Category: Advanced Markets

Tsunami Warning! CARRIER COI INCREASES! Review your policies now!

Tsunami’s are primarily caused when an earthquake happens in the ocean. They can also be caused by landslides, meteors, storms, etc. They are unexpected, difficult to predict and the consequences can be catastrophic. Carrier cost of insurance (COI) increases don’t take human life; however, they are unexpected, difficult to predict and their consequences on permanent life insurance can be devastating. Fortunately, like earthquakes in the ocean they don’t happen very often. They ARE occuring with more frequency now. We currently have 10 carriers (and counting) who have increased COI’s. It’s a real problem, pay attention! Here are some of the examples cited by a top carrier for COI increases: updated mortality assumptions lower investment earnings updated expenses updated persistency/lapse assumptions Let’s look at these more closely… People are living longer and mortality is decreasing. That should be a good thing right? Live longer, pay more premiums. Every illustration I see with IRR numbers show lower IRR on cash value and death benefit the older the policy is which should be good for the company. However, lower investment earnings are really hurting carriers. We need interest rates to increase. General accounts of carriers are heavily vested with investment grade bonds. Average maturities are @10 years, the yield curve has been declining for decades and is just now starting to turn. Bond portfolios don’t turn around overnight so it could be...

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What about VUL Rescue?

What about VUL Rescue? Is there a Whole Life solution? What about IUL?   I have been following the US version of the JP Morgan Guide to Markets; for about 15 years. It is a terrific resource for producers. It is produced quarterly and covers Equities, the Economy, Fixed Income securities, International, other asset classes and Investing principles. Slide four (4) shows the S&P 500 Index at inflection points. Over the past 20 years the market has had two inflections; an @100% increase followed by an @50% decline; an @100% increase followed by another @50% decline. The current increase started in 2009 and has now reached 258% as of June 30, 2017! If you have a client who owns a VUL they have had outstanding performance assuming a portfolio that mirrors the S&P 500. When is it time to become more risk averse? We recently had a client who was concerned that a 20% or a 50% market correction would seriously impact his VUL. True, you can invest more conservatively or even move the money into a MM account within the VUL; however, the performance may not outpace the fees and expenses of the product. Keep in mind, policy expenses are not correlated to the market. If the market declines the policy fees and expenses can increase. A double hit to performance. One solution was to consider a specially...

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Prospecting CPA’s and Business Owners

The COLI Best Practices Act imposed notice and consent requirements before a business purchases life insurance on an employee, owner, officer, or board member. Not following the rules means life insurance proceeds are income taxable to the business. Use these simple prospecting questions to uncover opportunities to help CPA’s and business owners address and solve this critical issue. Attached is The ASA 101(j) Advisor Kit. For CPA’s 1. Are you filing Form 8925’s for your businesses that own life insurance? …If no or I don’t know; explain… 2. Life insurance purchased after August 17, 2006 is income taxable unless you complied with notice and consent when the policy(s) were purchased. Suggest you can help research the problem and fix it if there is an issue. For Business Owners 1. Does your business own any life insurance? (on anyone, owner, employees, officers, directors) …if yes, then… 2. Who files the Form 8925’s? (yearly filing for all businesses that own life insurance) …if they don’t or are unsure, then… 3. When was it purchased? …if after August 17, 2006 then explain… 4. Life insurance purchased after that date by the company is income taxable unless you complied with notice and consent when the policy(s) were purchased. Also, your CPA has to file an annual Form 8925 for the business. 5. Don’t assume your agent understood 101(j) or the carrier told them...

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Transfer for Value and Funding Cross Purchase Buy Sell Agreements

Please review the John Hancock piece on Understand the Transfer for Value Rule. It’s another nuance of life insurance ownership and transfer that can eliminate the most valuable element of life insurance; the tax free receipt of death benefits by the beneficiary, IRC §101(a). Our role is to understand the rule and its exceptions. I want to focus on section #4 of the piece, What are the exceptions to the transfer-for-value rule? Exception iv. states: “A corporation in which the insured is a shareholder or officer”. Compare that to the partnership exceptions: A transfer to a partner of the insured A transfer to a partnership in which the insured is a partner. It would be a logical correlation that if: A corporation in which the insured is a shareholder or officer is an exception then; A shareholder of a corporation in which the insured is also a shareholder is an exception; i.e. a co-owner of a corporation. That is NOT CORRECT. Let’s use some examples to illustrate: A shareholder of a corporation in which the insured is also a shareholder is not an exception to the transfer for value rule. Two co-owners sell each other policies on their lives to fund a cross purchase buy sell agreement. Two co-owners endorse death benefit to each other on personally owned policies to fund a cross purchase buy-sell agreement. Why would two...

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Review: Why The Trusteed IRA May Be A Riskier Alternative To A Trust As IRA Beneficiary

Several weeks ago I posted an article, “Stretch IRA’s, to do or not to do?” in which I used a real case to illustrate why stretching IRA proceeds are rarely done and in this case was a bad idea. It is one of those situations where the facts of a live case got in the way of a really good concept. Please review Michael Kitces article, “Why The Trusteed IRA May Be A Riskier Alternative To A Trust As IRA Beneficiary.” Michael does good job describing the pro’s and con’s of using a Custodial IRA vs. a Trusteed IRA. The two primary reasons against using a Trusteed IRA were: Finding a competent attorney to draft the trust Trustee fees to maintain the account In a vacuum those are two good reasons not to use a Trusteed IRA. The article “Stretch IRA’s, to do or not to do?” applies real life facts to a great concept and ultimately the decision was made not to stretch. Always remember, apply the facts and circumstances of each client’s situation to the concept before blindly implementing a strategy. Just because it sounds good doesn’t mean in practice it will be beneficial. In our case, we used Life Insurance to pay the tax on distribution of the IRA’s. The balance was used to fund the college education of 20+ grandchildren.   Michael E. Kepesky, JD...

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