Lisa Mitchell

Have you ever had a client who came to the end of their level term insurance period and then got a renewal notice that made them happy? More than likely, they were very upset and called you expressing “End of Term Insurance Period STICKER SHOCK!”

LEVEL TERM PREMIUM TO ANNUAL RENEWABLE TERM

Most carriers change from a level term premium during the term guarantee period to an annual renewable term (ART) rate, considering the insured’s attained age at that time. The problem? Since there is no new underwriting upon renewal, the carrier charges rates that are reflective of a much higher risk profile. This higher risk profile translates to possibly a lot more money AND the “End of Term Insurance Period STICKER SHOCK!” The reality of course, is that most clients who are still healthy enough and need continued coverage, (at the advice of their insurance advisor), will not pay the increased premium and WILL subject themselves to underwriting to obtain “freshly underwritten rates” that are more reflective of their health status for another guaranteed term policy. If they are not healthy, and feel they need life insurance coverage going forward, they will exercise their conversion privilege OR continue to pay an ever-increasing premium at the high (ART) rates.

 SOCIETY OF ACTUARIES STUDY

A May 2021 study, commissioned by the Society of Actuaries from SCOR Global Life USA Reinsurance Company (SCOR), may provide some answers and shed light on many issues affecting the direct writing carriers today. Of note and the purpose of this ONEIdea is that it may explain many of the pricing and conversion option decisions being made as a result of some of the findings and how you can advise your clients.

Allison Bell’s June 4th article for Advisor Magazine entitled “When Term Life Policyholders Leave the Level-Premium Bubble” notes two significant statistics from the SCOR study and concludes that “consumers who face a huge premium increase turn out to be good at judging their health”.

Ms. Bell notes that:

Indeed, when a consumer reluctantly pays for “substandard rates on an increasing basis”, they often know the end is near.

A PERSONAL STORY

When my aunt was in hospice some years ago and in her final days of life, it coincided with the expiration of a 20-year term policy that she had purchased. In fact, her 21st year renewal billing statement was sitting in her mailbox when I was visiting her. My uncle asked if he should pay the increased premium, to which I, of course, replied with an emphatic “YES”! The premium was almost 5 times what her level premium had been, but it was the best “investment” my uncle ever made since the company was obliged to pay the death claim a few days later.

TERM CONVERSION PREDICAMENT

This same predicament is being felt by insurance companies, and has been for some time, on conversions. Most clients who know that they are not healthy and can still convert their policies will do so, to avoid the uncertainty of an increasingly burdensome premium requirement at the end of the term period.

Claims experience from many, if not most, insurance companies has not been favorable on term conversions for many of the same reasons….consumers are good at judging their own health and often know something is “not right” with their health.

It is no wonder that carriers DO NOT WANT customers to do what the industry calls “late term conversion” and have taken steps to change their conversion period or limit the products available for conversion. More and more we are seeing long term durations limit the years in which a client can convert a policy or, alternatively, limit the product options available to a client for conversion. Most often, the product limitations are very expensive and take into consideration impaired mortality.

In a recent conversation with a carrier who will remained unnamed, I was told point blank that they favored early conversions, but “late term conversions” were a real problem for them.

It is also no wonder why life settlement companies are so interested in buying policies from consumers just prior to the term expiration period and converting them to a permanent policy. Settlement companies are investors, and they are looking for returns – BIG returns. So, much to the insurance company community’s chagrin, it makes sense that life settlement companies are looking for clients who do not want their old term policies and are NOT in good health.

LOOK BEYOND PRICE

Today more than ever, advisors should look beyond price when making recommendations for term insurance to their clients. I cannot tell you how many times I have received telephone calls from advisors asking if I can help them get an exception for a client whose guaranteed term period or conversion privilege has expired, and the client is not in good health, maybe completely uninsurable. The answer is “NO”. Insurance companies know that these cases are claims waiting to happen well before they priced for them.

Term conversion privileges vary greatly from company to company. When making term recommendations, look for the following:

1. How long the conversion period is relative to the term period. Most carriers do not allow conversion for the full-term duration, in fact many carriers limit this option rather dramatically.
2. Carriers that offer term products that allow conversion to ANY product they offer. Beware of a carrier who offers a conversion period but only allows that the client convert to a “conversion product”. These products are generally priced significantly higher than a fully underwritten product, often as high as 200% more in mortality charges.
3. The availability of a conversion extension rider. If a carrier offers this rider, consider recommending it to your client with the understanding that it comes at an additional cost. This will offer your client options should they find themselves in impaired health as they near the end of their term guarantee period.

AgencyONE’s sales support team monitors and tracks carrier conversion data and can help you advise your clients and direct them to the best carriers and products according to their financial and insurance needs.

Please contact AgencyONE’s Marketing Department at 301-803-7500 for more information or to discuss a case.

I typically see Premium Finance cases in the concept stage and probably see about 3-4 of these cases per week. A lot of advisors would like to offer Premium Finance to their high-net-worth clients who need insurance, but not every case makes the cut. In this week’s ONEIdea we discuss a Premium Finance insurance case – with options – that went well!

THE PREMIUM FINANCED CONTRACT

Some of the Premium Finance requests I see involve hypothetical cases that might be a good fit and are worth showing the client. Some are previously presented finance cases that AgencyONE is analyzing and evaluating to get a better picture of what was shown to the client (such as the one discussed in the linked blog post from Gonzalo Garcia, CLU). Others are actual Premium Finance cases that have been discussed in detail with the advisor and client who like the strategy of using leverage to obtain the required financial and insurance goals.

THE ATTRACTION OF A PREMIUM FINANCE CASE

Advisors continue to show Premium Finance cases because they are typically LARGE, and they appeal to high-net-worth clients who like the idea of borrowing funds to pay for the life insurance rather than liquidating existing investments. The majority of the cases we see at AgencyONE request a design where the client:

• pays as little as possible;
• posts NO collateral;
• pays minimal interest; and
• pays off the loan using the value in the policy.

ILLUSTRATING A PREMIUM FINANCE DESIGN CAN BE DIFFICULT

One reason is that the typical criteria for the sale is NOT REALISTIC! It is best for clients to have some “skin in the game” and to be prepared to pay interest annually and post the needed collateral AT A MINIMUM. The more the client contributes to a Premium Finance case the more likely the policy will perform as designed and remain viable to help the client “weather” any down years that might impact the contract. Benefits of the client financially contributing to a Premium Finance deal are:

1. flexibility on borrowing amounts;
2. flexibility on years to borrow;
3. ability to exit the loan earlier and more efficiently; and
4. less risk to the policy over time.

ILLUSTRATING PREMIUM FINANCE DESIGNS UNDER AG49A

Limits are set on the allowable max index rates and also for par loans. When par loans are used the crediting rate of the policy is restricted to 50 basis points higher than the par loan rate. Example – a 5% par loan restricts the crediting rate of the illustration to 5.5%. Real performance is not affected, but these AG49A restrictions are an issue for some advisors since we are not permitted to show anything above the established illustration parameters.

A PREMIUM FINANCE INSURANCE CASE (with options) THAT WENT WELL

Recently, an AgencyONE 100 advisor presented a 52-year-old male client who was heavily invested in real estate and needed about $5,000,000 in life insurance coverage. The client had plenty of net worth but not much available cash for paying the insurance premiums. The client was in a position to pay the interest but was concerned about how he could exit the loan efficiently.  The original request from the agent was to use a participating policy loan to pay off the bank loan. I explained that this design just MOVES the loan from the bank to the life insurance policy. The burden of the loan still exists but is shifted elsewhere. I then explained the risks of leaving the loan inside the policy. The contract would have to continue to perform and maintain positive cash value for the life of the insured to make this plan work. If the policy were to lapse, a huge taxable event would occur for the policy owner. The advisor and client were not comfortable with this possibility, so we continued to discuss the case and other available options.

PREMIUM FINANCE ALTERNATIVE OPTION #1

Discussions between the advisor and client revealed that the client had been considering selling some of his real estate rental properties in the next 10 -15 years. Could he use the sale proceeds to pay off the bank loan? This plan would leave the client with a cash-rich life insurance policy that could generate tax free income down the road. On the other hand, If the real estate sale proceeds were deposited into a brokerage account (instead of an IUL life policy) the growth would be taxable – an unacceptable and avoidable option.

AgencyONE uses Insmark to illustrate Premium Finance cases. The Insmark illustration below shows the client borrowing an annual premium of $418,799 per year for 7 years. Since the client was not using the policy value to pay off the loan, he was able to borrow LESS. The client pays all the interest along the way AND pays the loan off by selling a portion of his rental property. He can then take withdrawals to basis/standard loans from the policy of approximately $346,239 per year for the years 15 to 38 –

The finance sheet above has quite a bit of useful information: premiums borrowed, projected interest payments due, cumulative loan, policy values, and additional collateral required in the right-hand column. The advisor and client were amenable to paying interest but were unsure about the additional collateral required (column 11). To address this concern, AgencyONE presented another option for the client to consider.

PREMIUM FINANCE ALTERNATIVE OPTION #2

In this scenario, we added an Early Cash Value (ECV) rider to the contract that would OFFSET the collateral requirement the client was required to pay (except for a small projected amount in year 8). The addition of the ECV rider:

• LOWERED the borrowed amount;
• impacted advisor compensation by spreading comp over 4 years;
• added a chargeback provision; and
• also reduced the projected income to the client by $39,615 per year.

The ECV rider will, however, provide the full 100% Cash Surrender Value (CSV) to offset the collateral through year 7.

BUT, is adding the ECV rider to avoid posting collateral worth losing a projected $950,760 of income over the time period illustrated, years 15 to 38? This depends upon client preference and requires detailed discussions between the advisor and the client. The AgencyONE 100 advisor presented both options to the client for review.

AgencyONE’s Advanced Markets and Case Design Team possess the knowledge and expertise to assist with all of your Premium Finance cases. We are available to talk concept, design, and implementation, AND we have strategic relationships with funders, such as US Bank, who can assist with lending on your cases.

Please contact AgencyONE’s Case Design Team at 301.803.7500 for more information or to discuss a case.

We get it. You are out there pounding the pavement, finding clients, convincing them YOU are the ideal advisor to help with their financial planning needs. YOU want to deliver the best solutions from the right carriers who offer the most affordable premiums. YOU are competing with that “other advisor” who always shows best class numbers whether they are warranted or not and tries to convince your client that he or she can do better. At the same time, you are contending with on-line and TV ads that offer “quick and easy” insurance products. AgencyONE recognizes that your GOAL is to deliver only the best product and price to your clients, ideally at PREFERRED or BEST CLASS offers. BUT if you want PREFERRED Offers, you need to understand PREFERRED criteria!

KNOWLEDGE IS POWER – ARM YOURSELF

Understanding preferred criteria arms YOU with the information you need to have meaningful, educated conversations with your clients. YOU can set realistic expectations and demonstrate a greater depth of knowledge while ENGAGING your clients in the underwriting process. In this ONE Idea, we are going to take a closer look at what goes into a preferred offer and WHAT AND HOW you need to communicate with your clients.

THE DEVIL IS IN THE DETAILS

Assuming your client does NOT have a ratable medical impairment, avocation, occupation, foreign travel or driving record, meaning they are considered a true STANDARD RISK, AgencyONE looks at a carrier’s preferred criteria to see where the client can qualify for the best possible rate class. This allows YOU to deliver the desired product at the most economical cost. The number of preferred classes (Standard Plus, Preferred, Super Preferred, etc.) and the parameters around each vary from carrier to carrier. Typically, preferred criteria includes specific metrics around:

• BuildBlood Pressure
• Cholesterol
• Tobacco Use
• Family History
• Foreign Residence and Travel

BUILD

The COVID pandemic has kept a lot of us away from the gym and possibly snacking a bit more than usual, and the result may have been unwanted weight gain. A 10-to-15-pound weight INCREASE can result in a rate class DOWNGRADE! Did you know, for any recent and significant weight LOSS, most carriers will add half of the weight BACK until the weight loss has been maintained for an entire year?  Each carrier has MULTIPLE build charts. In addition to preferred build criteria, carriers may have DIFFERENT parameters for males and females, Accelerated Underwriting Programs, Long Term Care Riders, TERM, UL, and Hybrid products. Many carriers underwrite by your Body Mass Index (BMI) which you can calculate here. Clients considered UNDERWEIGHT (generally a BMI < 18) can also be knocked out of preferred classes!

SO, WHAT SHOULD YOU DO? Be specific with your clients. EXPLAIN WHY you need their ACTUAL weight, not their GOAL weight, and how this information can translate into premium dollars. AgencyONE has all the necessary information at our fingertips and can help guide you and your clients toward the ideal carrier.

BLOOD PRESSURE

A “normal” blood pressure reading can vary depending on who you ask, but 120/80mm/Hg is typically the means for comparison. The preferred parameters for blood pressure readings differ for each carrier, each rate class, the age of the client, and in some cases, if the clients are treated for hypertension. Many carriers will average 12 months of blood pressures to determine your client’s class qualification.

SO, WHAT SHOULD YOU DO? If your client says that he or she has high blood pressure, ask how well it is controlled. If your client takes medication, remind him or her to TAKE IT as prescribed leading up to AND on the morning of the insurance exam. Advise your client to LOOK at the examiner’s blood pressure reading, and if it seems higher than is normal, REQUEST IT BE TAKEN AGAIN. Understanding the economic impact of the blood pressure will help your clients engage.

CHOLESTEROL

Total Cholesterol and cholesterol ratio are considered with preferred criteria. [The cholesterol ratio is total cholesterol divided by HDL (good cholesterol)]. These parameters also vary by carrier, rate class, age, and if the client is treated for high cholesterol. Although not typically included in preferred criteria, an elevated triglyceride level can also affect underwriting offers.

SO, WHAT SHOULD YOU DO?  If your client says that he or she is on a statin for their cholesterol, ask them how well it is controlled. Explain how the cholesterol readings on the insurance exam can COST or SAVE your client money. Encourage your client to watch his or her diet and alcohol intake leading up to the exam, and to make sure to take any recommended medication regularly.

TOBACCO USE

If your client used to smoke cigarettes and has quit, it can take anywhere from 1 to 5 YEARS to qualify for a preferred or best class offer depending on the carrier. There are differing parameters around cigars, dip, chew, Nicorette Gum…. even marijuana smoking.

SO, WHAT SHOULD YOU DO? DISCLOSURE is EVERYTHING. Make it VERY CLEAR to your clients that you need ALL the details. If your client quit smoking cigarettes recently, get the actual quit DATE (most people know it). If your client tells you that he (or she) smoked a cigar on the golf course – find out how often and when your client had the last “puff”. The fact is, there are carriers that will take cigar, dip, chewers, Nicorette users at their lowest preferred class (Standard Plus band) and NON-tobacco rates, even with nicotine in the urine…as long as they know it IS NOT from cigarettes. With Marijuana – same story – preferred rates are possible. Disclosure and frequency of use are imperative details to collect and will help AgencyONE point your case in the right direction.

FAMILY HISTORY

Your genes matter! Carriers look at the age and cause of death for an applicant’s parents and sometimes his or her siblings. Many carriers will not offer ANY client preferred or preferred best classes if he or she has ONE parent that passed away prior to age 60 to 65 from cancer or heart disease. There are carriers that ignore family cancer histories all together, some that will offset family cardiac histories if the applicant has had certain medical testing, and other carriers that will consider a preferred offer if ONLY ONE parent died before age 60. Some carriers throw these parameters out of risk assessment entirely once the applicant reaches” insurance age” 59, while others never do. The guidelines are “all over the place” with family history!

SO, WHAT SHOULD YOU DO? Ask your client if anyone in his or her immediate family passed way. If so, what was their relationship to the insured, age, and cause of death? Again, AgencyONE uses this very important information to guide you and your client towards the best carrier for your case.

CASE STUDY

Client: John Smith, 59-year-old male applying for $5,000,000 of 10-year Term, Key Man coverage
Build: 6’3” in height, 245 pounds
Blood Pressure: Normal, averaging 123/82mm/Hg
Cholesterol: 293 HDL 50 – TC/HDL ratio of 5.86 on the insurance exam
Tobacco: Non-smoker
Family History: Father was a heavy smoker, passed away at age 57 from heart attack

AgencyONE HAS YOUR BACK

We have created several tools to make gathering and relaying this information easier. Our AgencyONE Informal Inquiry and Exam Prep Video provide detailed information about what is required to start the underwriting process. Good, clear communication between advisor and client is extremely important. Explain WHY the details matter and how accurate collection of the details will very likely save your client time and money.

AgencyONE’s Underwriting Team has many years of well-regarded experience, deep carrier relationships, knowledge of underwriting guidelines, and a mastery of carrier niches to direct your client’s cases to the RIGHT CARRIER at the RIGHT PRICE EVERY TIME! We are COMMITTED to providing you and your clients with exceptional underwriting, competitive offers, and extraordinary back-office support.

At the time of writing this, 2021 is already half over and AgencyONE was seeing quite a few of our carrier partners introduce their compliant Section 7702 IUL options. From a design standpoint, our case design team has noticed that the initial face amounts generated are noticeably lower and the income is higher based on the 7702 changes. Some advisors have expressed concern that their clients are sacrificing too much death benefit for such a small increase in projected income. This week’s ONEIdea will discuss death benefit design options using Section 7702 products.

PROJECTED INCOME – TRUE MINIMUM NON MEC DESIGN

If projected income is the most important aspect of the sale, than a true minimum non mec design will provide the highest possible income for your client (Click here for a FAQ and explanation of MEC). This design requires leveling and dropping the death benefit at the end of the premium payment period to further maximize the design. Let’s consider two different ages since these comparisons perform differently based on age. Assume the following:

• Male 45 and Male 55, both preferred non-tobacco
• $10,000 premium for 10 years; then a maximum death benefit drop in year 11
• Income from ages 68 – 85 using withdrawals to standard loans
• Maximum carrier AG49 rate

The table below shows a true minimum non mec design illustrated today:

The information set forth in the table above does not allow any extra room for additional funding and also does not provide much death benefit, if needed. Many of our AgencyONE 100 advisors prefer to have additional cushion built into the death benefit so that their clients can increase premiums down the road. While they do not keep a policy optimally funded, the new product versions offer clients the option to increase future premiums.

DOUBLE MINIMUM NON MEC FACE AND MAINTAIN PREMIUM

Another scenario to consider is to keep the premiums the same but double the previous minimum non mec face to see what that looks like. The table below explores this option:

TWO SCENARIOS – DIFFERENCES

The main differences between the two comparisons above are that the face amounts are higher for 10 years in one scenario but then drop quite a bit after the reduction to the corridor limits in year 11. Cash values are lower which cause the income to also decrease. Target is 2X the minimum non mec amount. Even though the design builds in premium and allows room for the client to increase the funding later, it drags down the values. There is too much death benefit for the premium paid and, if the client does not increase the funding of the policy, it will impact the policy’s future values in a negative way.

A BALANCED OPTION

What is the best way to offer more death benefit and provide room for more premium BUT not impact the cash values and income? Some of our carrier partners have come out with basic charts that provide increase percentages based on sample ages. While fairly generic in nature, one of our carrier partners has created a special solve for this in their software. It is an option called “Balanced Solve”. This option typically falls between the 2 versions shown above. However, each case needs to be based on the agent recommendations and the needs of the client. This special solve option provides a quick way to see how the design will be impacted and what the tradeoffs are for more initial death benefit.

RESULTS OF A BALANCED OPTION

This balanced option provides more initial death benefit and only slightly impacts the cash values and income. The percentage drops are within a more acceptable range and allow the clients to increase contributions down the road as their income levels increase. This design gives the client more options without impacting the cash value and income – as much as the doubling of the face amount scenario. Is the small decrease in values worth the extra death benefit trade off? Only you and your client can decide that.

AgencyONE’s Case Design Department is very well-versed in carrier product intelligence, has an exceptionally high degree of case design experience, and stands ready to assist our AgencyONE 100 Advisors and their clients in considering the best death benefit design options using Section 7702 products.

Medical Underwriting today requires two very different phases of assessment with the variety of living benefits currently offered and sold. While AgencyONE is consistently estimating MORTALITY for the life product, closer attention to your client’s MORBIDITY risk is required when Long-Term Care or Chronic Illness Riders are part of the case. These two phases of assessment may be why you are asking the question – WHY is My Client a Preferred Life Risk, but Declined for Long-Term Care?

MORTALITY VS MORBIDITY

Simply put, when underwriting MORTALITY, the focus of our medical assessment is on the probability of DEATH. However, the probability of becoming disabled exceeds that of death. To go on a Long-Term Care claim, the applicant must demonstrate an inability to perform two of six activities of daily living (bathing, continence, dressing, eating, toileting, transferring), or have a severe cognitive impairment. As such, when underwriting MORBIDITY, we are looking at conditions that could result in a long-term need for different levels of convalescent care. There is a greater focus on an applicant’s OVERALL state of HEALTH and FUNCTIONALITY, and how it could impact their ability to care for themselves.

In this ONE Idea, we are going to walk you through some of the differences in underwriting and demonstrate how knowing the CORRECT carrier for mortality AND morbidity can greatly impact the success of your case.

LONG-TERM CARE RIDERS (LTC) VS CHRONIC ILLNESS RIDERS (CIR)

A traditional LTC rider is underwritten similarly to a life insurance product. Impairments are carefully vetted and offers can range from preferred to a table rating, SEPARATE from the life offer. Chronic illness riders fall into a “yes” or “no” category. Many have a short “knock-out” list, but if the life offer is table D/4 or better the rider generally CAN BE included.

A FEW MORBIDITY RED FLAGS

Osteoporosis is a metabolic bone disorder which results in a reduction of bone mass. As the bones deteriorate, they weaken which can lead to fragility and fractures. Bone density is measured by a test called a DEXA scan. The severity of osteoporosis is underwritten based on that score and/or a history of falls and fractures. Osteoporosis would not generally affect the life offer, but it ALWAYS puts LTC offers and insurability at risk.

Recent surgery, particularly ORTHOPEDIC, would only affect the life offer if a complication or chronic pain component existed. The TYPE of surgery alone can make your clients uninsurable for a traditional LTC rider. Certain carriers will DECLINE LTC for applicants who have had spinal fusions, multiple back surgeries, or joint replacements because of chronic osteoarthritis.

Physical therapy is a treatment commonly found in medical records for a multitude of reasons. We would not give this a second thought if your client is applying for a life product alone. However, clients actively receiving physical therapy are declined for LTC for about 6 months after it concludes. Then, ratings would depend on WHY physical therapy was ordered and how the client is functioning thereafter.

COVID “long haulers” continue to emerge and many have residual physical and emotional symptoms. For now, each applicant will be handled on a case-by-case basis; however we anticipate guidelines for LTC/CIR and life underwriting will continue to evolve.

A WORD ON COMORBIDITIES

Comorbidities are the presence of two or more diseases and/or medical conditions. Often, one condition has the potential to make the other worse. For example, an applicant with diabetes who is also obese may have a more difficult time controlling his/her blood sugar and cholesterol, is less likely to be exercising, and could be considered a less favorable risk. Underwriters like long-term stability when it comes to ANY chronic condition. When your clients present with comorbid conditions, the “big picture” is scrutinized more closely. Greater attention is paid to the individual’s:

• build;
• lifestyle and social habits;
• medical surveillance and follow-up;
• compliance with treatment; and
• mental health history, cognition, and social support.

NOT ALL CARRIERS UNDERWRITE LTC THE SAME – CASE STUDY

Jane Smith is a 59-year-old, nonsmoking female applying for a $1MM policy with an LTC rider. She has a history of high blood pressure and high cholesterol which is medically managed and well controlled. Jane had in-situ breast cancer 10 years ago without recurrence, is postmenopausal, and has suffered bone loss. Calcium and vitamin D supplements are a part of her regular regimen and she has no history of falls. The APS indicates Jane exercises regularly, is up to date with screening mammogram, PAP testing, and colonoscopy. Her recent blood work is normal and most recent DEXA scan showed her greatest bone loss at -2.9, which indicates that Jane has osteoporosis.

We know immediately that at least TWO carriers would DECLINE the LTC rider due to the DEXA score and that one may be MORE competitive on the life offer with this history. AgencyONE presented the case to the two companies we felt would be most competitive for this client:

$1MM UL policy, all pay to age 100, LTC at 2% – LTC benefit $20K monthly.

IF LTC OR CIR IS A PART OF THE CASE, WE NEED TO KNOW UP FRONT!

It is imperative to let us know up front when LTC or CIRs are included in the case. This changes the path of the case, not only in the APS information we need, but which carriers we price and recommend for your client.  Details about your client’s lifestyle that will provide the carriers with an accurate and holistic representation of the case are also very important to include.

Long-Term Care and Chronic Illness Riders offer an extremely valuable benefit for your clients. If you are not talking with your clients about these options, START NOW. Our case design team are experts with the various products available. Together, we can help you choose the ideal carrier(s) AND negotiate the offer your client deserves.

The potential loss of step-up in basis is very real with President Biden’s The American Families Plan proposal that was released on April 28, 2021.  While this is a proposal and NOT law (yet), I am sure that it will be the subject of hard negotiations on Capitol Hill for the foreseeable future. I cannot resist the opportunity to make a few points about how properly structured life insurance can provide significant planning solutions to the tax impact of the proposed plan with respect to the potential loss of step-up in basis.

Click here for the full Fact Sheet as presented by the White House (excerpt below). Toward the end of the White House’s document, you will find the tax reform that is proposed by the Biden Administration to pay for the benefits of The American Families Plan.

Life Insurance Is An Asset

Life insurance is a very valuable asset. It enjoys an automatic step-up in basis at the time of death because the benefit is paid income tax free and can be excluded from the taxable estate if properly owned. Let’s ignore that for just a second.

Assume that a wealthy 60-year-old individual has a choice to either purchase investment assets (stocks, bonds, alternatives, etc.) or a $5,000,000 guaranteed life insurance contract. The life contract will come with a commitment of approximately $200,000 per year for 10 years.

In the investment account, the portfolio generates both capital gains and dividend distributions. This would be taxable to high income earners under the Biden Plan at ordinary income rates of 39.6%, plus a 3.8% Medicare tax. Reinvested dividends and capital gains increase the basis of the portfolio each year and should be tracked accordingly. The portfolio will also experience untaxed capital appreciation over time until death. It would be taxed at the same 43.4% rate to the heirs under the proposed White House Plan.

Unique Qualities of Life Insurance

Life insurance is unique in that the death benefit is paid income tax free and enjoys an automatic step-up in basis for the full benefit paid at death, regardless of basis.

We have provided a summary analysis based on the hypothetical facts laid out above. You will see the benefit of life insurance as a wealth transfer asset is not only guaranteed after the 10 premium payments, but exceeds the net wealth transfer to heirs until the very later years of life. In fact, based on our assumptions, the crossover point is age 96. (This DOES NOT account for any state estate taxes or inheritance taxes which may be due.)

We have assumed that the investment portfolio earns a 5% total return with a 2.5% capital appreciation and 2.5% reinvested income (dividends and capital gains distributions). A more detailed analysis is provided here.

Life Insurance as an Uncorrelated Asset

The other important attribute of life insurance is that it is a completely uncorrelated asset to any other economic events that could affect financial markets. Imagine if a client passed away in 2003 after the tech bubble, or in 2008 during the great recession, or in March of 2021 during the initial market correction of the COVID-19 pandemic. All of those corrections were approximately 30 to 40% market corrections. Individuals do not choose when they pass away, and the markets do not care …. and neither does life insurance. It is worth its full value and is fully liquid exactly when it pays the expected benefit.

Life Insurance – properly owned and structured

Life insurance proceeds can be further excluded from the insured’s taxable estate. If the taxpayer would be subject to estate taxes, life insurance should be owned in an irrevocable trust and outside the taxable estate of the individual or couple. The analysis conducted in this presentation would be substantially the same because a trustee would have to liquidate securities or other assets to pay for the needs of trust beneficiaries. A trust does not enjoy a step-up in basis regardless of the current White House administration’s proposal, unless it owns life insurance – which is always fully liquid at face value.

The product shown in our analysis is a fully guaranteed universal life policy with 10 premium payments. Other products, without similar guarantees, may provide a lower premium and further enhance our analysis. Equally, Whole Life products may have a higher premium but provide a growing death benefit due to paid up additions, delivering more death value as a result. AgencyONE is product neutral and has access to over 30 insurance companies in our portfolio. Our goal is to assist advisors in making recommendations that serve the best interest of their clients.

Please contact AgencyONE’s Marketing Department at 301.803.7500 for more information or to discuss a case.

The American Families Plan – Excerpt

Households making over $1 million—the top 0.3 percent of all households—will pay the same 39.6 percent rate on all their income, equalizing the rate paid on investment returns and wages. Moreover, the President would eliminate the loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs. Today, our tax laws allow these accumulated gains to be passed down across generations untaxed, exacerbating inequality. The President’s plan will close this loophole, ending the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity.

Finally, high-income workers and investors generally pay a 3.8 percent Medicare tax on their earnings, but the application is inconsistent across taxpayers due to holes in the law. The President’s tax reform would apply the taxes consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.

Term insurance is designed to provide a needed death benefit to cover shorter terms at an affordable cost. Some compare it to renting insurance coverage because it is not a permanent policy, it does not offer cash value (no equity), and the insured could possibly outlive the coverage. BUT term insurance does something very important – it locks in future insurability making the process of conversion easier.

FUTURE INSURABILITY – A STRONG SECONDARY BENEFIT

While many believe that a term policy only provides a death benefit, clients and advisors should be reminded that term insurance ALSO provides a STRONG secondary benefit – IT LOCKS IN FUTURE INSURABILITY!  This is a tremendous plus in scenarios where the client has experienced a change in health that might otherwise make getting underwritten in the future difficult. A term policy guarantees insurability, offering the option to lock in permanent coverage. It is important to remember that conversions do not only make sense due to health reasons. Clients have changing needs over time and a conversion can be an excellent way to help meet their needs without going through underwriting. So, when are term policy conversions a good idea? Following are a few examples:

• a new job or pay raise that may allow an overfunded cash product
• a future estate need
• the addition of a Long-Term Care rider
• an inheritance
• the birth of a child or the departure of children that have aged out of the household
• a mortgage that has been paid off

CONVERSION OPPORTUNITIES

AgencyONE has talked through many conversion options with advisors recently and was pleasantly surprised with the information provided. Many said that even if the client chose not to convert, the option provided a GREAT reason to check-in with the client. Others said that while the client’s current situation did not dictate a conversion, the conversation resulted in referrals and the initiation of new cases with family members and business colleagues.  The conversion option helps advisors stay in front of the client, promotes a current risk assessment, and provides the opportunity for additional sales to the client and any possible referrals that result from the conversation.

WHAT YOU NEED TO KNOW IF YOUR CLIENT WANTS A TERM POLICY CONVERSION

You are required to review and understand the carrier’s conversion details for the existing policy. You must also identify the qualified product choices for converting. Following are some additional conversion facts to consider:

• Some carriers have different term versions with underwriting classes that do not line up. One carrier’s product from 2010 can convert standard plus to standard while a newer version converts standard plus to standard plus. Also, an initial preferred NT rating may be restricted to a standard NT conversion.
• Carrier conversion language may restrict you to only specific products, and these product options may offer little flexibility.
• Some options allow conversion to ANY permanent product available for sale within the carrier’s product line.
• Other carriers dictate specific time frames for the type of conversion that can be made. For example, ANY product can be chosen if conversion takes place early in the term (i.e., the first 4-8 years) of the policy but then limits the available products for the conversion thereafter.
• Carrier product selections are constantly changing. Products that clients have successfully converted to in the past may not be available in the future. Many GUL products have either been discontinued or had price increases that may prevent them from being a viable conversion option for your clients.
• Some carriers will help you promote early conversions to lock in competitive permanent coverage now.

CARRIER PRODUCTS CONSTANTLY CHANGE

AgencyONE remains up-to-date and well-versed in the latest carrier conversion information. Even if AgencyONE is NOT the current GA for the term case you want to convert, we can help obtain the information needed to run quotes, compare fully underwritten coverage, if applicable, and place the conversion for you.

During the last several weeks I have assisted quite a few AgencyONE 100 advisors with alternative estate and gift tax planning options to present to clients who are concerned with many of the Biden Administration tax proposals. Advisors and clients know that optionality is key to estate planning when the tax environment is so uncertain. We have discussed these issues at length in many of our recent ONEIdeas and our past webinar series. (The Election is Over – Now What with Alan Brown, JD, & Randy Zipse, JD, AEP & The Tsunami is Coming – The Wealth Tax with Joe Ross, ChFC, CLU, CRC, AIG Financial).

I have been in this business for almost 40 years, and I have never seen a more challenging OR a more opportunistic environment at the same time.

A Review of the Current Planning Environment

Since the Tax Cut and Jobs Act (the Trump Tax Act) of 2017, wealthy clients have enjoyed a unified estate and gift tax exemption that doubled from the prior $5MM per individual ($10MM per couple) in place and left by the Obama administration (subject to annual cost of living adjustments). The current (2021) limits have increased to $11.7MM per individual and $23.4MM per couple. As a result of these very high limits, less than 1% of U.S. estates are subject to an estate tax.  Individual and joint taxpayers can give these amounts over their lifetime to trusts or directly to descendants without a gift tax due.

Estate Planning Strategies for Wealthy Clients

The simplest estate planning strategy for most wealthy clients, assuming they have other assets available to live on, has been to simply move (gift) large amounts of money (up to $23.4MM) downline generationally (children\grandchildren) or to make gifts to trusts. Life insurance owned by a trust (outside of the client’s taxable estate) has typically been part of the financial equation, depending on the composition of the estate and the need for liquidity or leverage.  Additionally, clients can make annual gifts based on the annual exclusion amount per beneficiary of $15K ($30K per couple) without any gift tax due or informational IRS filing requirements.

COVID, Interest Rates, & Planning

As COVID-19 gripped the economy, interest rates continued to plummet. They hit historic lows, while clients of means continued to enjoy a booming stock market and increases in other assets. In fact, CBS News reported on March 31st, 2021 that the world’s 2,365 billionaires enjoyed a $4 trillion boost to their wealth during the first year of the pandemic – a 54% increase!

This has triggered an outcry by many to tax the wealthy. This idea is supported by two-thirds of Americans, according to the CBS article. While it may prove elusive, many pundits believe that something will happen on the tax front that may include:

• raising taxes on incomes over $400,000;
• reducing the estate and gift tax exemptions to $3,500,000 per taxpayer;
• decoupling the estate and gift tax exemption; and
• limiting lifetime gifts to $1,000,000.

This poses a quandary to wealthy individuals. Should they “bite the bullet” and gift assets to trusts or outright to their heirs under the current tax regime.

Optionality- Premium Financing Strategies

One of the often-overlooked strategies for purchasing life insurance in trusts brings us back to the low interest rates mentioned before. There are two common financing strategies: commercial premium financing and private loan\sale arrangements that increase options in planning.

Commercial Life Insurance Premium Financing

This involves banks and other financial institutions that lend money to families or trusts for the acquisition of permanent life insurance to cover estate tax or other liquidity needs. The primary reason for this is if a client’s assets are earning more returns than the cost of financing. This creates a positive spread or arbitrage. Another very important reason to consider is if highly appreciated assets need to be liquidated to pay life insurance premiums. A capital gains tax would be created at the time of sale.

If a trust can borrow money at 3% and leave assets invested in equities, family businesses, real estate holdings, etc. earning 6%, then there is a natural positive arbitrage. The risk is if the cost of borrowing exceeds, for any extended period, the returns on the portfolio assets.

My gut tells me that the United States is likely in a protracted low interest rate environment. This is caused by the weight of the U.S. National Debt, which has and will continue to grow due to pandemic relief, and the proposed infrastructure investment, which are currently being discussed. I do not believe that the Federal Treasury will increase the cost of borrowing any time soon. The ONLY way out of this quandary is to increase taxes in a meaningful way, which is not popular. The tax increase subject further highlights the importance of “wealth tax” planning.

Commercial premium financing is a complex area and requires significant expertise in modelling, stress testing, and a sound exit plan. After all it is a bank loan which needs to be paid back.

Private Financing or Private Sales

Did you know that you can lend money or sell an asset in exchange for an interest-bearing note to a family member (or trust) and that the IRS will dictate what interest rate to charge? Currently, for a short term loan of 3 years or less the prescribed interest rate by the IRS is .12%, for a mid-term loan of 9 years or less the rate is .89%, and for a long-term loan of greater than 9 years the rate is 1.98% (IRS rates for April 2021).

If you could sell an asset that is earning 10% to your trust in exchange for a note paying you 1.98% and you knew that all growth over the “hurdle rate” of 1.98% would forever be outside of your taxable estate, would you? If your trustee could reinvest the excess cash flows into other assets and diversify the trust portfolio, would that make sense?

Private financing arrangements can take a variety of forms. As noted, they can be outright private loans, sales in exchange for notes or in the form of a loan regime split-dollar arrangement. All of these are sophisticated tools that require a well-versed tax attorney and\or accountant.

AgencyONE Advanced Markets

The AgencyONE Advanced Markets team has developed a comparative presentation and analysis that can be customized for your clients. The presentation considers:

• asset\portfolio composition;
• liquidity, tax, and cash flow analysis;
• comparisons to outright gifts; and
• commercial premium financing and private financing strategies.

This presentation has been used for a number of clients and has led to some very significant planning. Again, optionality is the key to estate planning today when the environment is so uncertain!

This week’s ONEIdea is an ANATOMY LESSON on the AORTA that discusses how the artery works and what can happen to cause an Aortic Aneurysm. Many ask, “can I still get life insurance after being diagnosed?” The answer is “yes”, but it depends upon the specifics of the diagnosis, treatment, and follow-up care. The examples at the end of this article will help to illustrate how cases can vary from one client to the next and result in the successful placement of a policy…. or not.

The Anatomy of the Aorta

The AORTA is the largest artery in the body and the single major vessel that distributes the blood from the left ventricle of the heart. The Aorta is NOT just a blood delivery system but consists of several layers of muscle and sensory tissues that serve multiple functions to help monitor and stabilize blood pressures and heart rates.

The anatomy of the Aorta is very simple and gives us reference points for problems, such as an Aortic Aneurysm, and areas of concern that most affect mortality considerations. The Aortic Root is the beginning of the Aorta where this major blood vessel arises from the heart (left ventricle). The Aorta “ascends” upward (naturally called the Ascending Aorta) then arches backward (The Aortic Arch) and turns downward to supply blood to the rest of the body through the Thoracic Aorta in the chest area and the Abdominal Aorta below the diaphragm. Major artery branches from points along the path of the Aorta supply blood to the brain and the rest of the body.

How the Aorta Works

When the left ventricle squeezes, blood is forced out of the heart across the Aortic Valve and into the Aorta at tremendous pressure. That pressure reading is known as your SYSTOLIC blood pressure (the FIRST number on a blood pressure reading). The Aorta must be strong and resilient to handle these pressures which can vary dramatically in any normal day.  The layers of tissues that we mentioned before must all work together to strengthen the Aorta…. but sometimes they do not.

Aortic Aneurysm

If you think of the Aorta as a bicycle tube and tire (layers), if the outside liner is weakened, the inside tube pushes through….and enlarges…and can tear (dissection) the other layers. Years of high blood pressure, simple aging and wearing out, or genetic weakness (Bicuspid Aortic valve complications come to mind), can all cause a weakness and ballooning of the Aorta. The life insurance risk with a known aneurysm is very real, since a rupture of this ballooning major artery can mean death in minutes, potentially.

Aorta Size Matters

OK men, the statistics are in. 7-9% of men over age 65 have some sort of “enlarged” Aorta. Is this simple wear and tear or is there a life-threatening aneurysm involved? Because these enlargements, dilations, and aneurysms are typically asymptomatic, they are often found “incidentally” through a routine chest x-ray or another medical scan. Once discovered, they cannot be ignored by underwriters. This does NOT mean that an operation is imminent or even needed at all…just that the aneurysm or dilation needs to be watched to see if it is GROWING, which would indicate further weakness and more concern.

Underwriting an Enlarged Aorta

The diameter of a normal Aorta is like that of a garden hose (1-2cm). Underwriting “enlarged” Aortas requires attention to details like: is this a true aneurysm (involving all three layers of the aorta) or just a stretching/dilation? Because an enlarged Aorta is relatively common and the mortality is low, the underwriters start getting a mortality concern at 3.8 cm and above. A carrier may rate the case if above 4 cm and surgery may be involved at 5 cm as a very real danger exists for RUPTURE.  It is NOT unusual for underwriting to “hedge” on providing quotes in these situations until a proven track record of stability (which may take years) is delivered to the underwriter or medical director. Clearly, the finding of an enlarged Aorta must be WATCHED with regular physician follow-up.

Screening Tests & Aortic Aneurysms

During 2020, at the height of COVID, doctors were not ordering, and patients were not getting as many routine screening tests. Patients, doctors, and institutions were all reserved about bringing “healthy” people in for testing.  However, we WILL see an uptick in screening tests for the remainder of 2021 and throughout 2022 as we all move back to a “normal” medical care schedule.

Life insurance and financial planning experts know that any NEW medical test carries the possibility of an abnormal finding that could cause a DECLINE or a RATING on a life insurance application.  AgencyONE has always encouraged clients who are actively involved in underwriting to SEE THEIR DOCTORS ONLY AS REQUIRED AND TO HOLD-OFF ON ANY ROUTINE TESTING, IF POSSIBLE, UNTIL UNDERWRITING IS COMPLETED.  A test that shows a “suspicious” finding today will certainly require follow-up and it may take an extended time to get a negative finding to move forward with the needed life insurance protection.

Remember, the majority of Aortic Aneurysms are asymptomatic and usually discovered during a routine screening test. IF YOU HAVE CLIENTS WHO ARE INTERESTED IN LIFE INSURANCE, PLEASE ENCOURAGE THEM TO GET ALL THEIR COVERAGE/FINANCIAL PLANS FUNDED AND IN PLACE NOW, BEFORE THINGS BEGIN TO “NORMALIZE” AND SCREENING TESTS RESUME.

Aortic Aneurysm – Can I Still Get Life Insurance? Case Examples

In December 2020, a 70-year-old male with a family history of coronary artery disease was directed by his physician to get a routine Chest CT scan for a coronary Calcium score.  The score came back 38 (essentially no concern at his age) but there was an incidental finding of a 4.2 cm Ascending Aortic Aneurysm. A follow-up echocardiogram verified excellent cardiac function allowing for a substandard offer rather than a postpone.

In January 2021, a 49-year-old male with occasional Gastro Esophageal Reflux Disease (GERD) (medically treated with antacids) which was causing chest discomfort was ordered by his Doctor, as a precaution, to have a routine chest CT for a coronary Calcium score. The Calcium score was “0” (perfectly normal) but an incidental finding of a 4.4 enlarged Aortic Aneurysm was found.  Since no prior comparison films existed, the client was started on blood pressure medication and ordered to be seen in 6 months for a stress EKG and a new chest CT to determine if the aneurysm was growing. The life insurance CASE WAS POSTPONED due to the routine screening test with incidental positive Aortic Aneurysm finding AND the $1.5 million in permanent protection WAS NOT delivered to the client.

Advisors and clients who are knowledgeable about the underwriting process and have regular medical care and follow-up in place are an important part of obtaining accurate underwriting and successful policy placement. These things along with the receipt of complete medical records by the underwriter are vital and help make the assessment of risk more favorable.

In a New York Times article entitled It May Be Time to Start Worrying About the Estate Tax the author, Paul Sullivan, addressed the challenge of the lost step-up in basis on assets that have been transferred at death as his main point. This eventuality should be a worry for ALL taxpayers, not just for the very wealthy, because the new proposed tax law IS NOT really an estate tax. Let’s call it what it is – a CAPITAL GAINS TAX.

CAPITAL GAINS UNDER THE CURRENT LAW

By way of example, imagine that Generation 1 purchased a house 30 years prior at a price of $100,000. Assuming no basis adjustments, which could have occurred due to improvements to the home or property (but…keep your receipts!), Generation 1 passes away and the children inherit the property – now valued at $500,000. The children have their own homes, have no interest in living in their parents home, and decide to sell this house. Under current law, the children would enjoy a new basis of the home’s value upon the death of their parents – in this case $500,000 – the so called “step-up in basis”. If they sold the house for that price, the children would pay ZERO Capital Gains tax.

CAPITAL GAINS UNDER THE NEW LAW

Under the new proposed law, which not only has the attention of President Biden, but as the New York Times article suggests, is also being examined by our new Treasury Secretary, Jane Yellen, the children would have a Capital Gain of $400,000! Depending on the Capital Gains tax rate, they could pay as much as $160,000 in taxes on the sale of the home (at 40%) and divide up the net of $240,000 amongst the siblings.

CAPITAL GAINS & A FAMILY-OWNED BUSINESS

This same scenario could occur with the sale of a family-owned business or a stock portfolio, or generally any other asset, that can experience untaxed capital appreciation. While this scenario is serious for many taxpayers, it may be even more so for those who are considered wealthy and have an estate tax due. The confiscatory nature of transfer taxes can take a tremendous bite out of an estate.

FAMILY-OWNED BUSINESS CASE STUDY

Consider the following example of a business owner couple who has grown the value of their company to $30,000,000. Most businesses will have fundamentally depreciated most of their assets and may have zero or a near-zero basis. Furthermore, let us assume that President Biden has been successful in reducing the estate tax exemption to the proposed $3,500,000 per individual taxpayer, or $7,000,000 per couple and increased the estate tax rate to 45%.

The chart below shows the REAL impact of the proposed tax law changes being considered under the Biden administration. The “big deal” is the Capital Gains Tax, even though the asset would also be part of the couple’s taxable estate. The estate confiscation would be north of 58% after paying $17,511,000 in wealth transfer taxes.

PROPER ESTATE PLANNING

There are many planning solutions available to address these tax problems. With proper planning, many estates can reduce their tax bill significantly, if not entirely! As I have always stated, wealth transfer taxes are a voluntary or, maybe better described, an ignorance tax in the United States. In this case, what you don’t know CAN and WILL hurt you…financially.

Regrettably, it is the uninformed taxpayers or those who choose to “stick their heads in the sand” who end up with taxable estates that result in a very heavy burden for their unsuspecting heirs. Estate planning professionals, attorneys, accountants, and a variety of financial advisors have been working around the transfer tax system for many years. Their knowledgeable assistance should be sought to ensure that your clients’ estates are protected and properly managed.

AN OPPORTUNITY FOR FINANCIAL ADVISORS

To that end, AgencyONE has created a brief presentation for use by financial advisors, which is generic, succinct, and can be delivered to consumers on a variety of platforms. AgencyONE is happy to brand this presentation with your firm’s logo and contact information. This presentation can also be delivered virtually by an AgencyONE professional in support of financial advisors with their clients and prospects.

AgencyONE’s goal is to help raise awareness regarding the impending threat of estate confiscation. The new proposed estate tax law is an opportunity to encourage taxpayers to engage with their legal and financial advisors to begin planning estate succession. Helping your clients perpetuate their legacy of hard-earned wealth requires astute advice and planning.