What factors landed us here?  AG 38, for one.  The regulatory environment for the dominant product of the last decade is tougher than ever.  The economy, particularly the interest rate environment has also had a big impact, and both of these factors are not only in play here, but have been well chronicled in various publications .  The real problem is that carriers are forced by regulations like AG 38 to reserve as if the current economy will last the entire life of a UL policy.  While most reasonable people would agree that this is not only unlikely, but virtually impossible, it is the environment that carriers are currently operating in, and has forced them to go back to the lab and come up with new products.  

Now that the stage is set, how, exactly, does this product work?  Quite simply, Lincoln decided to take a very predictable index, the US Treasury rate, and use it as the basis for this new product,  While they were at it, they decided to fix every other product variable including the Cap Rate and Participation Rate.  That's right, unlike all the other indexed products out there this one is limited to one moving part: the performance of the actual index.  Of course, that is a bit of an over-simplification, as we all know that indexed products are not actually invested in the underlying index, but why let a little fact like that get in the way of a very good product story?  

The result of all of this is quite simple: the client can manage their funding based on their opinion of future Treasury rates.  As these tend to move slowly, and within a relatively narrow band, the variance in premium created by movement in the index is also quite narrow.  At the end of the day, this creates a product that is somewhere between an NLG and a current assumption product, and at a price that is extremely attractive in today's market.  The ownership experience will likely be quite a bit more comfortable, as the one variable is not in the control of the insurance company (let's face it, sometimes when the carrier is in control it ends badly for the policy owner) and the client does not need to stress about the timing of premium payments like they do with an NLG product.  

Given all of this, the one question that needs to be answered is that of performance.  Just how does this product stack up against the currently available products in the market?  Early indications show savings of 5% or more depending on age, face amount and underwriting class.  Of course, what really matters is how it prices for your case, and the good news is that an illustration is only a phone call or email away.

The origins of this are found back in 2005's Deficit Reduction Act.  You can read more about it here, but the bottom line is that it became harder to qualify for Medicaid.  Perhaps an unintended consequence of this was making it more challenging for nursing facilities to collect their fees and ultimately led to the application of filial responsibility laws that date from the 1600's.  The logical conclusion of that entire chain of events is the recent lawsuits and early case law they represent.

Of course, I am not an attorney, so that is about as far as I want to go into the legal side of this.  I would rather turn my attention to the prevention of the circumstances that created the unfunded liability in the first place: lack of long-term-care planning.  While I could argue that the mother's plan above worked fairly well from her perspective, the son is surely less than thrilled with the outcome.  Given that one of the provisions of these filial responsibility laws is the child's ability to pay, perhaps he would have preferred paying with discounted dollars via a long-term-care insurance policy if he knew that he would one day be left holding the bag.  Easy to say in hindsight; perhaps a bit of a challenge in reality. 

There are, however, more options for LTC funding today than ever before.  I'm a big believer in the asset based solutions like Lincoln National's MoneyGuard, which would have allowed the son in the case above to own and fund a contract to cover the bill.  By now, you all probably know that he would ultimately collect a death benefit that could offset some or all of the premiums paid depending on the policy funding and claims experience.  There are quite a few other solutions out there currently, with traditional life insurance contracts now offering everything from simple death benefit acceleration to robust long-term-care coverage.  Even some term insurance policies now offer this type of feature, making it much more accessible than ever before.

Of course, not all of these solutions are created equal.  In fact, I think some of them may even create a false sense of security for this type of claim.  I'll revisit this topic again in a week or two with an analysis of the options listed above, and if they would adequately insure against a risk similar to the one described in this case: a finite stay in a facility, followed by a full recovery and limited to no impact on mortality. 

Until then...

Links:

» 2005 Deficit Reduction Act

» PA Court Case

Many well-intentioned cynics have used this transaction as evidence of how the unscrupulous white man took advantage of the uninformed red man. However, I am not convinced that this business deal was not a fair arm’s length transaction. Let’s do the math, howbeit with some unsubstantiated assumptions.

The purchase of Manhattan Island took place in 1626, 379 years ago. Assuming a 3 percent inflation factor, $24 inflated at 3 percent per year equals a current value of $1,760,027. Manhattan consists of 14,478 acres. Through division we discover that the current value of the original per acre purchase price is $122.

I’ve been to Manhattan. Trust me; in my opinion, it’s not worth $122 an acre. However, what is important to note from our history lesson is that an assumed 3 percent inflation factor grew $24 into more than $1.7 million.

If anything, history has taught us that we must take inflation into account in our retirement planning. The following bread example may be more relevant to us than the purchase of Manhattan for $24. In 1970 $1 bought 3 loaves of bread. Today the same $1 buys about a half loaf. In other words, someone retiring in 1970 on an adequate fixed income is now struggling to survive on 17 percent of her original purchasing power.

Many retirees purchase certificates of deposit from banks, "because CDs are a safe investment." Let’s take a closer look. Assuming a $10,000 CD is paying 4 percent interest, this would presumably mean that after one year the value of our CD would be $10,400. Wrong.

Assuming a combined state and federal tax bracket of 33 percent, we would need to deduct $132 for taxes. We also need to think about purchasing power, that is, how much bread can we buy?

Our current inflation rate is 3 percent. We now need to reduce our CD by not only taxes, but by inflation as well. One year’s inflation reduction on $10,400 is $312. Therefore, our $10,000 CD grew

to $10,400, but after subtracting $132 for taxes and $312 for inflation, we are left with $9,956. A loss.

As one man recently put it, "investing in CDs simply means that you are safely going broke." As we invest through our retirement years, we need to remember that a loss is not a safe investment. We must take into account inflation and taxation, as well as safety, when evaluating where we invest our retirement monies.

As an example, let's take a closer look at Phil. You can read the details here , but it comes down to this: his combined tax rate jumped 9.6%, pushing him over the 60% mark. Clearly, this has his attention, and his strategy is to think about moving out of California. For the rest of us, and maybe even Phil, there is a way to deal with this without having to leave behind friends and family, and that is to defer more of our income.

I did some quick calculations using the following assumptions:

» Total tax rate in 2012 - 50%

» Total tax rate in 2013 - 59.6%

» Income - $1MM

» Salary Deferral of 10%

You can see from this chart , that by deferring 10% of a $1MM salary that someone in Phil's position could actually see more of their money stay out of the tax man's pocket ($463K 2013 "retained income" vs. $404K 2013 retained income with a 10% deferral). Sure, the net income drops (far right column of the table), but the goal is to actually hang on to your money, not spend it all. Further, the reduction in net income is just over 4%, far less than the 9.6% reduction with no deferral.

The other aspect of this discussion is the future income side of the equation, and the obvious solution is the use of life insurance to create a non-taxable income stream through the use of life insurance. This is not a new strategy by any means, but it just became a lot more attractive based on increased tax rates. Changing the way a client allocates their investment capital to include a life contract may make sense simply from a tax diversification perspective. While some may use this as a rallying cry for the use of Indexed UL, I think it demands a more sophisticated approach considering the various accumulation focused life products available: Whole Life, Variable, Current Assumption and Indexed.

In fact, having a subject matter expert on life insurance and deferral programs to work with is critical. There are any numbers of ways to structure these plans, as well as a myriad of regulations that may or may not apply to an individual case. Between our carriers and connections with prominent independent experts, we can help you put your team together and launch this important part of your 2013 strategy. I'm ready when you are. Give me a call or send an email to get started.

How so? It’s all in the client’s ability to manage their coverage over the long haul. Rather than simply focus on the product’s conversion language, we need to turn our attention to how a client may actually use their coverage. We all know that precious little term insurance is actually converted. The real question is why? The obvious answer is price. The last thing most consumers want to do is increase their insurance premiums as they age. In fact, there may be a smaller perceived need for insurance just at the time we come knocking on their door with the option of conversion, pay the renewal premium, or let the coverage lapse. None of these choices are typically met with much enthusiasm.

What if, however, we could come to them with a fourth option? What if that fourth option was to continue coverage at the same premium, but with a reduced face amount? Sure, they would rather continue the coverage at the same premium and face amount, but that ship sailed back when they bought term insurance. One carrier feels so strongly that they built this option into their term contracts, maintaining the level premium beyond the initial guarantee period by using a schedule of face amount reductions as the client ages. They didn’t stop there. Rather than tie the conversion rights to the level period, they built the product with a conversion period of 20 years or age 70, whichever comes earlier. This conversion right is there even if the level premium period has expired.

Of course, the newly converted policy will be at the reduced face amount that is in force at the time of the conversion, but the alternative of letting the coverage simply lapse at the end of the level period pales in comparison. The icing on the cake for this product is that it is very competitively priced, and available from a carrier that most of us already do business with: Protective Life. If you are curious about the details, you can access the product guide here, or reach out to me for a quote. The real advantage of this product won’t show on a spreadsheet of term costs, making a full illustration a critical part of the sale.

This new product is part of an emerging trend in 2013. We all know what happened with NLG pricing in the fourth quarter. One of the byproducts is a movement away from spreadsheet selling and back to actually making recommendations based on the entire feature set a product can deliver. Look for this to come up again and again as we explore the 2013 product landscape in more detail in the coming weeks.

The next logical step in the process is to look at costs. Even that proved to be an incomplete analysis, as not all product types use an "unbundled" architecture. Whole Life (WL) products, for instance, do not provide the supplemental policy charges report that Universal Life (UL), Indexed Universal Life (IUL) and Variable Universal Life (VUL) products do, leaving us no choice but to use the annual premium amount as the "cost" for that type of product. When I added the cost data to the chart we introduced in the first part of this discussion, we see the following:

Again, there is no apparent relationship between the policy charges and the "reward" the policy can deliver to the insured's beneficiaries. In fact, based only on this chart, it appears that Current Assumption UL (CUL) may be the best "deal" out there. Institutional buyers, such as the money sources behind life settlements would certainly agree that CUL is the most efficient type of contract. Those of us who have been around for a while, however, know that the typical insurance buyer would probably not have agreed with us over the last decade or so as No Lapse Guaranteed UL (NLG) dominated the market.

So where does that leave us?

Costs and premiums are all over the map. Reward metrics are often based on assumptions and are an incomplete measure as a result. NLG no longer enjoys a significant price advantage. The only conclusion I can come to is that the best consumer value is the product that the client understands, can afford to pay for, provides value beyond simply the death benefit and provides the peace of mind the client really wants when making a life insurance purchase. That leaves the insurance professional with a rather large challenge: becoming, once again, a student of product. Not only the various types that are out there, such as the difference between VUL and IUL and why a client would select one over another, but also the more subtle differences within each product type. The notion that there is one "best" product is simply flawed. As I prepare to close the year and look towards 2013, my thoughts turn towards how I can provide producers with the tools needed to rebuild the product knowledge base that has been sitting on the shelf while NLG has dominated, and position us all for success. There are significant plans in the works, and I look forward to the challenge of transitioning to the next product era.

Which variables should be considered?  How should they be weighted?  How to integrate the needs and attitudes of the client into the discussion?  I'm confident that the ultimate calculation is beyond the scope of this column, but given the transition the life insurance industry is in the midst of, identifying the variables is certainly worthwhile.  

First, the obvious:

- Premium, measured by the net present value

- Face amount, measured by the internal rate of return

- Cash value, measured by the internal rate of return

These are all rather straight forward.  Unfortunately, the including the balance of the variables injects ever increasing levels of complexity into the equation:

- Guarantees of various types

- Carrier strength

- Time horizon

- Policy expenses

- Available riders

- The list goes on and on...

One of our carriers, MetLife, has developed an interesting approach to the total value conversation.  The MetLife Life Insurance Selector Tool guides clients through any number of decisions around their insurance purchase: Term versus Permanent, blending term and permanent as well as the various types of permanent insurance.  The interview process described by MetLife is intended to point the client to the policy type that is most appropriate for their needs.  One could argue that this is the product that represents the best "total value" for the client, but it is a far cry from a definitive analysis of the feature set of each product type and the corresponding cost.  While the tools from MetLife are great, they are limited to their products only and really only address the client focused variables, so let's expand their discussion to include the total product spectrum and begin to understand the total value equation in more detail:  

In general, there is a trend of higher levels of risk and correspondingly higher potential rewards as we move from left to right.  No surprises there.  Unfortunately, that is not nearly enough to understand the relative value of these products.  As more data is added to the chart, however, a story begins to unfold.  By overlaying premium* on this spectrum, for instance, we can see that the relationship between premium and potential reward is anything but linear.    

* Male, age 55, Preferred Nonsmoker, $1,000,000 face, guaranteed to maturity or to endow  

Clearly, focusing on price as an indicator of value is not enough, nor is a simple risk/reward discussion.  We need more data.  The next step, which I will cover next week, is to consider the actual policy charges.  One last thing: Despite all the analysis, the ultimate value of a life insurance contract is what it does for the loved ones left behind. Let's not lose sight of that in the midst of this discussion.

Like most impairments, the carrier's willingness and ability to make a great offer on a sleep apnea case will depend largely on the proposed insured's compliance with their physician's prescribed course of treatment, as well as the treatment's actual effectiveness.  What could that look like?  Consider the following:

» 50-year-old male who qualifies for Preferred Best rates with the exception of an abnormal sleep study two years ago.
» A diagnosis of moderate obstructive sleep apnea was made at the time, and a CPAP was prescribed.
» Two subsequent studies (one six months post diagnosis, a second six months prior to the application) were normal.
» The documented compliance and control enabled the carrier to offer Preferred Best.

Before we all dust off old sleep apnea cases and get them ready to submit, there are some additional factors to consider:

» The initial diagnosis was obstructive sleep apnea (OSA), rather than central, or mixed apnea .
» OSA was categorized as no worse than "moderate".
» The prescribed treatment demonstrated resolution of the symptoms.
» The proposed insured was a nonsmoker.

Having underwritten an OSA case or two over the years, the big challenge here is the subsequent sleep studies.  In the vast majority of cases, the proposed insured fails to return for the recommended follow ups that were the lynchpin of the case described above.  The real issue is the documentation of compliance and control.  It may not be enough that the proposed insured "uses their CPAP".  Without the subsequent sleep studies to create the paper trail, the underwriter is left with very little choice but to assume that there is still a potential issue, resulting in Standard or worse.

All of that said, I still think dusting off those old cases is a great idea.  They may be a follow-up sleep study away from a really great offer on a new permanent life insurance contract.

This presents two questions as I see it:

What can we still accomplish from a planning perspective before the sun sets on the current estate tax laws?

What are the longer term impacts of the election around estate planning, life insurance taxation and financial services legislation?

We have all heard about the opportunity the current gifting limits afford high net worth clients. What we have not seen is the flood of sales that could have accompanied such a finite opportunity. American General has identified three strategies that allow clients to still take action THIS YEAR yet have the ability to "unwind" these transactions and recover the assets should they change their mind. Now that the election is over, those clients who may have been waiting to see who won can use these to execute on gifting strategies before the opportunity rides off into the sunset. Click below for:

End-of-Year Wealth Transfer Strategies

Preparing for the sunset of the 2012 lifetime gift tax exemption

As we all begin to turn our attention to next year, the second bullet point above becomes more and more important. The long term impacts of the election are far more important to the future of our business than anything that may happen over the next six weeks. Even though the ballots are barely done being counted, John Hancock has provided some early analysis based on the winners and losers from earlier this month. Please listen in to the post-election edition of JHAM Radio hosted by Randy Zipse, Senior Counsel and VP of JH Advanced Markets Group, and featuring Chris Morton, VP, Legislative Affairs with AALU as they discuss the election's impact on key.

Click here to listen to the broadcast

The current economy and state of our federal budget are creating a climate that has the potential to harm our business in very significant ways. The "threat level" posed by potential changes to taxation of insurance products is at an all-time high, and the resulting damage will impact our practices, our incomes, and our client’s financial security. This is more than likely not news to any of you.

What may be news, however, is the higher level of organization and collaboration that this has created among the various industry groups we all belong to. ACLI, AALU, NAIFA, NAILBA, GAMA and IRI have all combined their efforts, along with a number of our carriers, to create a web site – www.securefamily.org - dedicated to informing producers and the public alike about the threat to financial security that some of the possible budget changes represent.

This is important in any number of ways, but the most critical is the platform the site creates to have a unified voice on these issues. Frankly, even as strong as the groups mentioned above are individually, the collective influence we wield when working together has the potential to dwarf the individual efforts of any one organization.

As we all reflect on and acknowledge the positive impact our profession has had on our lives and those of our clients, I encourage you to take the time to click through to www.securefamily.org to see just how important our industry is to the national and state economies as well as personal financial security. While you are on the site, perhaps take the time to sign the petition declaring your support for the industry that has given us all so very much.

Enjoy the holiday with your loved ones!

There are some additional, more subtle, but equally important results of these changes.  Some carriers, ING for instance, are getting out of the Guaranteed UL space entirely by suspending sales.  While they may re-enter the market at some future date, the fact that more price increases are expected industry wide next year and the United States is the only country in the entire world that offers this type of product makes me question if they will.  In fact, other carriers may follow their lead right out of this market altogether.    

Further, we have talked before about needing to understand the fine print around conversions.  One of the points that is frequently lost in the decision making process when purchasing term insurance based on the laser focus on price is the conversion option.  Many carriers already restrict conversion to products other than the currently available Guaranteed UL.  It is not a big leap to think that this trend will continue.  Combine that with the fact that some carriers may elect to exit the space all together and you have some rather significant motivation to convert your term insurance now while a guaranteed product is still available.    

Producers who understand that this is essentially a fire sale on Guaranteed UL are having a huge fourth quarter.  They are systematically reviewing their client's term insurance for possible conversion and re-visiting clients who wanted to "wait and see" on new purchases with excellent results.  The trick is knowing all of the transition rules and deadlines that accompany all of the price changes.   That is where I can help.  Give me a call so I can help you review your book and navigate the transition rules on the way to a huge fourth quarter.

Early in my work with these products, however, I used a design with one of my producers that was 180 degrees in the other direction.  The design?  Using EIUL to minimize the cost of life insurance coverage.  This producer had written a significant amount of variable life insurance over the years and as we were reviewing the contracts a couple trends emerged.  The first was regarding premiums.  The economic climate had made it very challenging for people to keep up their premium payments.  Minimizing out of pocket costs was the order of the day, and the variable contracts they owned were simply not well suited to that approach because of the higher costs associated with the product.  

The second was that there was a subset of the EIUL world that was really well suited to a minimum funding design, and they were not the carriers with the highest caps or illustrative rates.  Instead, the carriers that had the lowest cost structures rose to the top.  Think about it.  It is similar to comparing gross and net rates of return.  Even if the gross rate is the same, the individual with the lowest tax bracket is going to see the best net rate of return.  In the case of a life product, it is the expenses that fill the role of the tax rate and the products with the lowest expenses resulted in the lowest premium costs.  Over funding a product with a high illustrative rate can overcome higher cost structures on paper, but when we squeeze funding levels down to a minimum, these expensive contracts are exposed.  The same can be said if we experience a market that does not approach the cap rate in a higher cap rate product.  It simply never has the chance to perform as it was designed.  

So why bring this up?  A couple reasons.  Primary among them is the fact that we are already seeing the GUL price increases we expected based on the ratification of AG 38 back in September with another round of increases expected in 2013.  With these price increases comes the need to explore lower cost, alternative designs that perform well in our current economy and are likely to continue to perform well in the future.  The second is that there is some evidence that EIUL product design is trending in this direction.     

What this does not mean, however, is that a high cost, high cap product has no place in the market.  It certainly does, particularly in many of the sales scenarios described above.  In a market that repeatedly reaches or exceeds cap rates they will likely perform quite well.  It all comes down to the purpose of the sale, and making sure that the product you are recommending is built to accomplish that goal.  The idea that there is one best product for all sales is simply not the case.  

Term insurance:   There are big discounts (as much as 23%) available when a client elects to "pre-pay" their insurance with a one-time payment.  Why shell out the single pay instead of paying as you go?  Economically, it makes no sense, as the discounted premium produces a lower rate of return based on it being paid all in the first year.  When there are other complicating factors, like a messy, or even not so messy, divorce, using a "one and done" approach begins to have some appeal.  Instead of having that premium payment remind the client of the not-so-good times each year, they can put it squarely in their rear view mirror where it belongs, while still meeting their obligation under the divorce decree.  

Permanent Insurance:  One of our carriers allows for a portion of the death benefit to be paid as an income stream rather than a lump sum.  There are pros and cons to this of course, control being primary among the cons.  However, like the example above, when we focus our attention on the "why", some significant uses for the discount present themselves.  Turns out this product also has a chronic illness rider that can be added to the policy.  As an optional rider providing access to 100% of the policy face amount via a monthly benefit, there is a cost associated with it.  Using the income stream option for just enough of the life coverage and the corresponding discount to offset the LTC costs results in.....you guessed it, getting more for the same premium.  

In either case, remember that in some cases, the "more" is peace of mind.  Tough to put a price tag on that.

That's right.  Included, not excluded.  Sound like a problem?  You bet.  

Of course, while this is theoretically possible, it is rather unlikely to come to pass.  The thinking is that there was a lack of, well, thinking, around the rather far reaching results of a very broadly written section of the budget.  In fact, two experts, Randy Zipse, VP of Advanced Markets at John Hancock and Ronald Aucutt, Partner with McGuireWoods LLP, discussed this very topic in a recent podcast from John Hancock Advanced Markets Radio .  Why do they reach this conclusion?  The revenue associated with this section of the budget is $910 MM, far short of what the presenters would expect if the intent of this budget provision includes all grantor trusts.  I'll leave further analysis to them, but one of their points, that this budget isn't necessarily tied to one candidate or party, makes this worth watching both now and in 2013.   

The balance of the discussion reviews additional aspects of the budget proposal, as well as the political climate around estate taxes through the end of this year and in to 2013.  As expected, the safe bet is on no action being taken until after not only the election, but the inauguration.  Further, the expected action based on the presenter's commentary is likely to be an extension of the current limits.  The rationale for this opinion is that while the two candidates have widely differing views on this issue (Romney in favor of complete repeal, Obama in favor of a return to lower limits and higher rates) neither will be willing to expend the political capital necessary to push what they really want through Congress should they win the election.  The current levels are thought to represent a compromise both sides could live with, at least for now.  

Another aspect of their conversation led me to the McGuireWoods web site, and a resource that I think I will find myself coming back to in the future.  Mr. Aucutt maintains a document called Estate Tax Changes Past, Present and Future on the site, and not only is it a great resource for what is going on right now, it is a very thorough study of the history of the estate tax.  While I have seen timelines and the like in the past, most of them focused on the various tax rates and the on again off again nature of the tax over the years.  Mr. Aucutt goes quite a bit deeper, and anyone who needs to strengthen their knowledge of current law would also be well served by gaining the perspective his history provides.  Rather than simply letting this resource stagnate, the author updates it roughly twice a month, rendering it a useful tool not only for today's information, but also staying informed going forward.  

Needless to say, the next few months will tell the tale about many things.  While much of it is unknown at this point, what is clear is that the only thing we can really count is more changes.

Now, I have been talking about this eventuality for the past 18 months at least, and anyone who has been following along will not be surprised by this coming to pass.  The most important aspect of the entire discussion, however, is not that we saw this coming; it is what is still ahead of us.  Specifically, if the last decade or so was the "No Lapse Guaranteed" era, what product is going to rise from the ashes to prominence?  Further, is it in our best interest for what amounted to a monoculture over the last decade to repeat itself, albeit with a new product leading the charge?

I'll go out on a limb and say that a new era dominated by one particular product is the absolute last thing we need.  Unfortunately, history tells us that is exactly what is going to happen.  A few weeks back, I talked about the need for product innovation, and that is certainly part of the discussion.  The more fundamental issue is that the collective product knowledge and sales skills that our industry possessed prior to the last decade has atrophied. 

The result is that a subset of today's life insurance agents doesn't have the skill set to articulate the relative strengths and weaknesses of the life insurance products available today.  More importantly, this group is also ill prepared to guide clients through the process of matching client needs to the appropriate life product.  The one mechanism that has historically filled that void, the career agency system, has contracted to the point that it can't fill this training void.

So what is the solution?  I'm not sure anyone knows (in fact, I am sure that no one knows!).  We will investigate that very question over the coming months.  There are enough smart people in this business that it will not take long for us to sharpen our collective pencil, and adapt to this new era.  Frankly, periods of change, such as the one we are about to experience, often result in an even greater opportunity for the well prepared.  The trick is making sure you are paying enough attention to be ready.

Fast forward to today, however, and perhaps things change a little, if not a lot.  With the proliferation of additional Accelerated Benefit Provisions for Long Term Care, Chronic Illness and Critical Illnesses there are more reasons to talk about, and make the recommendation to purchase, a product with these features.  While these new Accelerated Benefit features were introduced almost exclusively on permanent products in the early stages, they are now available on term contracts - and that just expanded the market for them dramatically.

All those clients who were unwilling to pay for Long Term Care?  They are now prospects .  Did they readily admit the need and simply could not afford it?  Again, they are now back in the market, so to speak.  Of course, these chronic illness riders are not true LTC policies, and we need to be a bit thoughtful in how we talk about them as a result.  However, the triggers (being unable to perform 2 of the 6 ADL's or requiring substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment) are virtually identical.  A major difference is how benefits are paid; annual payments on an indemnity basis.  That's right. Get all your money in one lump sum once per year until the benefits are exhausted.

Exhausted benefits are also an item that needs to be covered in depth with the client.  While there will be a small residual death benefit paid to the beneficiary when the insured does pass, it is entirely possible, or even likely based on the typical duration of care, that virtually all of the death benefit can be accelerated away.  This is completely OK as long as everyone goes in to the transaction understanding this is a possibility.  Exhausting the death benefit becomes increasingly important when we are working in the other market for this product: the younger prospect with a laundry list of risk management needs and a limited budget.

The younger client can use this recently introduced product to cover not only mortality, chronic illness and critical illness, but disability as well.  There is a limited amount of disability income coverage available as a separate rider.  The addition of this rider essentially makes this a risk management Swiss Army Knife for the younger client.  Sure, as their income increases the plan is to beef up their coverage with stand-alone policies, but until then, this coverage is far better than no coverage.

You can check out the Product Guide here, or give us a call to request a quote. 

That, of course, was bad news for those of us looking to move on cases that involve a history of PSA elevations or even prostate cancers.  So rather than wait for the medical community to make up their minds about PSA testing and hope that it benefits underwriting someday, how about we talk about what we can do?  Sounds good, but is there really anything we can do once the cancer is diagnosed?  

The answer, like so many things in our business, is "it depends."  What does it depend on?   

Four things:  

Age of the client.  The older the better.  The idea is to identify the risks that are likely to die with the cancer rather than from it.  

The nature of the cancer.  Specifically, a recent diagnosis with a Gleason Score of 6 or less, and a PSA of less than 10.  The balance of the pathology details need to be favorable as well.  

Well followed.  Regular visits to the doctor, with a recommended treatment protocol that is followed to the letter.  Even watchful waiting is in play here in the right circumstances.  

Manual shopping.  As in "Underwriting Manual."  Some carriers use one, others two, and a very few use three.  That gives the underwriter who truly knows his or her craft to use the one that will give the client the most favorable result.  

All of that said, what, if anything, does this recent announcement mean?  Is it a game changer?  Will it provide any relief to the frustration this type of history can cause both the insured and underwriter alike?  Rather than speculate, I went to the rolodex and called Will Walker, director of Member Services Underwriting at the Advantage Insurance Network.  Together we posed the following questions to Dr. Jim Topic, Head Medical Director at Protective Life:    

WW:  As a physician, what is your reaction to the recent announcement regarding PSA testing?

JT:  I was expecting the move toward this response.  I wish more emphasis had been placed on risk selection and proper follow of high PSA.  The main reason for the lack of clear benefit of screening is twofold in my opinion:  High levels of crossover of screened vs. non-screened populations and the high adverse effect of PSA follow up.    

WW:  Will this study change the role of PSA testing as part of normal age and amount requirements?

JT:  I do not believe it will.    

WW:  Will there be any impact on the underwriting of elevated PSA levels and prostate cancer based on this new information?

JT:  Unlikely.    

WW:  If clinicians are no longer performing PSA testing, how would an elevated PSA discovered on the medical exam be handled?

JT:  First, it is unlikely physicians will change quickly.  Second, PSA is still a valid marker of cancer and risk needs to be assessed.    

WW:  What testing would you expect the clinician to perform to reach a level of comfort with an elevated PSA risk?  Repeat PSA/Free PSA testing?  PCA3 urinalysis?  Biopsy?

JT:  All of the above, and I would expect more use of active surveillance post biopsy.    

WW:  Currently insurance companies run Free PSA's as a reflex test if the PSA is elevated on the exam.  If clinical medicine no longer utilizes routine PSA testing, will you put more credence on the Free PSA results from the insurance exam?

JT:  Free PSA falls rapidly if the sample is not frozen.  We do not advise use of free PSA on insurance labs unless proper handling is guaranteed.  We currently use medical records, Free PSA, PCA3,PSA velocity, and will continue to do so.    

WW:  What do you perceive the insurance community will ultimately do if the PSA test is no longer used at the clinical level?

JT:  PSA will continue to be used by insurance companies.  As therapy changes or becomes more specific we will see more surveillance - likely rated as if partial therapy accomplished (if done at a documented center under a solid protocol).  Better late chemotherapeutic approaches may allow lower Flat Extra/Table Ratings in future years.  Most manuals have incorporated current advances as they can be documented.  Due to the disease behavior, though, it takes years to document long term effects.    

WW:  Although we chose to incorporate the Q&A with Dr. Topic, similar answers were given from other Tier-1 Insurance Companies Medical Director's.  Their feelings could be summarized by this statement:    

"We are not reacting to recommendation by the U.S. Preventive Services Task Force.  There's inconsistency regarding PSA screening in the clinical community between U.S. Preventive Services Task Force, American Urological Association & American Cancer Society.  Prostate cancer is still the second leading cause of cancer deaths among men after lung cancer.  We continue to review PSA and Prostate cancer assessments on an annual basis."    

Clearly, this is far from a game changer.  In fact, it may increase the frustration when dealing with this history because there seems to be a body of opinion that discounts the relevancy of PSA testing.  That leaves us in the field with a bit more work to do when working on a case with this history.  Educating the client becomes paramount, and involves two aspects as I see it:  The first is the difference between clinical medicine and medical underwriting.  Simply put, the clinician has the luxury of time.  He or she can afford to use a wait and see approach.  The underwriter, however, needs to make a one time decision and then live with it for the life of the client.  The second aspect is referenced in the last answer from Dr. Topic: it takes time for any new medical information to result in usable data for the underwriting community.    

Of course, this is no guarantee the client will agree with you, but we have to play the hand we are dealt on this one.  Have a good week.    

The question in my mind is, "Are these really as easily understood by the public as we all think?"  

Why concern ourselves with this?  Very simply, I think these products may create a false sense of security.  To understand why we need to put ourselves in the client's position and look at financial products through their eyes.  Specifically, I think back to when ROP term hit the market and all the advertising I heard on the radio and saw in print.  The public perception was that these products delivered both very competitive premiums and the client would get all their premium dollars back at the end of the level period.  The truth, as we all know, is that it is really a matter of competitive premiums or receive your premiums back.  

That critical difference between "and" and "or" has proven to be the difference in the product being widely accepted and sold versus the niche product it is today.  Market share does not lie, and as a percentage of the total insurance market, ROP term is a bit player.  Fast forward to today, and we have linked benefit products being marketed aggressively, and yet another public perception problem.  I think the public views these products as providing death benefit and living benefits, when in reality, it is almost always a matter of death benefits or living benefits.  

When the mechanism for providing living benefits is an acceleration of the death benefit, it has to be an "or" rather than an "and."  Sure, there may be a small residual death benefit after acceleration occurs, but that will be small comfort when an insured passes after accelerating virtually all of their death benefit to cover chronic or critical illness needs during their lifetime.  Don't get me wrong, I think this type of coverage is actually a great risk management tool, particularly in the context of spiraling LTC costs.  It is not, however, the "Swiss army knife" that it is being touted as.  

So if we all see the gaping hole that this approach can leave in a risk management plan, what is the solution?  At the very least, stack some term insurance on top of this type of contract.  Properly structured, a term insurance contract of the appropriate duration can provide the additional liquidity that will likely be needed at the end of an extended illness that has drained the linked benefit product.  It also provides the flexibility to convert some, or all, of the term if there is a recovery after a critical illness acceleration has occurred, essentially replacing the permanent coverage that has been lost to the acceleration.  A second alternative is to "gross up" the face amount to provide a cushion of permanent coverage that the client intends to leave intact in the event of a critical or chronic illness claim.  

 How different?  An estate tax exclusion amount of $60,000 versus $5 million.

That's not a typo.  That is a problem waiting to happen.  Admittedly, this is a rather unique niche, but if the recent statistic quoted by Lincoln Benefit is any indication, there is $82 billion of real estate in the US held by international buyers.  The need for US insurance in rather significant amounts is very real, and has the distinct advantage of very clear laws rather than some sunset provision and potential reform clouding the issue.  In other words, the "wait and see" approach that your US clients are using as an excuse to do nothing does not apply here. 

Need more ammunition?  Try this one:  The taxes may be due at both the first and the second death!  No unlimited marital deduction for these folks (You can check out more details on the laws here ).  With $82 billion held by international buyers, the need for insurance is staggering ($28 billion?!) and, my guess would be, largely unfunded.  Admittedly, as great as all of this sounds from a "need" perspective, this type of business presents unique challenges.  At a minimum, competent tax and legal advisors well versed in these issues need to be involved.  Our concern in the life business, however, is more about how to close the sale once we have identified that need.   

The hurdles presented by underwriting foreign nationals who do not reside in the US are many, but there are pockets we have identified with relatively clear paths to follow.  Obviously, these cases are all very unique and the country of origin and travel details are critical variables.  There is the possibility, however, of being able to complete the cases with carriers you already work with and, in some instances, even complete the medical requirements in the home country.   

Sure, we do it all the time.  So what is the "it" in question?  1035 exchange a policy with a loan balance.  While it is commonplace for us, it was news to the producer I was speaking with, and it is an area that can trip you up in a very, very big way.  How big?  How about creating a taxable event for your client despite a 1035 exchange being executed?  Did I mention that there are no actual dollars in your client's pocket as a result and they still may have to pay some tax?  Do I have your attention?  I think I should.

So just how does this happen?  It all comes down to the concept of "boot" and the creation of a situation where the exchange is no longer considered like to like.  Of course, this assumes that there is gain in the contract, and that we elect to pay off the loan rather than move it over to the new policy.  To make matters even more complicated, this same issue can rear its ugly head when we are doing something as simple as pulling money out of a contract prior to the exchange, even if there is no loan. 

The technical details of all of this are beyond the scope of this forum, but can be found in these two publications:

Policy Loans

1035 Exchanges

So if we are not going to dive in to the technical details, why bring up this topic today?  One reason: there are a bunch of life policies out there with loans on them.  These policies are frequently in danger of lapsing, and the likelihood of finding yourself with a client facing a very unwelcome surprise at tax time as a result of a poorly executed exchange is alarmingly high.  You know as well as I do if they are facing an unwelcome and unexpected tax bill, it is a pretty short trip to the phone to call the agent that handled the transaction to demand answers. 

Now that we all understand the problem, what is the solution?  Step one is being aware of the trap, so we have that handled.  Step two, however, is a bit more complicated.  When we start talking tax code, 1035 exchanges and boot, we find ourselves squarely in the grey area of our business where the lines between being a life insurance professional and providing tax advice begin to blur.  This is not something that we can afford to have happen.  The downside is simply too enormous.  We need a better strategy.

Unlike a few weeks ago when I suggested that we change the way we do business (evolve even?) if we want to remain effective, this time we should do just the opposite and get back to one of the pillars of our past success:  tap our professional network.  We all need CPA's and attorneys we can trust.  We really need some who flat out know life insurance taxation.  If you have been in the business for long you probably already know them. 

It's time to dust off those relationships, and start using them to set yourself apart from the rest of the pack.  Your clients may never thank you for helping them avoid a problem the never knew they had, but the revenue from being able to rescue that old, over-loaned life contract can sure help you keep your practice "in the black" where it belongs.  Knowing you did it right will help you sleep at night. 

Really?

I am 100% positive that none of these clients would enter into a financial transaction where they were "on the hook" for hundreds of thousands or even millions of dollars without some information regarding the other party's financial condition.  Never mind that there are insurable interest laws that need to be followed.  Of course, facts and logic are often lost in these discussions, so we are left to deal with a client who, as one did, "respectfully declined" to answer the financial questions.  My cynical side immediately wanted to respond that the insurance company would respectfully decline to offer coverage as a result.  Luckily, I was able to contain myself and come up with a more appropriate response.

Why bring this up?  One of our carriers has just instituted a new form requirement for any insured over age 26.  The 4506T-EZ .  Never heard of it?  You will, because this carrier is certainly not going to stand alone as the only one requiring it.  What does this form do?  It allows the carrier to go directly to the IRS for information about the client's tax filings.  Needless to say, the initial reaction from some in the field has been less than positive.

 Before we grab our torches and pitchforks and join the angry mob over this, let's take a look at why this is being implemented and how we can deal with it.  First, the "why ."  In a word;  fraud.  Every one of our carriers is spending more time than ever investigating fraudulent activity in life insurance transactions.  Most of this fraud has centered on income and net worth documentation.  In that light, I see their point clearly, and agree that this ounce of prevention (additional disclosure) is worth a pound of cure (fraud investigations after the fact).  I do think, however, they have applied this requirement too broadly. 

 One of the other "selling points" the carrier is touting is that it will speed up underwriting.  They do not intend to pull tax returns on every case.  If there are questions they need clarified, they can now go straight to the IRS rather than have to wait for the client or CPA to provide the information.  It may also actually be a bit more private, as this information bypasses the agent and general agency completely (I'm not sure this is a good thing!).  Also, this form is routinely required for other financial transactions such as a home or auto loan.  All of that aside, how do we deal with this new reality?

One strategy initially is to avoid that carrier.  However, I do not anticipate them being the only carrier to go down this path, so we will need a better answer than that sooner or later.  That answer comes down to our presentation of the document.  Most clients have no idea what the actual insurance application process entails.  If we position this as a normal part of the process, most will simply sign and move on.  However, if we pay an undue amount of attention to this new and onerous requirement so will the client.

I would compare this to a change in a product like a bonus on an annuity.  Many producers will throw up their hands when there is a reduction, thinking that there is no way they can sell the product with the reduced bonus.  The truth of the matter is that your prospect probably has no idea that there was a 10% bonus last month.  He's just excited about the 5% he can get today.  If the producer manages to keep what is in the past in the past where it belongs, the client will never feel as if they are missing out on something.  Present this new form as if it has always been part of the process and it becomes a non-factor for most clients.

It came up when I asked him if he had a full medical file on the applicant who was declined.  His answer was that he had a copy of the application he could send to me.  While a good start, it really is not enough to determine why the client, a diabetic, was declined.  More importantly, even if we go ahead and assume that it is related to her diabetes (not a big stretch really), it is not enough for us to formulate a strategy to move the case forward either in the near term, or after sending her back to her doctor to address the issue.  The reason he only has the app copy and nothing more?  He relies on his carriers to order his underwriting requirements, including the exam and the medical records.  He never sees them.

Based on all of the producers I speak to each week, this has become more and more common over the last few years.  The reason?  Probably the biggest driving force is the retraction of our industry as a whole since the end of 2008.  Offices that once employed any number of people are now staffed by a skeleton crew.  While this has kept expenses down, it has also had a dramatic impact on how much business can actually get done each week.  As these same offices now focus their attention on trying to re-attain the production levels they saw prior to the end of 2008, the one thing they are extremely hesitant to do is invest in infrastructure and take on the overhead that comes with it.

So why I am spending my time talking to this producer about how he runs his practice?  Simple.  There may be a better way to tackle the challenge of growing production, and the only way I can even begin to have that conversation is to understand how he works.  The alternative strategy to growing his business?  Outsourcing.  Rather than hire someone to run illustrations, outsource it.  Rather than relying on the carrier to order the requirements and lose the ability to truly control the case, utilize a third party that will step in and handle that aspect of the transaction for you.  Simply put, there are ways to leverage his time without taking on the staff and overheads directly.

The result for this producer is significant: when he comes up against a case like this declined diabetic again, he will be able to quickly determine if there is a strategy to move it into the win column by working with this trusted third party.  Just who is this benevolent third party?  In this case, it’s me and the rest of the staff at Cavalier Associates.  Rather than having to spend his time moving from carrier to carrier like a nomad wandering the desert, he can stay focused on revenue generating activities.  By the end of the conversation he had admitted that placing more business, even at a reduced compensation level, was better than having higher compensation and placing fewer cases.  He saw the value of the relationship in more actual dollars in his bank account.  After all, it is not the percentage that matters nearly as much as the actual compensation. 

If you are looking to grow and need to expand your team, we should talk.  It’s time to work smarter, and we can help.   Handling the medical records and illustrations are just the beginning.

The first pattern is one we see every year – a first quarter dominated by price increases.  What makes this year unique versus past years is the magnitude of some of the changes – take a look at the pricing at John Hancock as an example – as well as the fact that some of these very same carriers had a price increase as recently as six months ago.  We all know the reason for this – reserving is more expensive as a result of the current economic environment. 

A related pattern is the restriction on first year lump sum or 1035 exchange premiums.  There are any number of ways the carrier accomplishes this – re-pricing the product completely with uncompetitive product performance, putting a multiple of target premium ceiling on first year premiums, or even dropping interest rates - and they are all based on one fundamental issue: it makes no sense to a carrier to take on a large amount of premium, and then credit more to the policy than they can hope to earn in an investment position with the proper risk profile.  Until this changes, we will continue to see carriers adjust these and any other policy feature they can to manage this upside down position.  This is also contributing to the flurry of price change activity.

A third trend we are seeing is indicated by the title of today’s email.  The days of carriers focusing their product pricing on “lifetime guarantees” may be coming to an end.  There have been attempts at this before, but they focused on guarantees to life expectancy (LE) rather than to a point of hyper longevity.  It appears now that there might be some economy from a reserving standpoint at age 105, and I think we can all agree that just about everyone is going to be on the “wrong side of the dirt” by that point. 

I think that the issue with the LE approach is that while an institution may be OK with guarantees to that point on a group large enough to have a normal curve, individual families simply bear too much longevity risk as a result of only having one or two lives to consider in the equation.  That potential premium payment at age 86 to extend coverage that would otherwise lapse can be enormous, but if funding to age 105, I think that risk is appropriately minimized.  While I could set out to prove this statistically, I think I’ll pass on putting you all to sleep and trust our collective intuition on this one!

One last note: there is one additional area we all need to keep an eye on, and that is compensation.  Given that some carriers are using this as a way to shore up profitability of certain products or designs, it makes sense to me, all client-centered metrics being equal, to send the case to the carrier that still pays full compensation.  We do enough pro-bono work already!

• The urine sample has to be clean.  No ifs, ands or buts.
• No more than 24 “uses” per year for Preferred rates (a use would be smoking a cigarette).
• No more than 12 “uses” per year for Select rates (That’s right, they go to best class for this.  Crazy, right?).

• Placing a $92K target case with Lincoln Financial on a client who travels to Haiti on a regular basis.  Even with Haiti being a “D” state the Florida “Freedom to Travel Act” opens the door to move forward on the case.
• Placing a $214K target case with John Hancock based on their huge retention and excellent current assumption UL product.
• Placing a $680K target case with Transamerica in a 72 hour period from app to in force!  Sure, there was an informal offer that was rock solid, but come on, 72 hours to process an app start to finish?  On an 80 year old!
• Placing a $375K target case with Lincoln Financial at Table 4 when the rest of the carrier community was stuck at Table 5 to decline.

• Guaranteed premium and death benefit.  They may be rising in price, but the public clearly loves guarantees.  Of course, the premium will be top 3 in most cells for you spread-sheeters out there.
• Upside potential.  There has to be some cash in this product if the client over-funds, because as much as the public likes guarantees, they love cash.  Don't forget the downside protection as well!  No putting their principal at risk!
• Preferred loans.  Need an income more than the guaranteed death benefit?  OK. Use the preferred loans to turn on an income.  Heck, let's even give the client the option to use variables loans, and change their mind back to fixed!
• Ready for the icing on the cake?  How about a premium that drops over time?  Why not put the trigger for that in the client's control?  Maybe even reward them for doing something they do anyway, like going to the doctor?  Why not let the premium stop all together?

• Male age 50, Preferred Nonsmoker.
• $1mil face amount
• $9053 guaranteed premium
• Premium begins to drop in year 4, with the following results:
• Year 10 net premium = $8932
• Year 20 net premium = $8304
• Year 30 net premium = $6472
• Net premium falls to $0 at age 93!

• A withdrawal of every nickel the client has paid in premium
• A reduction in face value
• A reduced, fully guaranteed death benefit for life
• All for the cost of time value of money (and maybe a little bit of tax)!  

• Husband and wife
• Both age 60, both standard or better
• $200K in CD assets
• Single pay in to an SGUL (Survivorship Guaranteed UL) with a $500K face amount
• Wait ten years
• Withdraw $200K (Did I mention that there was this plus more in GUARANTEED cash value at year 10?)
• Reduce the face amount by the amount of the withdrawal

• Husband age 69 and female age 65, both Preferred Nonsmokers
• $24,000 of Social Security Income each year
• 40% combined income tax bracket
• Projected tax = $9,600
• After tax income = $14,400

• None of your client’s policies are in trouble.  
• None of these insurance companies are in trouble
• Even if there is something to this, the carriers in question have a simple remedy – change the way they are reserving.

• Premature policy lapse
• Extension of the original premium payment period
• Significantly reduced accumulation or income potential
• Under performance versus currently available products

• Better informed clients, who may have a better handle on what they are actually buying.
• A reinforcement of why this is an asset that needs to managed like any other.
• Exposure of designs that should never see the light of day, because the margin for error is so slim.
• More realistic client expectations.
• Separation of the agent from policy performance
• More satisfied policy owners

• All cash value coming out of the contract will receive LIFO tax treatment
• All distributions will be taxable to the extent the exceed cost basis, even if taken out as a loan
• Any taxable distribution made prior to age 59 and a half will be subject to a 10% penalty

• The only taxes due will be on the gain in the contract. No gain, no tax!
• The taxes are only paid when the money is taken out of the policy. Leave it in, never pay tax.
• The 10% penalty only applies to the taxable portion of distributions. No gain, no penalty!

• Male age 45 - IRR on Death Benefit at age 85 = 4.63%
• Male age 55 - IRR on Death Benefit at age 85 = 4.85%
• Male age 65 - IRR on Death Benefit at age 95 = 5.15%

• Rather than purchase a GUL, purchase a CUL contract funded at the same premium.
• Using John Hancock as an example, the guarantees are through age 90, longer than Life Expectancy.
• Cash growth is positive in every year based on current rates.
• Even if Hancock drops the current rate to the guaranteed minimum in year two of the contract, the projected performance is through age 94.
• In this example (Male age 65, PNS, $1mil, just like in the Hancock piece from the link above) Hancock can drop the rate to 3.2% and the policy still carriers to age 120 on the current side.

• Carriers increasing rates on GUL contracts
• Carriers pulling out of the GUL market place all together
• Carriers increasing GUL pricing to the point that they may as well have pulled out of the market
• Carriers reducing guaranteed rates on any type of UL contract
• Carriers reducing current crediting rates on traditional UL contracts
• Carriers reducing Cap Rates on EIUL contracts
• Carriers preferring to write LESS business in the fourth quarter rather than writing more, unprofitable business

• Rather than buy $10 million of GUL, buy $3.5 million with increases scheduled to reach $10 million by year 30.
• Buy a 30 year ROP contract for the balance of the coverage, for a total of $10 million.
• Use the ROP payment at the end of year 30 to drop into the UL contract at the end of the term.
• Design the GUL so that it has a level premium aside from the lump sum.

• Annual premium savings of $1,400 versus the full $10 million GUL for 30 years.
• Annual savings of more than $13,000 per year in years 31 and beyond (that is not a typo!).
• An increased IRR on death of anywhere from 11 basis points (year 40) to almost 700 basis points (year 10).
• Increased coverage in years 6 through 30 thanks to the additional coverage obtained via the future purchase feature on the GUL.
• More compensation as each of the increases is commissionable!
• And the cherry on top……higher projected cash values in every year. As much as $400K more!

• Male age 50
• Preferred Nonsmoker
• $1mil face amount
• GUL product

• Is that “one off” carrier making a positive contribution to your practice?
• Why did you end up sending that case to them?
• How much more of your time did you spend navigating the underwriting process?
• Was the case even profitable as a result?

Underwriting by Discovery

• Estate Planning
• Planning for Non- Citizens
• What a Trustee Should Know
• Private Financing
• Buy-Sell Planning
• Employer-Owned Life Insurance
• Non-Qualified Benefit Plans
• Charitable Planning
• Land Conservation Planning
• Case in Point - Case Studies!
• Legislative Updates

• There needs to be cash in the policy! Without it, there is no reason to execute on this strategy.
• Avoiding creating a MEC is critical.
• Attention needs to be paid to the impact of loans and withdrawals on the ultimate death benefit. These will almost certainly reduce the net death benefit available to the ultimate trust beneficiaries.
• Attention needs to be paid to trustee selection. A bad decision here can create an incident of ownership
• The strategy can work with both single life and survivorship contracts.

• $1 million exemption, 55% top rate
• 2021 projected tax = $6.8 million
• 2031 projected tax = $9.4 million
• $3.5 million exemption, 45% top rate
• 2021 projected tax = $4.5 million
• 2031 projected tax = $6.5 million
• $5 million exemption, 35% top rate
• 2021 projected tax = $2.9 million
• 2031 projected tax = $4.5 million

• Initial Face Amount = $4 mil
• Option amount every third anniversary = $1mil (four total)
• Total potential insurance @ age 73 and beyond = $8 mil

• Inherent conflict of interest arising from the system used to pay for credit ratings
• Ratings agencies weakened their standards as each competed to provide the most favorable rating to win business from the issuers of these securities
• Ratings models fail to include relevant mortgage performance data
• Unclear and subjective criteria used to produce ratings
• Failure to apply updated ratings models to existing rated transactions
• Inadequate staffing to perform rating and surveillance services

• Rather than go straight into a SPIA, move their qualified account into a deferred annuity, capturing a 7% bonus.
• Fund a Long Term Care policy on each of them (as this would be one of the major risks that could cause them to unwind this entire transaction) using MoneyGuard from Lincoln on a 10-pay basis. The new contract offers a full return of premium even on the ten pays now (this version not yet approved in all states).
• Fund a carefully selected survivorship contract on a 10-pay basis.

• $150 per day LTC benefits for 7 years with full return of premium on both husband and wife
• $1.2 mil of survivorship coverage
• An additional $324K in death benefit from the LTC policy if they don’t use the LTC benefits during their lifetime.

• Generation One needs to be fairly advanced in age, or have a very short life expectancy
• Review of estate planning documents to verify the transfer to Generation Two
• Third party verification of the net worth of Generation One

• 45 = $2,700,000
• 55 = $1,950,000
• 65 = $1,200,000
• 75 = $0!!!!!

• 87.2% of the nation’s wealth is controlled by the wealthiest 20% of the nation’s families (Proving the 80/20 rule by a wide margin!).
• 25% of U.S. households had a zero or negative net worth in 2009.
• Even at the peak that preceded the recession, 50% of all U.S. households owned no stocks at all – including indirect ownership via mutual funds or retirement plans.
• Stock ownership has been the primary driver of net worth gains since the recovery began, and this has driven the gap between the wealthiest families and the poorest to an all-time high.

Who's Pulling the Levers?

• Every carrier has some niches that they are just more comfortable in than others
• Every client presents a unique risk profile
• All we need to do is match the right client with the right carrier the first time.

• The ANICO Underwriting Process
• Retirement...Insured and Guaranteed!
• "Term-Universal Life Blend" on a No Lapse Guarantee UL = Flexibility
• Revised Suitability in Annuity Transactions Model
•  ...and more

• Delayed gratification - a 5 year look back crediting strategy
• Even greater short term volatility as a result of the global component (if we look at year by year results.  This is why the five year look back.  That and the honest admission that even the professionals don't have an effective crystal ball to time markets)
• An expected rate of return that is 1% to 1.5% higher than a single index product
• A total expected return of 8% to 8.5% as a result

• There is a higher potential rate of return in VUL contracts because of the cap in an EIUL
• VUL's are more expensive because of the sub-account level management fees
• Most VUL contracts are not actively managed, and are frequently neglected until they are in trouble
• Last, and perhaps most important, it's the money you keep that matters most

• $10K per year in "premium"
• 7% net rate for EIUL
• 8% net rate for VUL
• 20 payments
• M&E, etc, are identical across both policies (I know this is unlikely, work with me!) so that the net "investment" in each contract is identical

• Account Value of EIUL @ year 20 = $409,955
• Account Value of VUL @ year 20 = $457,620

• EIUL - Receives guaranteed minimum interest of 2%; Account value = $418,154
• VUL - Drops 15% (Giving the subaccount managers the benefit of the doubt here), no minimum interest rate; Account value = $388,977

• EIULs will have a lower guaranteed interest rate
• There is a larger amount of money per premium dollar for the carrier to invest
• The carrier buys options on the applicable index as the investment methodology (versus the more conservative strategy used for AUL contracts)
• There is an increase to the net rate of return to the client based on the above

• Average rates on AUL contracts are roughly 5%
• The expected increase in rate of return for the client based on the use of options in an annual point to point contract is roughly 40% (this was the consensus of the carriers when asked this question)
• 40% of 5% is 2%, for a total of 7%
• The realistic long term rate of return a client can expect in an annual point to point S&P contract is approximately 7%

• Is there any benefit to individuals who don't happen to pass away in the next two years?
• What is the significance of the re-unification of the Gift and Estate Tax Exemptions?
• What happens to financial underwriting for estate planning at the carrier level?
• What happens to financial underwriting for estate planning at the reinsurer level?
• With the projected number of taxable estates now at approximately 3600, is estate planning essentially a dead end for the insurance professional?
• What should clients be doing now to position themselves for a future repeal or reduction of the $5 mil exemption?