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.

If you would like additional information regarding immediate conversion opportunities we invite you to CLICK HERE to register to attend our webinar on Wednesday, April 28th at 3:00pm ET. This webinar will discuss the changes that are occurring with carriers and products and where the conversion opportunities exist RIGHT NOW!

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 bi-weekly 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 recent 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.

Our Case Design team recently worked on an interesting case with one of our AgencyONE 100 advisors. It started out very straightforward, but we soon discovered that finding the right life insurance solution for the clients would require drilling down beyond the initial request from the advisor.

Guaranteed Survivorship Solutions

Mr. & Mrs. Smith, both 50 years old, were looking for $10,000,000 of Survivorship Guaranteed Universal Life (SGUL) coverage that would carry them to age 100 and offer full guarantees. AgencyONE presented 3 SGUL options for the clients to consider. Following are the results for this request:

As you can see, Carrier A had the most competitive premium with Carriers B & C coming in significantly higher in cost.

New Survivorship Solutions – Guarantees & Cash Value

We explained to the advisor that many of the newer survivorship contracts are built on INDEXED chassis which offer GUARANTEES AND projected CASH VALUES that might be of interest to Mr. & Mrs. Smith. Cash value is instrumental when flexibility or an exit strategy is required.  However, it is important to note that accessing existing policy cash values will impact the guarantees and possibly hinder long term policy performance. In the next scenario, we added two fully guaranteed Survivor Index Universal Life (SIUL) contracts to the original mix. This offered more options for the clients to consider along with a greater level of flexibility:

Premium To Length Of Guarantee

Adding SIUL contracts satisfied the requirement for age 100 guarantees with the bonus of cash values BUT it did not help lower the projected premium. Carrier A’s SGUL premium was still the lowest cost.  Including SIUL to the SGUL comparison showed the upside of cash value – which is always a good option to offer clients. Could we show Mr. & Mrs. Smith even more? What could we do to keep a competitive guarantee while also including cash values? The ONLY way to find a lower premium is to forfeit some of the guarantees and rely on cash values to help carry the contract. The key to finding the solution to this case is identifying the right combination of premium-to-length-of-guarantee.  After running the solves to age 100, AgencyONE benchmarked the premiums to the guarantee years to see how they compared. The list in Table 3 below shows the NEW top 8 reprice scenarios run to age 100. The IUL assumes a 5% annual return.

Now we are beginning to see a valuable comparison between the cost of the policies, the guarantees, and the cash value benchmarks. If the advisor chooses to go with the SIUL product, we will need to drill down further to see what index options are available and how they will look in ALL years.

Premium Pay Scenario

In passing, the advisor mentioned that Mr. & Mrs. Smith might just want to pay the premium for 20 years and be done with it. AgencyONE reminded the advisor that the order of the pricing and the length of the guarantee will depend upon the pay scenario. To illustrate, we re-ran the same 8 carriers from Table 3 as a 20-pay scenario to show how the carrier line-up would shift:

As you can see in Table 4, the top carriers moved around quite a bit on premium AND some of the guarantees were impacted. This new order is likely to change which carrier the advisor and clients select to write the coverage.

The advance product design used in this case shows the clients that you possess the ability to understand product nuances, can commit to doing the necessary homework, and, most importantly, are dedicated to their best interests! The AgencyONE Case Design team is committed to making sure that you have ALL the pertinent information so that you and your clients can make the most informed decision relative to their financial and risk management needs.

Most of you are familiar with my personal story but for those of you who are not, please indulge me. This ONEIdea is about insuring minors – yes, “kiddie life insurance”. The press is full of articles about why life insurance for children (a minor child) is a terrible idea, but there are other opinions on this topic such as those expressed in the Forbes article titled Pros and Cons of Life Insurance for Children by Cameron Huddleston and Amy Danise which presents a very balanced and thoughtful commentary.

A Decision By Young Parents

As young parents, my wife and I insured both of our children for $50,000 of Whole Life Insurance shortly after our daughter, the youngest, was born. Our son was about to turn 2. The life insurance was not intended to provide savings with equity type returns, rather it was to hopefully provide a safe and secure investment. The premiums were around $30-$40 per month for each child, which was an affordable investment for us at the time. We also started funding a 529 plan for each child with extra money and hopefully better returns.

A Child’s Unexpected Illness

When our daughter turned 1 she was diagnosed with a benign brain cyst and required a shunt, which is a tube that runs from her brain to her abdominal cavity. Its purpose is to drain the cerebral spinal fluid that is constantly produced by a functioning brain and that is normally naturally flushed. In her case, the natural drainage did not work and left unchecked, the build-up of cerebral spinal fluid caused significant hydrocephalous. At the time, our daughter was not walking, and we did not know if she ever would. The size of the cyst (think of it as a water balloon) was the size of an orange. Her brain (gray) matter was largely non-existent as it had been completely displaced by the cyst. After several surgical procedures and weeks of treatment at Washington, DC’s National Children’s Hospital, our daughter (now 22 months old) finally walked and started doing many of the normal things one would expect of a child that age – a small miracle. Unfortunately, because of scar tissue in her brain from the surgeries or the shunt (it is hard to know), at age 4 she started having seizures and was diagnosed with epilepsy. Our daughter is now 27 years old and continues to suffer from tonic clonic (grand mal) episodes.

My Child’s Life Insurance Today

Now, let’s get back to the life insurance. My wife and I have paid just over $10,000 in premiums at $32 per month for 27 years and the cash value is approximately $15,000, which equals a paltry 2.52% tax free return. However, we really do not care too much about that – it was always “safe money”. The real gain is that, due to paid up additions on my daughter’s policy, the death benefit is now almost $150,000 and will continue to grow as premiums are paid and dividends are earned. While this is not a huge amount of life insurance, I will take an educated guess that it is more coverage than most 27-year-old adults have and more importantly – it is permanent insurance. The insurance is fundamentally “paid up” as the dividends are larger than the premium due each year and the policy should sustain itself or continue to grow (with additional premiums) for the rest of her life. Why is that important?

Life Insurance For Those Living With Epilepsy

The Epilepsy Foundation’s website provides information on what to expect from life insurance underwriting:

• Complex and Tonic-Clonic Seizures – During the first year since the last seizure, you may be postponed or in some cases be offered standard rates plus an additional 100% markup. In years 2-5 after the last episode, standard rates plus an additional 50% markup will apply. After 5 years, standard rates may be available.

Because our daughter continues to have at least one seizure per year, she will likely be a permanent postpone for additional life insurance coverage unless her seizures stop at some point in the future, and at the very best, she will be highly rated. But the reality is that she may never be able to get life insurance, never mind afford it. Now, for some, that may not be a big deal – she is single, does not have children, has little debt and is fortunate enough to have parents that can help her out. But what about when she wants to get married and have children, and maybe buy a home? There is NO “cheap term insurance” that will solve her problem – she cannot buy it – AT ANY PRICE.

Life Insurance For Children – A Good Decision?

Did my wife and I make a good financial decision? In retrospect, we might have felt that a 2.5% tax free return on an investment of 27 years was downright boring – but it was the best financial decision that we ever made on behalf of our daughter. We do not think of her cashing the policy in for the cash value; we think of the insurance benefit she will be able to leave our (future) grandchildren if something were to happen to her when they needed her the most.

For those of you who are advising young families, or maybe even grandparents who want to help their children and grandchildren, purchasing life insurance for children is a solid financial decision. In today’s crazy, pandemic reality, it has never been more important. You never know when a child will become ill or develop a condition that could impact their life forever.

Life Insurance For Children – Guidelines & Suggestions

With all that said, if you are encouraged to recommend this idea to the right client or prospect – not all insurance companies are child friendly. So, you must do your homework. There are financial underwriting guidelines for insuring minor children that you should be aware of, in addition to medical underwriting guidelines and procedures. Nevertheless, most insurance companies do not require the typical underwriting scrutiny for minors, such as exams and lab work and many will issue policies with very limited underwriting requirements.

Call the AgencyONE underwriting team for clear guidelines on underwriting minors both financially and medically. There are plenty of highly rated and brand recognized insurance companies that offer a variety of products that are very competitive for minors: Mass Mutual, Mutual of Omaha and Securian Financial to name just a few.

And as a final thought, I would like to highlight Securian Financial as a company that issues Preferred underwriting on minors, which is unique in the business. Combined with their Balanced Growth Accumulator Index Universal Life product with a proprietary and low volatility index account, this Securian product is an exceptional choice to recommend for these situations.

AgencyONE is committed to providing product neutral and consumer best interest standards to product and insurance company selection.

“Oops, I did it again…” a song made popular by Britney Spears in 2000 has absolutely NOTHING to do with life insurance protection but focuses on committing the same mistakes over and over. As an advisor to clients seeking life insurance coverage, you HAVE TO ASK THE QUESTIONS – the required medical and non-medical questions over and over again. Failing to procure detailed information limits AgencyONE’s ability to advise accurately and puts your client’s coverage and your sale at RISK.

It Happened Again this Week

The client was NOT asked by his advisor if he uses marijuana. The advisor just ASSUMED that the client did not. While many carriers are NOT testing for THC (the psychoactive compound in marijuana) on insurance exams, they can and will at their discretion.

The case presented to AgencyONE involved a client that was DECLINED for coverage because he was unprepared for the life insurance exam. The decline occurred NOT BECAUSE the client was using marijuana recreationally, BUT BECAUSE HE DID NOT DISCLOSE IT. This carrier tested the urine for THC and the result was obviously positive. This was very bad news for the client AND the advisor.

For the record, recreational marijuana use, up to twice a week, can STILL be underwritten on a PREFERRED NON-SMOKER basis at a handful of carriers.

Insurance companies are combatting fraud every day. When an applicant is not forthcoming with habits, like marijuana use, it ignites suspicion and an underwriter naturally wonders what else is not being disclosed.

This is Not Just About Marijuana Nondisclosure

Failing to disclose other pertinent information such as medical histories, doctors’ visits, medical tests, skin checks, colonoscopies, cigar or tobacco use, etc. can cause “hiccups” and significant delays in underwriting. If not admitted to up-front, these nondisclosures may lead to more questions, continued follow-up with clients to obtain additional information, and could potentially require additional medical records causing even further delays. Many times, nondisclosures are unintentional or simply an oversight by the client. Therefore, it is imperative that you thoroughly explain the underwriting process and impress upon your clients the importance of providing full details.

As professional insurance advisors, it is important from a LEGAL perspective that you ASK and thoroughly address ALL questions on insurance applications. If your client is completing a telephone interview or filling out a digital application, he/she needs to understand the importance of providing accurate, complete responses. This information becomes part of the LEGAL CONTRACT with the carrier. A nondisclosure is VERY LIKELY to be discovered by the carrier given the wealth of electronic tools and database information underwriters have at their disposal today such as:

• Prescription Database Verification Reports
• Medical Claims Information
• MIB and Insurance Activity Index

AgencyONE Has the Tools to Help!

AgencyONE has created a library of tools to help you and your clients. Our email taglines now include 5 ICONS with hyperlinks that open various tools designed to assist with the entire underwriting process:

Video: Preparing for the Life Insurance Exam

This video advises clients how to prepare for and what to expect during the insurance exam, including questions the examiner will ask…example: about marijuana and tobacco use!

AgencyONE Informal Inquiry and HIPAA Packet

Complete this form to provide AgencyONE’s underwriters with the pertinent medical and non-medical information needed to advise on case direction.  The packet includes additional exam-prep tips and instructions on how to retrieve the insurance exam LAB results.

NEW* Video: Interview Prep

This video is perfect to advise your clients on whow to prepare for and what to expect during the Telephone or Digital Interviews. The corresponding worksheet can be found on our website www.agencyone.net under the underwriting tab.

Patient Portal Connect

This flyer contains concise instructions on how your clients can securely connect their patient portal data when requested by AgencyONE’s underwriting team.  Technical help and security information is included in the multiple hyperlinks.

Video: Preparing for the Senior Supplement

This video explains what to expect during the senior supplement portion of the insurance exam.  While some of the questions and activities may seem trivial, the results can have a great impact on insurability.  The process MUST be taken seriously and preparing your clients is imperative.

Simply share the necessary linked icon(s) or the entire series with ALL your clients, and please visit our website for additional resources.

We urge you to make these AgencyONE tools an integral part of all your client preparations. You WILL notice a difference (in a positive way) on the underwriting process!

AgencyONE has the underwriting knowledge and necessary resources to help you present a thorough and well-planned case to the carrier best suited to your clients’ needs.

There are many wealthy clients that know that the window to make substantial gifts, and thereby reduce their estate tax liability, is closing due to proposed changes in the estate and gifts tax regimes. In fact, those in estate planning circles having been discussing this for months. There is a simple solution to the Estate and Gift Tax quandary that your wealthy clients need to know. Before we explore the solution, let’s look at the reasons taxpayers may not have acted in 2020:

1. Their attorney was too busy doing the same planning work for other clients and could not get to them before year end;
2. They did not believe that Joe Biden would win the election;
3. They thought that there would be a divided Congress and there would be continued gridlock in Washington; or
4. They simply kicked the can down the road for some other reason.

The Estate & Gift Tax Quandary

The BIG quandary now, for those taxpayers that did not take action, is that if meaningful gifts are made in 2021, will the law be retroactive to January 1, 2021, potentially causing a massive gift tax due in 2022? In the linked article by Bob Dietz and Tom Pauloski titled Could a Change to the Gift and Estate Tax Exclusion Be Retroactive, the authors discuss this problem. They address the issue of a change in the Basic Exclusion Amount going from the current level of $11.7MM per taxpayer down to $3.5MM per taxpayer under the Biden Proposal. What they do not mention however, as it relates specifically to the gift tax exclusion, is that under the proposal the Biden administration would de-couple the estate and gift tax regimes and REDUCE the Gift Tax Exemption to $1.0MM, while the Estate Tax Exemption would be REDUCED to $3.5MM. This of course would cause a bigger gift tax problem still. See CNBC article dated January 22, 2021 titled Here’s How Wealthy Families Will Save on Estate Taxes in the Biden Presidency.

We Have A Solution

To provide the intended result of gifting over $1MM without the risk of being subjected to a gift tax should the law become retroactive to January 1, 2021; we have a solution.

With the current Biden tax proposal being a reduction in the gift tax exemption to $1 million with an estate tax exemption of $3.5 million it seems as though prudent planning would be to make immediate gifts to take advantage of the current $11.7 million gift tax exemption.  However, with even the possibility of such a tax bill being retroactive, as unlikely as many advisors consider that possibility, is it wise to pursue that course of action?

To Gift or Not

Imagine the following scenario: A taxpayer makes a gift of $3,500,000 to a trust in March of 2021. The “Biden Tax Act” is passed sometime later in 2021 and is made retroactive to January 1, 2021 with a $1MM gift tax exemption. The taxpayer\grantor is now in a situation of potentially having to pay $1,000,000 in gift taxes on the difference between the $1,000,000 gift exemption and the $3,500,000 gift made. ($3,500,000 – $1,000,000 = $2,500,000 at a 40% gift tax rate equals $1,000,000 gift tax).

Of course, on the other hand, not making gifts in the current environment will almost certainly be a wasted planning opportunity. Why? Because it is difficult to imagine that a tax bill lowering the exemptions to at least the $5 million (with indexing to about $5.9 million) level is not a near certainty before the 2022 elections when a closely divided Congress could once again change hands, thereby making tax legislation for the Biden Administration much more difficult.

What To Tell Your Client

So, what should a prudent advisor tell his or her affluent clients?   Well, for affluent clients, it seems clear that making a gift of $1 million is safe.  A husband and wife, age 60 and 55, can purchase about $5 million of second to die insurance for $1 million.  That is very powerful leverage!

However, what about those clients with very large estates – a simple $1 million gift strategy will do little to reduce the estate tax exposure and create liquidity for payment of taxes.  What the possibility of a retroactive tax bill is likely to do is slow down the planning for those clients that really should be planning.  When Congress eventually does get taxes on the table – it could happen quickly.  In fact, many in Washington feel like a tax increase could be tacked onto another bill to offset costs for purposes of avoiding filibuster in the Senate.  Could a tax bill be tacked onto an infrastructure bill?

Take Action Now

Whether the tax bill that is surely coming down the pike is retroactive or NOT, one thing is certain. Your clients should take action NOW, because they risk either not having time to do planning before a retroactive tax bill takes effect or suffering the effects of a new tax bill again, without having the appropriate planning in place. And the action that your client can take NOW is to get his/her plan teed up via loan strategies.  Let’s look at a case study.

Estate & Gift Tax Planning Using Loan Strategies

Maggie May is 75 years old.  She is recently widowed.  Maggie and her husband were successful real estate developers. She has a mostly illiquid estate valued at approximately $40 million. The properties are growing at about 8% a year, including cash flow of about $2 million.  Maggie’s estate planning attorney has suggested that her real estate holdings be transferred into one or more limited liability companies (LLCs).  These LLCs would restrict transfer in such a way that her attorney suspects a valuation firm will discount minority ownership interests by about 40%.   The attorney is then suggesting that Maggie sell a substantial portion of these interests to an irrevocable trust that is ignored for income tax purposes (what some people might unfortunately call an “IDIT” or “defective trust”). If Maggie transfers her property into LLCs and gets a qualified appraisal with a 40% discount – she will have reduced the value of her estate considerably.  For the sake of discussion, we can now assume the value of the estate for estate tax purposes would be about $24 million.

Gift, Sale, Cash for Life Insurance

If Maggie makes a $1 million gift to her LLC and then sells another $9 million of this property to her trust, she will have reduced her taxable estate to $14 million.  Her cash flow from the retained assets would still be $1.167 million in year one and increasing.  The sale of the LLC interests would be at the current Applicable Federal Rate (AFR) which is 1.6% — generating another $144,000 in potential cash flow to Maggie (if needed).  But, even after the trust pays interest (which is not income taxable) to Maggie, it will have cash flow of about $689,500 (5% of the underlying trust assets valued at $16.67 million before transfer to the LLC and discounted less the $144,000 loan interest). This cash flow within the trust could be used to purchase life insurance on Maggie’s life.  Depending on the product and underwriting class – $689,500 could purchase about $17,500,000 of death benefit on a tax-free basis outside of Maggie’s estate.  And, by potentially using a premium financing strategy to reduce out of pocket cost, additional leverage could be created and additional insurance purchased by the trust.

Importance of Pre-Planning

If the gift and estate tax exemptions are not reduced, at some point Maggie could forgive the note and use her lifetime exemption. But, most importantly, this will be especially important if legislation is introduced that is not retroactive but has a very short window.  What is more likely than retroactive legislation is a tax bill that becomes effective immediately upon passage.  And, if tax law is added to other legislation as part of reconciliation, this window would be only days.   Having the property already in the LLC, appraised and transferred to the irrevocable trust, puts Maggie and her advisor in a position where they can literally complete the gift immediately by simply forgiving the note from the trust to Maggie.  Those clients that wait until they see the introduction of what is likely a certain tax bill will be in a queue with their advisors that will very possibly prevent them from meeting what could be a very short timeline.

Interest Rates & Trusts

With today’s low interest rates, selling assets out of a taxable estate and into an irrevocable trust outside of the estate tax is prudent planning!  If a client can earn even a modest return on the assets sold, the client and their family will be able to move the appreciation out of the estate tax system.  With a 1.6% AFR – assets earning 6.6% will grow by 5% (after loan interest payment) outside of the estate. The trust can use this appreciation to purchase life insurance or to reinvest.  But, given the uncertain tax environment we find ourselves in today, this type of planning seems an almost necessity for affluent clients.

As mentioned in the beginning of this article, many wealthy individuals and families had intentions of taking advantage of the incredible opportunity to move assets out of their estates in 2020 but did not, or could not, act. The environment has changed adding some risk that was not there prior to a Democratically controlled White House and Congress. Flexibility and nimbleness IS the name of the game today.

Life insurance products and underwriting requirements have undergone tremendous changes in the last year and historically low interest rates and COVID-19 have played a primary role. Every other week it seems we are getting another notice about a price increase, a product discontinuation, or an underwriting modification. It can be very confusing and has some asking, “what is left to sell”? The answer? There is still a wealth of life insurance product options available for your clients AND there are multiple carriers offering each.

In this ONEIdea, we are going to breakdown general characteristics according to product type. We will not discuss top pricing or carriers since these are based on age, underwriting class, and face amount. Please note that some of the products available may be different in New York.

Term Insurance 

Our carrier partners offer a variety of individual Term options. When running a Term comparison, it is important to carefully consider all options and look beyond just the spreadsheet cost to find the appropriate product for your client. Following are important things to consider:

• ease of application (E-apps);
• possible accelerated underwriting options; and
• available riders and future conversion options.

By looking beyond the lowest cost, you may find something that offers more options for your client to consider for a minimal increase in premium. The table below lists the max issue ages for each term duration (NY carriers may not have the same issue ages or product durations).

Current Assumption Universal Life

Current Assumption UL (CAUL) is a product that is primarily death benefit focused.  Lower crediting rates have diminished the product’s competitiveness for cash value accumulation sales. Death benefit products use crediting rates set by the carrier which can be modified monthly. One of the benefits AgencyONE sees with these contracts is that they are typically built with longer LE type guarantees. A few of these products offer LTC or Chronic riders that can add important coverage for the client. While CAUL has been a common option in the past, currently only 5 of our carrier partners offer this product. One carrier’s product has an issue age up to 89, assuming the client qualifies, and one offers a Current Assumption Survivorship (CASUL) option.

Guaranteed Universal Life

Guaranteed UL (GUL) has been extremely popular over the last 20 years. AgencyONE has seen carriers go from offering multiple versions of GUL products to pulling the product line all together. Given the current market you may be thinking GUL is no longer an option for your clients. Fortunately, 8 of our carrier partners still offer Guaranteed UL products (these do not count VUL or IUL products with lifetime guarantees). These GUL options can guarantee coverage up to age 121. They can also be run with shorter guarantee periods, short pay designs and some even have refund options. If you are considering a survivorship GUL option, 3 of those 8 carriers offer joint GUL coverage.

Indexed Universal Life

The most popular product type in the marketplace is Indexed Universal Life (IUL). When IUL was first introduced, the product was primarily designed for cash accumulation with limited guarantees. Over time, carriers broke up their product lines into two types:

1. Accumulation IUL which worked best with minimum non mec face amounts and max funded premiums
2. Death benefit IUL products that had a set level death benefit and used solved premiums usually to age 100 or 121

These products also had longer guarantees and, in some cases, could be guaranteed up to lifetime.   Many carriers have also introduced an Indexed SIUL product. A few of these are very competitive in price and can also be guaranteed to age 121! The “best” product for your case depends on the funding period, goal, and riders needed.

Whole Life

AgencyONE has seen quite a few requests for whole life recently. This product is still strong and offers many guaranteed pay options. The guaranteed cash values can be attractive to clients who are more conservative. Many of our carrier partners (some are still Mutual) offer strong Whole Life products with various pay options: 10-pay, 12-pay, 15-pay, 20-pay, pay to 65, level-pay to age 100, and level pay to age 121.

Variable Life

Variable Universal Life (VUL) insurance continues to be popular with our agents and their clients. There are two types of variable products that are currently available in the marketplace. One version can be used to accumulate cash value. These accumulation VUL’s are used on younger clients and are meant to grow cash value for future income needs. The newer accumulation VUL products include indexed account options which may be beneficial during the income years. The second version is a Guaranteed VUL product. This option provides a guarantee up to lifetime and the option to accumulate cash value (if the expected performance is achieved).  The guaranteed versions work well with 1035’s and short pay designs. There are also a few Survivorship VUL contracts to consider and two of them can be guaranteed, if necessary.

Hybrid LTC Products

Hybrids LTCs are great options to consider and compare to stand alone LTC products. While they have limited funding options (1 pay, 5 pay, pay to 65, and at some ages, a life pay is available), they can be written up to age 75. One of our carrier partners also offers a joint product for two lives with a lifetime benefit period.

As you can see, there are still a variety of available products to suit almost any case scenario. The many riders and product features can help enhance and customize the product design for your clients.

AgencyONE’s Case Design Department is known for its product intelligence, diligently monitoring product changes and updates, and being readily available to help you answer specific questions and find the most appropriate product to meet your clients’ financial and insurance needs.