As we all come to grips with new, increased NLG rates from most carriers, I have been keeping my eye on a nuance in the regulations that offers a significant opportunity in 2013. The nuance in question is the existence of products offering secondary guarantees that fall under a different set of rules than the NLG Universal Life products we have all been selling for the last ten years: Variable Life products.
At first I was rather skeptical. The last thing I want to recommend is “exploiting” a loophole in the regulations. Once I popped the hood and began to understand why Variable Life is treated differently than Universal Life from a reserving standpoint, I realized that there is a real opportunity with Variable in 2013. The crux of the matter is the presence of cash value and the fact they offset reserves, making reserving for these products an entirely different process than traditional NLG. As a result of these differences, Variable products are governed by an entirely different set of regulations: Actuarial Guideline 37. The bottom line is these products are significantly cheaper to reserve for at the carrier level, and the result is that they have become more competitive as a result of increases in NLG UL products.
A second market force is at work here as well. There is a renewed emphasis on products that offer a broader feature set and increased overall policy holder value positions products that do more than simply provide a death benefit in the current market. Even funded at the guaranteed minimum premium, these Variable contracts have the ability to accumulate significant cash values. Unlike older products, the death benefit in currently available products is protected from potential market downturns by the secondary guarantee. In some cases there is the opportunity to stop paying premiums early while locking in the guarantees if market performance allows it.
So what Variable product are we talking about? Which carrier offers it? How do they work? There are a number of them on the market from big name carriers like MetLife, Lincoln National and John Hancock, and they all have their own strengths and weaknesses. Short pays are particularly competitive, and using life expectancy guarantees with current side performance beyond LE is a very compelling design. The moral of the story is that the perceived challenge of increased NLG UL prices also creates a significant opportunity for our clients. All we need to do is show it to them.
We all find ourselves asking that very question this time of year, and while my list is filled with family, friends and colleagues, I find myself thinking of one more item on my list this year: my profession. Like most of you, the creative, rewarding nature of our work is a big part of the reason I continue to be so passionate about what I do. Currently, however, I am more than a bit concerned about our business.
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.
Traditionally, if there is such a thing in the Equity Indexed UL (EIUL) space, sales of EIUL products have been based on one common purpose – accumulating cash while providing a death benefit. Virtually every sales idea out there has this at its core. College funding, premium finance, life insurance as a retirement supplement and all the rest are built on the same foundation.
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.
Check out the origins of Reed Consultancy – http://ow.ly/ePSul
Aside from being able to quote one of the most quotable individuals in history, why would I feel compelled to make such a comment? It feels just like 2010, that’s why. Rather than get into all the similarities (which are staggering in number), today’s focus is on one of the budget proposals on the table for 2013 that includes language that could very easily cause the inclusion of ILIT held assets in a decedent’s taxable estate.
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.
We spend a lot of time in our business talking about all the creative solutions that are out there for business owners and executives. The unfortunate truth is the majority of our clients will never be able to use them. Why is that? How many of your small business owner clients are C-Corps? Go ahead and count. I’ll wait.
Is the number fairly modest? I’ll bet it is, and that means that non-qualified deferred compensation and a myriad of other concepts based on a separate tax paying entity are out the window as well. In addition, many of these are truly small businesses, and the expense of administration and compliance with the associated regulations can be a bit of a barrier to entry for this kind of work as well.
Of course, in our business there is no lack of creativity, and there are some solutions for owners of pass-through tax entities. In fact, the rise of the Indexed UL product has unlocked many of these through a diverse selection of product features. Combine these features with the ever-growing body of information around controlling your own destiny and future tax rates by funding Indexed UL contracts and we start to see a path through the maze these business owners face.
The issue, however, is tax. If we are focusing on pass-through entities, how can we find some tax relief for the business owner? I’m not sure we can without involving his employees and all of the complicating factors that come along with that. But what if there was another way to approach the tax issue? What if, instead of avoidance or deferral, we just make it easier to pay, and perhaps even put these dollars to work for us even while we are writing the check to Uncle Sam? Now we’re cooking with gas, as they say, right?
How do we execute on this? Simple. Take the money the business owner is already taking out of the business. Buy an Indexed UL. Over fund it to the hilt. Use the maximum non-mec premium, increasing face amount during the premium payment period and then level it out once we are done paying premiums. Stay with me if you think you have heard this before, because this is where it gets interesting. Take a loan. That’s right. Take a loan in the first year. In fact, take one in every year the business owner makes a contribution. Make sure it is a participating loan.
Now that I have your attention, let’s talk a bit more about the loan. Specifically, how much do we take out and why? Ask the accountant what the tax bill is on the money taken from the corporation to pay the annual premium. There’s your amount, and you probably already know the answer to the “Why:” to pay the income taxes on the withdrawal from the corporation. If you are still a bit fuzzy on how this benefits the client, it is all in the type of loan. Participating loans remain in the indexed accounts. Over the long haul, there could be a positive spread between the loan interest and the indexed interest. Sure, the client is still paying the tax, but they are using leveraged dollars from their life insurance policy to do it, and their cash value should continue to grow, creating a nice source of future income. Add to the equation a reasonable fixed, simple interest rate charged on the loan versus the compounding effect associated with the 100% of the cash value growth and this strategy sounds even better. This is not tax avoidance; it is tax planning.
With the ratification of Actuarial Guideline 38 last week, I think we have reached the tipping point. The end of 2012 is going to see another round of price changes on Guaranteed Universal Life products, and the increases are dramatic. How dramatic? A recent analysis of one carrier’s increase showed a range of 10% to 27% depending on the premium structure, with shorter premium payment periods shouldering the largest increases.
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. Rather, 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, however, 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. Perhaps 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, exactly, 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.
Definitely maybe. Any time a discussion of balancing budgets and deficit reduction breaks out there is commentary around the possibility of changes to the tax treatment of insurance products. This election year is no exception, and we all need to stay informed about the various budget proposals and how they will impact our clients and our business.
The challenge, however, is separating fact from fiction. At any given time we can find an “expert” who will tell us what we want to hear. In this case, the spectrum covers everything from insurance products are a sacred cow to the sky is falling and inside build up is going to be taxed in the very near future. I am not sure that there is a way to cut through all the noise to the truth at this point, particularly given that the election is far from decided.
A recent article in the Wall Street Journal provides an excellent example of the issue. The article includes a discussion of some of the provisions of Mitt Romney’s tax plan, a rebuttal from President Obama, and a reminder that Mitt Romney and his advisors have not previously indicated that taxation of insurance products and muni bonds are off the table. In fact, the article points out that taxing these assets would go a long way to funding the across the board 20% income tax cut Mr. Romney has proposed.
Confused yet? Wondering whose numbers to believe? You and the rest of the nation I think.
Rather than jump in to a political debate, what about the impact of this on our business? The assumption has always been that the tax treatment of inside build up in life insurance and annuities is a critical component of their appeal, and that any change would negatively impact sales. While I am not going to stand here and say there will not be any impact, I am not sure that it would be quite as significant as some would have us believe. The feature set of current annuity products is strong enough to stand on its own merits, and life insurance is still sold for the death benefit in most scenarios. That, however, is a discussion for another time.
If this debate accomplishes anything, it drives home the fact that we need to stay informed and involved in our industry and the political process. Regardless of your stance on any of the above, it is the only way our voices can be heard.
For at least a couple of decades now, term insurance contracts have included Accelerated Benefit Riders for Terminal Illness. We all know how they work, and all you need is a doctor to tell you that you only have 12 months to live and you can access an advance on your death benefit to do whatever your little heart desires: pay for treatment, take a vacation, or anything else you can dream up. The problem from the insured’s perspective is that this usually ends up with them dying. While we all have to go sometime, this is not exactly a feature that most agents talk up, probably for that very reason.
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.
A few weeks back I talked about product innovation and the need to look at ideas beyond variations on the current products. One could view that as looking for the current products to evolve into a new “species” of product. While I continue to think that is something we all need to pay attention to, I also believe that we need to pay attention to product diversity.
Over the last 30 years there have been distinct eras dominated by one particular product type: Universal Life in the 1980’s, Variable in the 1990’s and then Guaranteed UL in the 2000’s. Sure, there were a couple blips on the radar during those periods where other product types spiked, but by and large there was one dominant product during each of those decades. As the sun set on each of those eras, there was a painful transition period as the market adjusted to the new hot product, a wave a replacement sales were executed, and agents all made piles of cash. Clients by and large did not benefit from these transitions, much like investors who are constantly chasing returns, end up underperforming versus the market. I may be over-simplifying a bit, but not by much.
Today we find ourselves in yet another transition period, and while most are looking towards Indexed Universal Life as the next dominant product, I think there may be a more effective path to follow. Simply put, a product spectrum that is made up of strong candidates from each of the product types is going to be the best for all of us, agents and clients alike. Of course, as I say this I realize that has more or less been the case during each of these eras! So why has one product so thoroughly dominated? Take a peak in the mirror ladies and gentlemen. To use a tired cliché from our business, life insurance is sold, not bought, which means we, as the agent, are the primary drivers of this phenomenon. Sure, there are market conditions we need to take into consideration, but if there is one thing the last thirty years demonstrate it is that these are all cyclical.
So if the agents (and I include myself in that group!) are the primary driver, what is the reason behind the virtual “monoculture” of these eras? I think there are a few, including:
Training and education: As more and more licensed agents are outside of the traditional career agency system that has historically been the primary provider of training and education, it is more and more challenging for an agent to stay up to speed on all the intricacies of the products we offer. The result is we sell what we know. We need to do a much better job collectively educating ourselves.
The media: I include the authors of the many books on “selling systems” involving various types of life insurance in this group. The public places far too much weight on the generalities that dominate the internet and books available today. The one thing that they simply can’t do is take the details that make all clients unique into account when they are making their recommendations. The resulting generic recommendations are based primarily on market conditions and the flavor of the month product.
These are just two of the many forces at work in our business that shape the way we make recommendations to our clients. As we navigate the waters of this transition period perhaps keeping an eye on the long term rather than the current cycle will generate sales that make more sense in the long run, and clients will enjoy performance that more closely resembles what the insurance market has done over the long haul: provide the protection our clients need while delivering additional benefits based on realistic rates of return regardless of the product type.