Indemnification benefits are limited to the HIPAA Per Diem amount which currently sits at $360 per day or $10,800 per month. Indemnification funds can be used for anything and everything if the claim has been certified.

Reimbursement will reimburse a client or pay a service directly for expenses incurred. Each carrier has their own guidelines for what benefits received qualify for reimbursement.

Indemnification can create a headache for family members trying to keep up with invoices and billing.

Reimbursement alleviates some of this when it is set up that the service will invoice the carrier directly.

Reimbursement is most suited for professional/formal caregiving as carriers need to approve all claims.

Indemnification allows informal care to be paid for by the benefit pool.

Indemnification as a rider on a Life Insurance policy will liquidate the Death Benefit in a known period. 1% per month, 2% per month, and 4% per month of the face value are the most common.

Reimbursement as a rider on a Life Insurance policy can take longer to liquidate the Death Benefit as claims may not equal or exceed the monthly benefit each month.

With these in mind, here are some important questions to ask your clients regarding Long-Term Care to see whether Indemnification or Reimbursement would suit them best.

Would you prefer formal (professional home healthcare services, assisted living facilities, nursing homes, etc.) or informal (family, unaccredited healthcare aid, etc) care?

Would you prefer to pay all the bills yourself or delegate the responsibility?

(If it is a Rider on a Life Insurance policy) Are you more concerned with a known monthly benefit or passing as much as the Death Benefit to your beneficiaries as possible?

The next time your client asks you if you prefer Reimbursement or Indemnification, this is some of the information that can help you identify the right type of policy for them.

When Stress is Your Friend

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If you are familiar with the insurance industry you are likely aware that there are carriers that create products strictly to illustrate well. This is unfortunate as many times we – as advisors – get caught up in the products with the lowest premiums or the best illustrated Cash Values. However, once these products make their way to the real world, their performance differs substantially for their illustrations.

As a trusted advisor and/or fiduciary for your clients, how can you make sure that you are recommending a product that does not just illustrate, it performs.

At Algren Associates, we take pride in our role as your Brokerage General Agency. This includes vetting hundreds of products from the over fifty carriers we represent to mitigate the impact a product design flaw can have on your clients.

Our vetting includes everything from stress testing products to staying up to date on the carriers that sell them (Financial Strength, Cost of Insurance Increases, Etc.).

In my opinion, stress testing permanent products is one of the most important functions we provide our advisors. We are not content with selling the cheapest or best illustrating product if we believe there may be cause for a client to return to their agent upset in several years.

Here are some of the way we evaluate specific products:

  • We will run over half a dozen illustrations on the same sample client. Each illustration will assume poorer and poorer performance. We will then evaluate the impact that performance has on the product’s Cash Value as well as the Death Benefit.
  • We pay close attention to the charges and fee structures. We like to know if charges are spread evenly, front loaded, or back loaded.
  • We investigate when and how interest/gains are applied to the contract. Is it based on the beginning amount, an average amount, or a final amount?
  • We breakdown the guaranteed and non-guaranteed portions of the contract. This can include everything from persistency bonuses to caps and floors.
  • We also evaluate the quality of the rider(s) that are offered.

While this can be time consuming work it allows us to feel confident that your client is getting the right contract to fit their needs based on truly objective measures. It also allows us to feel confident when there is competition for a case that we can stand fully behind the decisions that we make when we help you present specific products to your clients.

So, let us Stress today so we can alleviate your stress of tomorrow!

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