Show Me The Money!

There’s the old story about the hungry chicken and the hungry pig who agreed to both contribute to a mutual breakfast.  The chicken suggested they have ham and eggs, to which the pig replied, “That’s a contribution for you, but it’s total commitment for me!”

When proposing life insurance we would manage client expectations better if we took time to explain the disproportionate obligations that exist once coverage is put in force.

It would also help them understand the purpose behind those often annoying requests and requirements made by the carrier – particularly in the area of financial underwriting.

Consider This:

Clients often think that a carrier ought to be inclined to sell them as much life insurance as they want.  They assume that because the local grocer would sell them his whole stock of fresh radishes, an insurance company ought to respond in the same manner and get frustrated when it does not.  The difference, again, is the disproportionate obligations and the economic exposure that remain after the transaction.  Except for a change in the type of asset you and your grocer are in the same position before and after the sale.

When a life contract goes into force the buyer is only under a non-binding obligation for periodic premium to keep the coverage going.  If paid the carrier is on the hook for a death benefit exponentially greater than the premium if the insured dies.  And that exponent is even more extreme when the client takes advantage of low term rates.  To use an example from experience with my own offspring:  a healthy 21-year-old female can purchase $350,000 for $185 a year.  The carrier is at risk for a payment that constitutes just 1/20 of 1% of their exposure.

We can argue that the disproportion is mitigated or eliminated when we look at the big picture.  If the carrier has underwritten correctly over a large pool of policyholders it all shakes out in the wash over time; does it not?

The key here is “if the carrier has underwritten correctly”

And part of correct underwriting is not issuing an amount of coverage that makes an insured worth more dead than he or she is when alive (or as we say in the trade, not increasing the likelihood that insureds will fall down a flight of stairs before their time).  The carrier wants to know why you need the coverage and the financial circumstances that justify both the need and the amount, usually in the form of a simple, easy-to-complete financial supplement that must be signed by a qualified third-party advisor for larger cases.  Resistance on this will only delay the case and maybe raise the suspicions of the underwriter.  Alert your client in advance and respond quickly to request that are made.

We turn over financial information for everything nowadays: loan applications, refinancing a mortgage, getting a new credit, or opening a PayPal account.  Don’t let your clients develop a mindset that applying for life insurance is any different.

We specialize in alerting you up front regarding potential underwriting requirements on your case, estimating how much coverage a carrier will allow given your client’s financial circumstances, and helping with bumps in the road if financial justification issues occur.  Give us a call.

How To Successfully Use RMDs In Life Sales

Many argue that the best Super Bowl halftime show took place in Jacksonville, FL, some years ago.  In a forum known for mediocre performances that fail to meet the hype and fulfill the expectations, the lights and fireworks opened on a band named Wings, led by one of the last vestiges of an earlier rock group whose work and music had taken a place as the centerpiece in the canon of popular music in the English-speaking world.  Paul McCartney chose to lead off with one of his creations from the Beatles’ music catalogue.  He and 80,000 spectators sang the song Baby You Can Drive My Car with its tale of a taken young man lured into a position as chauffeur for his rising-star love-interest only to have her confess at song’s end, “I got no car/ and it’s breakin’ my heart,/ but I’ve got a driver/ and that’s a start!”

And so it often is with insurance sales to be funded with a proposed insured’s unneeded RMDs coming out of their qualified plans.  It makes sense.  Use the money you must take, but don’t need, and leverage an eventual death benefit to heirs with insurance coverage.  But if you and this concept are driving a successful sale then make sure you have an insurance company that wants to be a “car-rier”.

The pill in the jam is financial justification.  The insured is 70-1/2 and, seldom, has any earned income.  Consequently, coverage can’t be justified for income replacement purposes.  And more often than not the proposed insured doesn’t have federal or state death tax concerns.

In these situations it is important to know the carriers who are sympathetic to and will underwrite reasonable amounts of coverage if other facts about the case are in order.

Consider This:

First, what percentage of the insured’s annual income is being used for premiums?  The acceptable amount could be larger in cases where it is adequately demonstrated that living expenses will be met with what remains.

Second, the amount of death benefit will usually be limited by a formula that ties the face amount to certain financial criteria.  A common example would be:  Permissible coverage = 50% of the net worth attributable to investment assets + FMV of residence – coverage in force.

Because insurance is often purchased in situations where no death tax is anticipated, clients overlook the advantages of purchasing the policy in a trust.  A living trust will keep the proceeds away from the exposure and expense of the probate court while allowing for their distribution according to a testamentary pattern not practical through a simple beneficiary designation.  An irrevocable trust will protect the proceeds from creditors as well.

Fifty-one years ago last April the Beatles had the top five single recordings on Billboard’s Hot 100 Chart.  No group or singer has every come close to such domination.  Billboard Magazine reported that during the first four months of 1964 the Fab Four accounted for 60% of all single records sold in the United States.

For similar success in your line of work – call or write to discuss those carriers who are comfortable with the “RMD-to-Life Premium” concept and ask for a marketing piece that will help generate interest and sales.

Multiplication Tables – Using Basic Financial Underwriting To Increase Your Sale

How much does an insurance company think that your client is worth?  Many times it is much more than your client does, and you have their underwriting guidelines to prove it!

Insurance companies don’t want to over-insure someone.  Too much coverage can often result in someone falling down a flight of stairs before their proper time.  Carriers set their financial underwriting criteria to limit the amount of insurance someone can buy, not to try to increase the size of the sale.  So financial guidelines are a carrier’s attempt to standardize the process for determination of the reasonable worth of an applicant based on their situation.

The most common insurance need among prospects and clients is to replace the income survivors would have anticipated had premature death not occurred.

The starting point for calculating the amount of coverage a carrier will issue for purposes of income replacement is determined by a multiple of current annual compensation based on the proposed insured’s age.

The multiple deceases with age, understandably, because death denies a person fewer potential income-producing years as they get older.  Multiples vary from company to company.

Consider one of the more conservative examples:
Age Multiple
20-29 20-25
30-39 15-20
40-49 12-15
50-54 10-12
55-59 8-10
60-65 5-8
Over 65 2-5

The table can help a client to realistically focus on just how big a pool of money the survivors would need to survive over the remaining years should a wage-earner pass away.  And the client can “fatten up” a little in that the compensation figure used is usually the pre-tax earnings which in the calculation process translates into an amount of untaxed death proceeds.

Carriers will usually only take earned income into consideration unless it can be shown that the insured’s death might have a direct affect on unearned income.   Non-working spouses can usually get a minimum of one-half the coverage on a working spouse.

At young ages the calculation can result in a large death benefit.  But it is what the client needs and if he or she is healthy the competitiveness of current term insurance rates make sufficient coverage affordable to all.

Call with any questions concerning financial underwriting questions that may arise in case planning or when dealing with carriers.

Trusts In A Nutshell

People of Planning –

Trusts were used long before Wills!  They are still so important today that every insurance advisor should be skilled in a few definitions.

Trust – A creator (or maker or grantor) puts legal title of his/her property in the name of a person (trustee) to hold and manage for the benefit of others (beneficiaries) in accordance with the terms and instructions of the trust document.

An inter-vivos trust is made by the creator during life and a testamentary trust is one established by the creator’s will after death.

Revocable trust – Established by the creator during life. It can be changed or revoked at any time. Property can be added or withdrawn anytime at will.  It provides no tax advantages, nor protects the property from creditors of the creator.  It can keep the property out of Probate Court at death.

Irrevocable trust – Removes property from the control of the creator.  It also keeps it out of the creator’s taxable estate and protects it from the creator’s creditors.

ILIT (irrevocable life insurance trust) – An irrevocable trust set up primarily (or only) to hold a life insurance policy.  But it can usually hold other assets.

Grantor or defective (IDGT) trust – An irrevocable trust where income taxes on the trust flow back to the creator, but the assets remain outside the creator’s taxable estate. Most irrevocable trusts are grantor/defective trusts.

SLAT (spousal lifetime access trust) – An irrevocable trust with a life interest in the creator’s spouse stacked on top of the remainder interest to the other beneficiaries (usually the kids).  This allows the spouse generous access to the assets during her life, but anything left over is not includible in the spouse’s taxable estate.

Dynasty (generation-skipping) trust – All beneficiaries have only a lifetime interest in the trust.  At death their interest is life to their heirs for life and on down the line.  Because all generation’s interests end at death nothing is ever included in anyone’s taxable estate.

Solving A Major “Minor” Problem

In the 2000 comedy flick Family Man, the investment guru played by Nicolas Cage is asked if he likes kids.  His response:  “On a case-by-case basis!”

But when minors are to be a party to a life insurance policy we can’t be so selective.  Every case is a potential problem and contracts must be implemented accordingly.

Minors are not legally competent (as in not allowed under the law) to own a policy or take possession of the death benefit, so… the easiest solution is to always use a state’s Uniform Transfer to Minors Act (UTMA) when drafting a beneficiary designation for a minor child.

A few basics:
  • The device is created in the beneficiary designation and operates like a “poor-person’s trust” when a separate formal trust is too expensive or too complicated to use.
  • A custodian-beneficiary is appointed to watch over the policy and proceeds for the benefit of the minor according to the directives in the state’s UTMA.
  • A successor custodian should always be appointed, since there is a good chance the custodian may pass away before the minor.
  • When the minor reaches the age of majority (which can differ with each state) the policy or proceeds must be turned over to him/her “lock, stock and barrel” – unlike a trust where control can be delayed well into adulthood.
  • The wording must comply with state law.  In addition, always check with the carrier Claims Department for its approval.
  • There must be a full and separate designation for each minor beneficiary.

The most important thing on a life insurance policy is the beneficiary designation.  But you’d never know it by the small amount of space given for it on the application – space that is especially inadequate if a minor is involved.  A UTMA designation will always take a separate page to be appended to the application.

You probably know that Cage’s real name is Nicolas Coppola.  He changed it for the screen because he didn’t want to appear to be cashing in on the reputation of his uncle, director Francis Ford Coppola.