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For those of us who have been in the estate, retirement or financial planning profession for many years, we have all heard the sales approach of asking your clients “if you had the choice to disinherit either the IRS, your children, or charitable organizations, which ONE would you pick?”

If you have children (and actually like them), the choice is really between the IRS and charity, and most people would choose to disinherit the IRS. Regrettably, there are many people who do not understand that they have unintentionally named the Internal Revenue Service as a beneficiary of their IRA or other qualified plan assets, such as 401(k) accounts. They may as well have listed the IRS as an additional beneficiary on their IRA or 401(k) accounts, as I have done by way of example, per the Beneficiary Designation Form illustrated below:

This is a little bit “tongue in cheek”, but I hope you get where I am coming from.

The tax rules for non-spousal beneficiaries of qualified assets are complex, and decisions should not be made without proper guidance from a financial professional. However, too many people are proceeding WITHOUT obtaining this advice. With approximately $29 TRILLION in 401(k) and IRA assets held by Americans at the end of the first quarter of 2025 (according to the Investment Company Institute), the revenue opportunity for the IRS is staggering. Taxpayer ignorance will feed the coffers of the Treasury Department to pay for services to the American people.

In very general terms, non-spousal IRA/401(k) beneficiaries are required to deplete any inherited funds by no later than 10 years from the date of the inheritance and pay their fair share of income taxes on those funds. These beneficiaries can take the funds in a lump sum immediately, make distributions in installments over 10 years, or leave the money to grow and wait to take a lump sum distribution at the end of the 10 years. The penalties for not complying with these rules can be onerous. These are the complex and generalized distribution rules under the SECURE Act of 2019, with further guidance from the SECURE Act 2.0 passed in 2022. The bottom line is that the Treasury Department wants their pound of flesh, and they want it sooner rather than later, as your tax dollars pay for a plethora of things such as veterans’ benefits, education, scientific and medical research and development, housing & community and other critical services that the government provides. And they also pay for other things including military spending, interest payments on the $36TT National Debt, Social Security and Medicare.

So, do you want to be a voluntary or involuntary philanthropist? Because one way or the other, you will be contributing to the cost of services provided to the citizens of these United States of America.

But, you do have a choice! Instead of having your children pay taxes to Uncle Sam on the IRA and 401(k) assets that you (and your spouse) do not spend during your lifetime, you can redirect those funds to charitable organizations that provide similar services (education, scientific & medical research, health services, veterans organizations, etc.). Let’s face it, government spending has run amok, and taxpayers have zero control over how our government spends our financial contributions to the nation.

AND it gets better. Enter the Donor Advised Fund or DAF. A DAF is simply a charitable giving account that allows individuals to make contributions, receive immediate tax deductions, and recommend grants to charitable organizations over time. A DAF can be set up in the family’s name (The Garcia Family Charitable Fund, for example), be the beneficiary of any leftover qualified plan dollars, and make grants to charitable organizations over many years by your children, grandchildren and possibly generations beyond that. Any dollars directed to the DAF ARE NOT taxed to your children, hence disinheriting your least favorite uncle, Sam.

This is how you become a voluntary philanthropist and take control of how your unused retirement assets get redeployed. Of course, you can always spend every penny of your qualified accounts before you pass away and then your children will not have a tax problem.

Let me show you how this works through a case that AgencyONE recently advised on.

Jane Smith (yes, of course I changed her name) is a 62-year-old woman whose husband John recently passed away. John had $3,000,000 of life insurance payable to Jane at the time of his death, which added to their investment portfolio, income tax-free. Jane was the named beneficiary of John’s $3,000,000 IRA account. As a spouse, Jane steps “into John’s shoes” as the IRA owner and now her two children are the non-spousal beneficiaries.

Additionally, Jane and John owned a home, which had been paid off, valued at approximately $1,000,000 and they also had a joint investment account of approximately $1,000,000. Jane will also receive her deceased husband’s Social Security Benefit of $3,000 per month. Jane’s lifestyle requires $150,000 after taxes on an annual basis, and she asked her financial planner if an additional $30,000 could be spent on travel to see her children and friends more frequently.

AgencyONE worked with Jane’s financial planner. We ran a variety of scenarios to make sure that we met her lifestyle goals, assuming a 3% inflation rate. The typical plan that I see looks like the chart below, where the client spends their Social Security (orange) and non-qualified assets (red) FIRST, leaving the IRA dollars to be drawn down using Required Minimum Distributions (purple).

With this scenario, Jane’s income and lifestyle goals are adequately met in alomst all Montecarlo simulations for returns. However, there is one problem…

Assuming Jane passes away at age 85, her children would receive approximately a $12.59MM inheritance but would owe approximately $1.9MM in taxes on Jane’s remaining IRA balance.

This is because, as stated previously, taxes must be paid on any balances in qualified accounts that pass to a non-spousal beneficiary – and they are taxed as ordinary income.

These funds will go to the US Treasury Department to be used to pay for all the budget items mentioned above.

Voluntary Philanthropy

When I talk about Voluntary Philanthropy, I do not mean that clients should necessarily be charitably inclined in any meaningful way. Clients simply need to understand that they are already contributing to “charitable causes” through the taxes they pay, but they have no control over where their money goes or how it is used. They need to “want to” disinherit the IRS by CHOOSING to make charitable donations versus PAYING income taxes. There is a reason that charitable donations are a deductible expense, if you itemize your deductions on Form 1040 – it is a government incentive. So how do we do that?

What if we could deliver results like this?

Here are the steps that Jane can use to accomplish this result:

1. Jane sets up a Donor Advised Fund – the Smith Family Charitable Fund – and deposits some amount into it as seed money. The donation could be low basis, highly appreciated securities, which means she will not pay capital gains taxes to make the donation.
2. Jane applies for life insurance in the amount (in this case) of $5,000,000.
3. Once the life insurance is approved, Jane takes a distribution from her IRA to cover the premium payment and the taxes due on the distribution.
4. Jane names her children as the beneficiaries of her life insurance.
5. Jane designates the primary beneficiary of the IRA as the Smith Family Charitable Fund (her family’s Donor Advised Fund).
6. Upon Jane’s death, any unused IRA balance, in this case $3.2MM, goes to the DAF and her children get the $5MM of life insurance income tax-free, along with any other non-qualified assets, which will enjoy a step up in basis for capital gains tax purposes.

The Montecarlo simulations for retirement income and lifestyle purposes continue to meet Jane’s objectives, assuming the same 3% inflation used in the initial scenario. Jane’s children’s inheritance drops from $12.59MM to $12MM, so they have given up $600,000.   However, they will now have $3.2MM in a Donor Advised Fund that they can use over their lifetime to give to any qualified charity of their choice. In fact, this DAF, assuming a 5% withdrawal rate, can give Jane’s children, and possibly future generations, the ability to make charitable donations of over $150,000 per year to their favorite charities in the name of the Smith Family.

AgencyONE constructed this analysis using both eMoney and Insmark’s Wealthy and Wise software in collaboration with the CFP Professional advising the client. We have also built a PowerPoint presentation that would allow us to provide a client-ready, customized presentation, subject to your firm’s compliance review, along with the full Insmark Wealthy & Wise analytics report.

If you are an advisor and have clients with IRA or 401(k) balances over $250,000, ask these clients or yourself, as their advisor, the following questions:

1. Do they have other lifestyle assets for retirement?
2. Will they consume the entire qualified plan balance during their lifetime, or will they only draw down minimum distributions as required by the IRS (age 73 or 75)?

To receive the PowerPoint presentation and the Insmark report, please fill out the form linked here, and we’ll email them to you.

Contact AgencyONE at 301.803.7500 if you would like to collaborate on a similar analysis or to discuss a case.

• We Don’t Talk About This Enough – A Widow’s Income Problem – Jun. 5
• Two Alternatives to a Non-Qualified Deferred Comp Plan – May 16
• The Tax Continuum – Apr. 14
• My Grandson Should Get More: Unequal Bequests – Feb. 7

Case Design & Product Intelligence

• Case Design Custom Comparison Options – Jun. 2
• 5 Questions for an Instant Approval LTC Coverage Solution – Mar. 24
• Introducing LifeCare: A New Hybrid LTC Solution from John Hancock – Mar. 3
• Asset Care Improvements & Repricing at OneAmerica – Jan. 27

Underwriting

• Underwriting in a Telehealth-Capable World – Jun. 13
• Underwriting & the Economic Impact of Non-Disclosure – Feb. 20

AgencyONE provides these ONE Ideas to help you and your clients gain a better understanding of the planning, product selection, design, and underwriting that goes into the purchase of life insurance (with and without linked benefits), annuities, and disability insurance. We hope you find these ONE Ideas helpful when assisting your clients with their financial, wealth, business, and estate planning needs.

Remember, if you see something you like, we can brand it for your company and make it client-facing, if necessary. Just let us know!

Contact the AgencyONE Marketing team at 301.803.7500 for more information or to discuss a case.

Living in an era of convenience has undoubtedly impacted nearly every aspect of our lives. Need groceries? Place a digital order in the morning for a delivery before dinnertime. Your kid forgot a posterboard and markers for the project due tomorrow? Order it on Amazon for same-day delivery. Want to read that new release from your favorite author? Download it now on your Kindle app.

The healthcare industry is making similar strides to improve the accessibility of their offerings in both products (i.e., Semaglutide) and services (i.e., virtual appointments) alike. I enjoy convenience and instant gratification as much as the next person, but I have a front row seat for how these “conveniences” can negatively impact the life insurance underwriting process. This week’s ONE Idea will focus on three specific areas of the telehealth industry where our underwriting team has had to intervene to ensure a favorable assessment:

• Mental Health;
• Weight Loss Management/ Semaglutide; and
• Testosterone Therapy.

The goal of this article is to provide our AgencyONE 100 advisors and their clients with the necessary guidance to avoid roadblocks on cases with comparable histories.

Telehealth

First and foremost, what is Telehealth? Mayo Clinic’s basic definition of telehealth is, “the use of digital information and communication technologies to access health care services remotely and manage your health care. Although Telehealth existed before the pandemic, in-office visits were still the norm. As a result of Covid 19, Telehealth usage has soared and is now a permanent and valuable part of medical care, offering significant benefits to both healthcare providers and patients. In my opinion, it should be viewed as a good option for supplemental care, but it does not negate the need for regular screenings in the traditional sense. This becomes especially evident in the underwriting process.

Mental Health

It is a well-known fact that the accessibility of mental health resources remains a major pain point for the U.S healthcare system and those looking for care. A substantial number of mental healthcare providers changed to virtual care during the pandemic and most of them have remained that way. Having access to medical health professionals in a virtual setting assists in providing accessible, consistent, and improved care.

Generally speaking, most of the cases our underwriting team encounters where psychiatric medications are prescribed through virtual means (i.e., via hers or hims health) tend to be mild in severity – for example, mild anxiety, mild depression, situational depression, job stress, etc. When it comes to assessing these risks in underwriting, the key is to establish a history of care and reconcile that history with the available data. The key factors in the assessment process include:

1. Receiving full disclosure of the diagnosed conditions, the treatment(s) used, and related timeline.
2. Reconciling the health history with prescription and medical claims data.
3. Receiving documented stability on the current treatment, i.e., maintenance on the same dosage for an extended period without issue (6-months+). Similarly, it must be determined if additional medications are/were needed to supplement treatment of the condition.

In these Telehealth scenarios, true/ comprehensive medical records can be scarce or potentially unavailable. Including a detailed account of the client’s medical history with the  formal application can help ensure a smoother underwriting process.

SemaGlutide/ GLP-1

Semaglutide is a weekly injection used to treat type 2 diabetes and/or aid in weight loss and long-term weight management. It is more commonly referred to as Ozempic, which is one of the several brands of Semaglutide. I would be genuinely shocked if a full week went by without encountering a case that involved Semaglutide. In underwriting, it’s becoming increasingly common to see medications prescribed through Telehealth services – almost a daily occurrence.

Similar to mental health, the most important part of the assessment is establishing the diagnosis and associated timeline. Is the client using Semaglutide for diabetes or just weight loss? This is generally the first question underwriters have when reviewing these files and providing this information at the inception of underwriting is extremely helpful.  Underwriters will use the data available (historical lab work, claims data, prescription check, etc.) along with the client’s declarations to answer that question and finalize their assessment.

Testosterone Therapy

Testosterone therapy just might be the trickiest of the three topics. Does the patient have a true diagnosis of low testosterone? Is it based on just one testosterone level or several that show consistently low results drawn over a span of time? For any client receiving testosterone therapy, there needs to be significant oversight of care accompanied by regular lab work. Along with checking testosterone levels, the client’s CBC (complete blood count) and PSA (prostate specific antigen) should be regularly monitored to confirm there are no abnormalities secondary to the use of testosterone. If there are abnormalities, the testosterone treatment may be adjusted or discontinued altogether.

Without the necessary oversight by a physician, this is a scenario that carrier underwriters are unable to accurately assess and therefore are likely to postpone coverage until the appropriate supplemental investigations are completed (CBC, PSA, and regular Testosterone panels).

Telehealth has undeniably improved access to care, but its convenience can create challenges in the life insurance underwriting process. By proactively addressing gaps/ issues in documentation and providing clear medical histories, our AgencyONE 100 advisors can help ensure smoother, more favorable outcomes for their clients.

Contact AgencyONE’s Underwriting Department at 301.803.7500 for more information or to discuss a case.

I recently read an article by Ashley Terrell, IAR in Kiplinger Magazine entitled Widow’s Penalty: Three Ways to Protect Your Finances.   It is well written and lays out some very real financial problems and decisions that widows are faced with when they should be afforded the time to grieve.

The three issues that Ms. Terrell highlights are:

1. The loss of a Social Security payment if both persons in the couple were collecting Social Security. The same could apply if the deceased had a pension with either no or lower survivor benefits.
2. The potential for increased Medicare Parts B and D premiums.
3. The loss of the ability to file taxes as a married couple and a reduction in the standard deduction.

These three items alone can cause significant financial stress to a widow, but there is more. Mainly, if a widow – who may now need more income to make up a reduced Social Security payment or pension, to cover higher Medicare Premiums and possibly pay higher income taxes – is required to take income from taxable accounts such as a 401K or IRA, it will trigger even more income taxes. 

Similarly, if there are non-qualified accounts that are available for income, taking money from these accounts may trigger capital gains taxes. It is a vicious cycle.

Ms. Terrell makes some excellent planning recommendations, including:

1. Creating non-taxable buckets of funds such as Roth IRAs or HSAs;
2. Selling the primary home to downsize and enjoying the spousal step up in basis, thereby eliminating (or reducing) capital gains taxes; and
3. Social Security strategies that can help maximize survivor benefits.

For recommendation 1, she states:

I am not a Medicare or Social Security specialist and will defer to her and other Financial Planners who know a lot more than me. However, I am an insurance expert, and Ms. Terrell’s comment on index universal life is confusing.

First, the statement “index universal life policy death benefits” implies that the ONLY life insurance available is “index universal life”. Or maybe Ms. Terrell thinks that whole life, term, non-index universal life, and variable life policy death benefits are taxable. Likely not, but let’s not put the tax-free nature of ANY life insurance into question. Life insurance death benefits, according to Section 1.101-1 of the Internal Revenue Code, are income tax-free. Full stop. Are there some occasions where a transfer-for-value of a life insurance policy could cause the death benefit to be included as gross income? Yes, but these situations are very rare and result from ignorance or “rookie advisor” mistakes.

Second, she does not mention distributions from the cash value of life insurance as a possible strategy for tax-free income. As I have written about many times, this can be an effective strategy for tax-free income during retirement. I will spare our readers with more on this but if you are interested, please see Cash Value Life Insurance – the Gift that Keeps Giving.

What I am encouraged about is that Ms. Terrell recognizes the value of TAX-FREE life insurance policy death benefits as a possible solution to a widow’s income problem at the death of her spouse. Clearly, this is not just a widow’s problem, because it is not always the men who pass away first – this is a gender-neutral issue, and the same problems exist for either spouse.

In February of 2024, I commented on an article that also appeared in Kiplinger titled If You’re Retired, Do You Still Need Life Insurance? and my response was somewhat scathing, addressing several reasons why one would want or need life insurance when you are retired – Our Financial Planner Said We Didn’t Need Our Life Insurance When We Retired… Then My Husband Died .

Admittedly, I missed the points that Ms. Terrell raises in her recent article which, frankly, should have been my opening salvo, but as I said, I am not a Medicare and Social Security expert. I just did not think of the most obvious reasons to own life insurance during retirement.

A healthy male, age 40, could buy $500,000 of permanent life insurance with payments to normal retirement age 67, for around $3,000 per year. A healthy female could buy the same amount of coverage for under $2,500 per year. At age 50, the corresponding premiums, also to age 67, are around $5,700 for a male and $5,100 for a female.

Paying the insurance premiums for a longer period (beyond 67 and into retirement) would reduce the annual outlay, but it would then eat into income needed during retirement. There is no right or wrong answer as to how to fund permanent life insurance, but the “wrong thing to do” is nothing at all!

Many financial advisors recommend term insurance for income replacement needs prior to retirement, but most term insurance will not likely be in force to solve the problems brought to light by Ms. Terrell. We should be recommending some amount of permanent insurance for younger couples, in addition to the term they need as they buy homes, take on debt and raise\educate families. At a minimum, we should make sure that the term life insurance that is being recommended has appropriate term conversion privileges.

Imagine what $500,000 TAX-FREE could provide as a supplement to the income needs of a widow or widower at a time when Social Security income drops, Medicare premiums increase, and income taxes increase as well. Widows should not be burdened with these challenges during a time of grief, given the simplicity of the solution. My thanks to Ashley Terrell for educating me.

Contact the AgencyONE Marketing team at 301.803.7500 to discuss a case.

Our Case Design team’s custom comparison tools are an important resource that help AgencyONE 100 advisors present their cases clearly and efficiently – highlighting the most competitive solutions in a streamlined format. By consolidating critical information into a single, one-page presentation, these complex cases are easier for clients to understand and advisors to sell, especially when compared to reviewing multi-page illustrations. These one-page comparisons can also be printed for our advisors to use during client presentations.

This week’s ONE Idea highlights the custom comparison options that are available for your next case.

Term Product Comparisons – Website Quote Engine

Our website has a self-service term quote engine that you can use anytime once you have registered and been activated to use our website. If you do not have access to our website, the AgencyONE case design team is happy to help with your next term case. The quote engine lets you compare carriers, death benefits, term durations, and underwriting classes.

Case Design built a $1,000,000 term quote on a 45-year-old female client and sourced 10-15-20-30 and even 40-year term options at this age, making it easy to compare premium differences based on carrier, underwriting class, and duration. This Term comparison for a 45-year-old female shows all the products and durations available from an individual carrier on one page.

As an added benefit, if you know which product you want, you can apply directly from the quote page by clicking the “Apply” button on the right as shown below.

We are happy to schedule a tutorial on how to use our website term quote engine for our AgencyONE 100 advisors. However, if you would prefer to have our Case Design team run your options, just email us the specifications on your case.
 

Next Level Comparisons: Permanent Products with Ensight

AgencyONE recognizes the importance of customized permanent product comparisons for our advisors in securing the right insurance solution for their clients. We use Ensight – a customizable tool that allows us to run case-specific scenarios with different product types and carriers. The resulting one-page report makes it simpler for advisors to present and sell insurance solutions effectively to their clients. The linked Ensight presentation compares IUL death benefit solutions from our top five carrier options, sorted by premium for a male client age 55. We added custom fields to show guarantee years, non-guaranteed cash values at ages 75 and 85, and death benefit IRR’s at the same ages.

An outstanding feature of the presentation allows you to open the summary of each of the underlying product illustrations (click on the red “PDF” box/ button), which saves time and effort and eliminates the need to provide five separate illustrations.

Hybrid LTC Comparisons

AgencyONE frequently uses Ensight for streamlined side-by-side comparisons of Hybrid LTC products including GUL, Death Benefit IULs, Cash Accumulation IULs, and VULs. The linked Ensight presentation shows a male 55 starting with a $5,000 monthly benefit for 6 years with a 3% compound. The report shows premium years, total benefit pools at ages 75 and 85, and monthly benefits at ages 55, 75, and 85 to reflect the compounding. Again, the red “PDF” link provides access to the underlying illustrations.

Customized Product Comparison Presentations

Our Case Design team also provides custom comparisons that show different product types which is helpful when showing IUL and GUL scenarios on the same comparison. Simpler designs show side fund accumulation as compared to insurance sales.

• Life Insurance vs. Buy Term and Invest the Difference compares a permanent life insurance contract for someone buying a 20-year term policy and investing the difference. The left side of the presentation shows the Indexed life policy with a $4,700 premium and a $300,000 death benefit. The right side shows the 20-year term which costs $1,753. The difference of $2,947 for years 1-20 and then $4,700 ongoing is invested at 5%. This sheet also allows us to input a tax rate if needed. The last column on the right shows how much projected value will go to heirs at death. After the 20-year term expires the value at death drops to around $100,000. By age 96 (projected), the value grows beyond $300,000. The comparison clearly illustrates how buying term and investing the difference may fall short – especially if the investment is not made.
• Side Fund vs. Hybrid LTC shows a Hybrid/LTC solution with a $5,000 annual premium for 15 years on a male client age 52. The purpose of the comparison is to show how much cash the side fund will accumulate as compared to the total pool of LTC benefits available. The side fund grows the $5,000 premium cost assuming a 5% ROR (not adjusted for taxes). It shows how much the benefit pool grows over time guaranteed versus the side fund. The last column on the right shows how much more LTC benefits are available compared to the side fund. This is a simple visual that provides a compelling comparison.

These are just a few examples of the comparison tools and strategies that the AgencyONE Case Design team can deliver. We offer a wide range of additional designs, and if you need something different, we are happy to discuss your goals and create a customized solution.

Contact AgencyONE’s Case Design team at 301.803.7500 for more information or to discuss a case.

In the April, 2025 Advanced Markets ONE Idea, I discussed that I often get calls from advisors telling me that their client, “John”, an S-Corp owner, wants to implement a Non-Qualified Deferred Compensation (NQDC) Plan and that after some discovery, a NQDC Plan may not be the best solution.

By way of summary, the case study in the prior ONE Idea revealed that:

John is 100% owner of an S-Corporation and:

• Takes a $250,000 salary (W-2 income) from the business;
• Has payroll expense for his employees of $1,000,000, of which
  • A key employee, Jill, is $200,000 of that and;
  • 10 other employees are paid the remaining $800,000; and  
• After deductible expenses, John has a profit of $500,000 which is reported as “pass-through” income to him on IRS Schedule K-1 of Form 1120-S.

The previous ONE Idea explained all the reasons why a NQDC Plan would not work from a tax perspective for John personally.  This ONE Idea will focus on John’s goal to retain and reward his key employee – Jill.  

Jill is a valuable employee, and John is relying on Jill’s expertise to continue to help him grow his company for an eventual sale prior to his retirement.  However, John does not want to make Jill a shareholder, thereby diluting his ownership. John is willing to allocate $100,000 per year to a retention plan for a period of 10 years.

John has decided that instead of paying Jill additional cash compensation, he would like to set up a plan that will reward her for staying with his company, helping him grow and sell the company within the next 10 years.

I would offer two solutions in a situation like this, depending on how important tax deductions are to John.

Solution #1 – Current tax deductions are important to John

If John is unwilling to use non-deductible dollars, such as in a Non-Qualified Deferred Compensation Plan or a Split Dollar Plan, a Bonus Arrangement with a Tax Loan may be an ideal solution. How does that work?

In this scenario:

• John’s contributions to the plan are $1,000,000 over the 10-year period.
• John will enjoy a 37% income tax deduction as a compensation expense to Jill.  His total after-tax outlay is $630,000.
• Additionally, John lends Jill $30,000 to pay her income taxes each year (assuming she is in a 30% tax bracket) and charges her 5% interest on the loan, which is accrued and payable at the end of the 10 years.
• At that time, Jill takes a distribution from the policy in the amount of Principal and Accrued Interest in the amount of $396,204 to pay John back.
• Total interest income to John equals $96,204, which is subject to a 37% income tax to John, resulting in $60,608 to John after taxes are paid.
• John’s total outlay after taxes is $569,392 over the 10-year period.
• Jill’s residual cash value in the policy is $904,130, which grows to $1,596,579 at her age 65.
• Jill then enjoys a tax-free income stream of $140,076 for 20 years, with a residual death benefit to her family.

The chart below provides more detailed numeric information.  It is important to note that a high early cash value policy has been used, providing immediate liquidity in the event of early surrender of the policy.

Solution #2 – Current tax deductions are not important to John

If current tax deductions are not important to John, he could purchase a corporate-owned insurance policy on Jill’s life under a Split Dollar arrangement, endorsing a portion of the death benefit to Jill for her family and retaining a portion of the death benefit for Key Person purposes. As previously stated, Jill is a very key and valuable employee to John’s company. They essentially “split the benefits” of the policy.

For the death benefit to be tax-free to Jill’s beneficiaries if she were to die prematurely, she must report an economic benefit to the IRS and pay taxes on that economic benefit. It is a small amount per year. How does that work?

In this scenario:

• John’s company applies for life insurance coverage on Jill and enters into a Split Dollar Agreement with her.
• John pays $100,000 to the insurance company according to the Split Dollar Agreement. This is a non-deductible expense to John.
• Because the policy is company-owned and has a cash value, John can book the cash surrender value as an asset of the company. In this case, that amount is $106,444, which provides a lift to his balance sheet.
• In the event of Jill’s death, John retains the right to a portion of the death benefit equal to the sum of his premiums paid, PLUS $600,000 of Key Person coverage on Jill. Any residual death benefit would be paid to Jill’s family income tax-free.
• Jill must report the Economic Benefit of that employer-paid life insurance coverage each year to the IRS and pay taxes on that amount for the death benefit to be income tax-free to her family.
• At the end of the 10th year, John has the right to transfer the policy to Jill as compensation, enjoying an income tax deduction at the time for the sum of the premiums paid equal to $1,000,000.
• Jill would report the case surrender value of the policy at that time as income, which is $1,245,002, and be subject to income taxes on that amount.
• Jill would take a distribution from her policy in the amount of the tax owed and would have a residual cash value of $930,379.
• The cash value will increase to $1,643,592 at Jill’s age 65, and she can withdraw $144,300 income tax-free until age 85, and a residual death benefit will go to her family.

The impact of this transaction with Jill is to essentially provide her with a “Stay Bonus” of the value of the policy if she remains with the company and generates the growth and profit objectives established by John.

Conclusion

Both of these solutions can work very effectively as an alternative to a Non-Qualified Deferred Compensation Plan with minor administrative requirements and avoiding the Section 409(A) requirements mentioned in the April, 2025 Advanced Markets ONE Idea. I hope these ONE Ideas have spurred you to think about your employer and key employee clients, recognizing that there are easily implementable solutions for many situations after good fact-finding and detailed discussions regarding client goals and objectives.

Contact AgencyONE’s Advanced Markets Department at 301.803.7500 for more information or to discuss a case.

“I have a client who wants to implement a Deferred Compensation Plan”.

I cannot count the number of times, over the course of my career, that I have had a call from an Advisor making this request. Upon asking a few questions and having a short discussion, I typically get the reply “no, that is not what they actually want”. I am not saying that Non-Qualified Deferred Compensation arrangements are not effective; they are. However, the business circumstances often contradict that solution. Many of the same objectives can be accomplished more simply in a small to mid-size business environment.

I was prompted to write about executive benefits in this ONE Idea as a result of a recent conversation I had with Tracey Ullom, JD, LLM, CLU from the John Hancock Advanced Markets department. Tracey shared that during the first quarter of the year, the most frequent inquiry that the department received was about executive benefits, replacing the typical inquiries on estate planning. I call that a leading indicator which warrants my, and hopefully your, attention.

 I refer to the chart below as “The Tax Continuum”. 

This chart provides me with a line of questioning to determine the priorities of the inquiry or request from the advisor with a business owner client.

Entity/Business Structure

My first response to the inquiry “my client wants a deferred compensation plan for him(or her)self and for certain key employees” is around the business entity structure. Is the business a C-Corporation or a pass-through entity? Advisors don’t always ask the client this question, and it is critically important to know this one fact. Ask the client; they will tell you. Most small businesses in the United States are pass-through entities (S-Corporations, LLCs, Partnerships, or Sole-Proprietorships) and the balance of this ONE Idea will address pass-through entities.

I will start with the obvious. If the business is a pass-through entity (S-Corporation, Partnership, Sole Proprietorship, or LLC), there is no point in discussing a “non-qualified deferred compensation plan” for the business owner(s).

An example will illustrate this point: 

John is 100% owner of an S-Corporation. He:

• Takes a $250,000 salary (W-2 income) from the business and,
• Has payroll expense for his employees of $1,000,000, of which,
  • A key employee, Jill, is $200,000 of that, and,
  • The remaining $800,000 is paid to 10 other employees, and
• After deductible expenses, John has a profit of $500,000, which is reported as “pass-through” income to him on IRS Schedule K-1 of Form 1120-S.

There is no way for John to “defer” pass-through income, as any profit will be passed through to him on his K-1. It is circular logic in a sense. IF John wanted to defer $50,000 of his $250,000 W-2 income, it would reduce his payroll expense by $50,000 and increase his profit to $550,000, leaving him with the same amount of taxable income. One could argue that it would save him the payroll taxes on this $50,000, which is John’s right to do, but John should be careful to pay himself a reasonable salary commensurate with his title and duties. Otherwise, he may be challenged by the IRS.

But what about the non-business owner employee? This scenario requires a DIFFERENT conversation if John wanted to create a non-qualified deferred compensation plan for his key employee, Jill, as a retention and reward tool. In this scenario, there is another key question that the advisor MUST ask John.

Is a current tax year deduction important?

If John allowed Jill to “defer” compensation, reducing her salary from $200,000 to $150,000, as an example, and have John’s company establish a Deferred Compensation account for Jill, it is John that will pay taxes in the year of deferral because it will increase his K-1 by the same $50,000.

Alternatively, if John told Jill that he would pay her the same $200,000 and “fund” an additional $50,000 into a Deferred Compensation plan, he would have a similar problem. (I used quotation marks because Deferred Compensation plans are, by definition, an unfunded promise to pay). His K-1 would still be $500,000, but he would have $500,000 in cash and a $50,000 liability. Contributions to a Deferred Compensation account are not deductible.

Most successful business owners are looking for current income tax deductions to reduce their current income tax liability. However, some business owners may find that the additional personal tax burden incurred is worth it to retain and reward a valuable employee. In these situations, a Deferred Compensation plan would be an excellent solution. John will eventually enjoy the tax deduction of the compensation payments, just not today.

What about the Balance Sheet and Profit and Loss (P&L) statement?

Some businesses need a strong balance sheet and P&L statement due to banking or other financing arrangements. We typically see these requirements with real estate developers, car dealerships, or any business that generally finances their inventory, as examples.

Because these financing arrangements are an agreed-upon promise to pay something in the future, Deferred Compensation plans create a liability on the balance sheet and can create a charge against earnings on the P&L statement.

Furthermore, many Deferred Compensation plans are “financed” with corporate-owned life insurance (COLI), which can also carry some early year charges against earnings. There are high, early cash value insurance solutions that can solve this problem, however.

The benefit of COLI is that it acts as a tax-deferred asset on the balance sheet, with P&L benefits, and provides long-term cost recovery of the cost of the plan. While the cost-recovery feature is often promoted as a benefit, the reality is that generally, the business owner will be long retired or possibly not alive when the benefits of the life insurance are received by the company. I am not convinced that in the small business setting this is a meaningful benefit.

The administration and accounting of these plans can be complex and will have an impact on the business’s financial statements. As such, a third-party administrator should be retained.

What about Regulatory Compliance?

Section 409A of the Internal Revenue Code, which became effective in January of 2005, outlines the rules for taxing non-qualified deferred compensation arrangements, requiring adherence to specific timing and form of payment, while imposing penalties for noncompliance.

If Section 409A requirements are not met, the deferred compensation is included in the employee’s gross income in the year it becomes available, along with an additional 20% excise tax and interest. 

The complexity and consequences of 409A are one more reason that competent counsel and a third-party administrator should be hired when considering such a plan.

What About Employee Considerations?

When employees receive deferred compensation payments, just like in a pre-tax 401K plan, all deferred income plus growth is taxed as ordinary income. This is not necessarily a bad thing, but if a key employee has done well with their 401k or other investments, they may not necessarily want more taxable income when they retire.

On another note, a participant in a non-qualified deferred compensation plan is a general creditor of the company. If the company becomes bankrupt or requires reorganization, some or all the account may be forfeited.

Concluding Comments on Non-Qualified Deferred Compensation Plans

Non-qualified deferred compensation arrangements can provide meaningful benefits to a key executive for retention and reward purposes, but they are not without their risks and complexity, as seen above.

This takes me back to The Tax Continuum. There are a variety of non-qualified executive benefit arrangements that can provide meaningful benefits to key employees, offering:

• a much simpler administrative environment;
• less regulatory risk;
• current tax deductions;
• either cost recovery or a future tax deduction;
• no corporate balance sheet liabilities;
• much less creditor risk for the employee; and
• tax-free income or death benefits for the employee & beneficiaries.

These programs can be classified as bonus or split-dollar arrangements with all the variations that they bring. More often than not, the conversation that started with the statement “I have a client that wants to implement a Deferred Compensation Plan” turns into a very effective split dollar plan for BOTH the Employer and the Employee.

AgencyONE routinely has these conversations with our advisors and helps them implement the RIGHT plan for their business owner clients. In our May 2025 Advanced Markets ONE Idea, I will dive further into split-dollar arrangements.

Contact AgencyONE’s Advanced Markets Department at 301.803.7500 for more information or to discuss a case.

If you have clients, as old as age 87, who can answer “no” to 5 simple questions, AgencyONE has a solution that will pay your client’s LTC expenses without payment of taxes on the distributions.

1.  Do you currently use any of these mechanical devices?

2.  Do you currently need or receive help with any of the Activities of Daily Living (ADLs)?

3.  Do you currently have or have you ever had a diagnosis of or been treated for any of these conditions/diseases?

4.  Have you ever been diagnosed as having or been told by a medical doctor that you have AIDS, HIV, ARC disorders or tested positive for antibodies for the AIDS virus?

5.  Are you currently receiving or have you ever received social security disability income benefits?

With tax season in full swing your clients are especially cognizant of the liabilities they face and may be looking for solutions to help mitigate those liabilities. They may not be fully aware of the tax implications of the policies and accounts they currently hold and might benefit from this Instant Approval LTC solution.

This solution focuses on clients repositioning existing assets for continued growth while maximizing tax efficiency for clients and their spouses. Clients who are willing and able to go through additional underwriting can unlock even more powerful benefits including a lifetime uncapped benefit pool that can cover them and their spouse!

Opportunity – Turn Tax Deferred into Tax-Free

Has a client ever brought you an old policy statement and asked, “what should I do with this?” At AgencyONE we regularly see statements from a range of policies; old, deferred annuities that are underperforming – maybe an indexed annuity with a very low cap, or a variable annuity that has grown significantly and now represents a tax liability to the client and their beneficiaries. We even see individuals that have cash value life insurance whose needs have changed.

Now you can offer a solution to reposition those existing assets and ensure that the money goes towards providing the best care possible, and not to taxes. Just drop an e-app and answer 5 questions. NO phone interview, NO labs, NO exams needed!

Case Study:

Brian, age 65 purchased a variable annuity 20 years ago using a $50,000 single premium. The policy has performed well and now has a contract value of $200,000. With no plans to use the contract for retirement income, Brian intends to use the contract as a pool of emergency funds.

• In scenario A: Brian keeps the variable annuity policy, which grows to $295,000 by age 75 when he needs long term care. He then begins drawing down the account value to pay for LTC services with each initial policy distribution being fully taxable as a distribution of gains.

By the time the policy is depleted, he has paid approximately $73,500 in taxes with a net amount of $221,500 towards his LTC costs.

• In scenario B: Brian executes a 1035 exchange with no tax consequences into a PPA compliant annuity. Furthermore, Brian’s wife Mary was able to answer the knockout questions as well. Mary is added to the new policy as an eligible person who can also access policy values without paying income tax on distributions. When Brian goes on claim at age 75, the policy has an LTC benefit pool of $294K.

By the time the policy is depleted, Brian has paid exactly $0 in taxes with a net amount of $294K towards his LTC costs.

By correctly answering 5 questions that gained them instant approval, Brian and Mary were able to reposition existing assets and ensure that their entire emergency fund went towards LTC expenses and not to taxes.

This Solution is for your clients who:

• Own existing non-qualified annuities out of surrender or cash value life insurance they don’t rely on for income.
• Are concerned about providing for long-term care costs.
• Desire TAX-FREE LTC benefits…even with gains in a non-qualified annuity or Cash Value life insurance.
• Don’t want to go through full underwriting or a phone health interview.
• Understand the importance of LTC coverage for themselves and their spouse – even up to age 87.

Contact AgencyONE’s Case Design Department today at 301.803.7500 to learn how a Pension Protection Act (PPA) compliant policy can help your clients keep their dollars in their pockets and out of the IRS’s.

One of our carrier partners – John Hancock – recently launched LifeCare (Hybrid LTC), an innovative addition to AgencyONE’s hybrid long-term care (LTC) offerings. This hybrid Indexed UL with LTC benefits is designed for clients seeking a policy that provides multiple advantages: more growth, more choice, and more tax-favored treatment. LifeCare stands out from other carriers as it incorporates an indexed chassis, which may enhance future benefits based on positive index performance.

This product review will cover product specifications, underwriting paths, LTC payment options, pricing competitiveness, index options, and state availability.

Product Specifications

• Issue ages: 30-75
• Underwriting classes: 4 total (3 nonsmoker, 1 smoker)
• Rated clients eligible
• Couples discount available (only one applicant required to qualify)
• Vitality program available to enhance policy value
• Death benefit range: $50,000 – $500,000
• Benefit periods: 2, 4, or 6 years
• Premium payment options: 1, 5, 10, or 15 years
• Inflation rider: 5% option available (6-year benefit period only)
• Account options: 3 indexed accounts + 1 fixed crediting account

See Producer Product Guide for more details.

Underwriting Paths

John Hancock offers two underwriting paths for LifeCare submissions.

1. Instant Underwriting Decision – In-good-order applications typically receive an approval within 5-7 business days.
2. Referral to Underwriter – Additional review may be required for medical history clarification, outstanding evidence checks, or medical records.

LifeCare applications are digitally processed only via iGO. Once submitted, an email will be received within minutes that confirms the chosen underwriting path. See attached Pre-Qualification Guide for more information.

LTC Payment Options

LifeCare provides flexibility in how your clients receive benefits while most other carriers only offer one or the other.

• Cash Indemnity – Clients receive 100% of their benefit payments as a set monthly amount, up to the monthly IRS per diem limit, without the need to submit receipts.
• Reimbursement – If the qualified LTC expenses exceed the monthly IRS per diem limit, clients can submit invoices for reimbursement or arrange direct payments to care providers while avoiding the need to submit proof of payment, receive funds, and make payments.

Pricing & Competitiveness

LifeCare’s performance is difficult to compare to other products.  Most hybrid options use a fully guaranteed benefit for 4-6 years with some type of inflation rider (either 3% or 5%). LifeCare differs from these traditional hybrid LTC products by relying on indexed performance for potential benefit increases.

Key considerations are:

• Guaranteed initial benefit with growth potential based on index performance.
• Vitality program (Silver, Gold, Platinum) can further enhance policy value.
• Best pricing occurs with the 4-year benefit period.

Index Options

LifeCare offers 3 indexed options for you to choose from based on your clients’ needs:

1. Select Capped Indexed Account: Current cap rate is 8%, guaranteed multiplier is 32%
2. High Capped Indexed Account: Current cap rate is 10.50%, guaranteed multiplier is 45%
3. Barclays Global Multi Asset Classic Indexed Account: no Current cap and a 170% Participation Rate. 

State Availability

LifeCare is approved in all states except:

• Not available in: CA, CT, DE, DC, FL, GU, IN, MT, NJ, NY, ND, PR, SC, SD.

Contact the AgencyOne case design team at 301.803.7500 for more information and to obtain detailed illustrations based on your case parameters.

$75 Billion… BBBBillion. That is the number.

A recent article in On the Risk, written by RGA Reinsurance and MIB, estimated that the insurance industry loses $75 billion annually to fraud. This impacts both policyholders (higher premiums) and insurance and reinsurance carriers!

The Impact of Accelerated Underwriting

The advent of Accelerated Underwriting has only increased this number, as there is now less direct agent involvement in the process. While the industry relies increasingly on computer and electronic applications that are completed by clients, telephone interviews, and para-medical services,there is more of a chance for client non-disclosures. These non-disclosures may still result in policies being issued, but advisors remain responsible for the representations in the policy.

This makes your field underwriting more important than ever. Thoroughly preparing clients for the application process—including the insurance exam, interview, and entire underwriting procedure—is crucial in achieving accuracy and preventing non-disclosures. Reading the whole question…answering with the whole truth.

Smoker or Nonsmoker? “They’ll Never Find Out.”

If nicotine is present in the urine of a client who admitted “no tobacco use” on an application or exam, they will be assessed SMOKER rates. The client will not be reconsidered for a non-tobacco class if pivoted to another carrier for 12+ months. 

This is the case even if that carrier would have otherwise considered nonsmoker rates. The rationale is simple: if clients don’t tell the truth on this matter, the carrier may be wondering what else they could be hiding.

For example:

• An occasional cigar user might still qualify for nonsmoker status within certain carrier guidelines—even with nicotine present in the urine test—if the client disclosed qualifying tobacco use upfront.
• A non-disclosure, however, inhibits the advisor from sending the case to another carrier as they would have no choice but to offer tobacco rates.

Underwriting: The Importance of Full Disclosure

At AgencyONE, we cannot emphasize enough the importance of honest and complete disclosure. Only a handful of carriers allow nonsmoker rate classifications for applicants who test positive for nicotine and admit use of tobacco products. We know these carriers and we specialize in matching clients to the best carriers for their tobacco use history, whether they use:

• Cigarettes
• Cigars
• Vaping
• Nicotine patches
• Nicotine pouches
• Smokeless tobacco
• Chewing tobacco
• Nicorette/nicotine gum

Given the increasing frequency of non-disclosures, perhaps the carrier tobacco use question should be changed and/or clarified since the wording of the question often results in a client’s non-disclosure. Simply asking a client “do you smoke cigarettes?” is NOT the right way to ask a tobacco use question.

Consequences of Non-Disclosure

Failure to disclose tobacco use can result in a contested and unpaid death claim according to a New York legal opinion. Additionally, the death benefit will not be adjusted, and the claim will remain unpaid—with potential forfeiture of premiums already paid.

Previously, if a client “forgot” about their tobacco use within the two-week positive urine testing window, the case could pivot to another carrier. But today, with industry-wide cloud-based data sharing, carrier exam results and non-disclosure statements are widely accessible. This non-disclosure will result in your client waiting a year before they can be considered again for non-tobacco rates.

Case Study

Mr. Smith is 47 years old and applying for $5,000,000 of 20-year-term coverage for the purpose of income replacement. During Mr. Smith’s insurance exam, he answered “no” to the tobacco use question. However, when the lab results came back, Mr. Smith’s urine was positive for nicotine metabolites. When requestioned about the positive result, Mr. Smith stated that he occasionally chewed nicotine gum and did not think to answer this question “yes” since it is non-smoked nicotine use and only occasional.

Nothing speaks louder than the economic impact of that non-disclosure. If the client’s nicotine use had been disclosed on the formal carrier paperwork (this particular carrier has favorable guidelines for nicotine gum use), Mr. Smith would have been considered for their Standard Plus Non-Tobacco class and the annual premium would have been $10,285. Because of the client’s inadvertent non-disclosure, he was considered a Standard Tobacco class, which came with an annual premium of $41,485! Mr. Smith must either accept this more than 400% increase in premium or wait a year to be considered for the Standard Plus Non-Tobacco class.

Advisor Responsibilities in the Age of Accelerated Underwriting

Advisors play a critical role in the Accelerated Underwriting process. It is their responsibility to ensure that clients understand the importance of providing truthful and accurate information. Advisors must also be well-versed in the criteria for the Accelerated Underwriting program and exercise diligence in educating their clients. While advisors can guide and inform, the accuracy of a client’s statements ultimately remains beyond their control.

To mitigate risk, educate your clients on how the process works, the existence of digital health data (i.e., medical claims, prescription records, electronic health records, etc.), and recommend they access their Patient Portals to verify details such as:

• Height & weight
• Blood pressure
• Medications
• Medical history
• Dates of last visits
• Other involved physicians

This helps align client information with underwriting databases, and ensures accuracy, efficiency, and faster processing.

AgencyONE Resources for Advisors

We provide an entire For Client Use section on our website which is available to our AgencyONE 100 advisors and their clients:

• Client-friendly videos
• One-pagers
• Guides for explaining the underwriting process

These resources make conversations with your clients easier and provide thorough and understandable instructions for them to follow.

Final Thought: Non-Disclosure = FRAUD

Failure to disclose is no joke. If intentional, it constitutes fraud.

Advisors, take the time to educate your clients on the importance of accuracy and honesty in the application process—because the industry is paying close attention.

Contact AgencyONE’s Underwriting Department at 301.803.7500
for more information or to discuss a case.