Interested in opening new markets – or rediscovering and growing existing ones?

-by Marc Schwartz and DuWayne Kilbo

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The business planning market has never been riper. While the more traditional estate planning market may be a bigger stretch for many advisors, there are close to 30 million small businesses that need your help and they need it now. The issues keeping business owners awake at night have not changed:

  • Concern over losing critical assets – people – themselves or key employees
  • The ability to recruit, retain and reward those key employees
  • Ensuring business continuity and succession
  • Retirement income needs
  • Growing and protecting personal wealth, with that wealth typically tied up in the business

What has changed is the new and favorable tax environment in which this planning can be implemented. And for business owners, planning for both personal needs and the business is often very tightly connected to dramatically expanding the need for insurance products. As an advisor, you’re uniquely positioned to deliver solutions for accumulation, and for pure protection risks such as untimely death, long term care and longevity concerns, and disability.  As the old saying goes, business owners either exit their business vertically or horizontally – and since the future is unpredictable, both contingencies need to be anticipated and planned for.

We’re now all aware of the Tax Cuts and Jobs Act (TCJA). Obviously, the outcome of this act is favorable for most taxpayers whether individuals or businesses. But to remind you of just one very important element: the C corporation tax rate has been reduced from a high of 35% to a flat 21%. As a result, cash flow to business owners has increased and the use of business dollars has become cheaper. With the goal of helping these business owners sleep well at night, we can address critical planning needs via additional personal dollars and/or more efficient business dollars.

If you have been looking to expand and grow your market, then 2018 and beyond provides an exciting and potentially lucrative opportunity.

So why the hesitation?

Pensive businessman with maze

Not jumping all over this? Not reaching out to existing business clients or prospecting for new ones? The news isn’t big enough?

OK.  So there might be a stigma to life insurance planning in the business market; some of the needs are often addressed by term insurance (low revenue) while permanent sales (high revenue) require a level of expertise, attention to detail, and ongoing administration that is daunting to many advisors.

What if Windsor could deliver a solution that tears away the perception and stigma associated with working with businesses? Wouldn’t it be great to plug into a platform that disrupts what we often consider traditional term sales and also takes away the complexity associated with permanent sales in a corporate environment?  Most importantly, what if you could deliver multiple, flexible solutions that fully address your clients’ needs versus selling them only what they can afford?

The solution exists

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Although it may be considered the industry’s best kept secret, the many advisors using it so successfully might prefer to keep the Lincoln LifeComp platform all to themselves.

In a nutshell, LifeComp is a suite of employer-sponsored plans that share a common funding vehicle (life insurance) and deliver several powerful advantages including unique plan design and presentation, full plan documentation, and comprehensive plan administration.

And LifeComp will help you change the game when it comes to conventional thinking around term insurance solving isolated issues. Through a more comprehensive approach, you can address needs such as buy-sell funding and key-person risk with flexible solutions that sync up with the desire for supplemental retirement, death benefit, and longevity planning. And when that happens, permanent sales happen!

The LifeComp Suite features four benefit plans that offer varying degrees of employer ownership and control. The plans will help businesses:

  • Recruit, retain and reward top talent
  • Build supplemental retirement income or death benefits for business owners and/or key executives
  • Receive attractive options for balance sheet reporting
  • Streamline plan administration and reporting

Want to learn more?  We’ll take you deeper into this unique set of solutions in future blogs.  Can’t wait?  Check out these LifeComp resources:

Videos on Demand – [approximately 30 minutes each]

Additional Resources

 

 

 

 

 

New Opportunities in Marijuana Underwriting – Don’t Let Them Go Up in Smoke!

-by DuWayne Kilbo

Known scientifically as cannabis and commonly referred to as weed, pot, and many other slang terms, marijuana is one of the most widely used recreational drugs in the USHand holding a leaf of marijuana today, and is also used in the treatment of various medical disorders.

According to the National Survey on Drug Use and Health (United States, 2002-2014), the 18-34 age group has the greatest incidence of marijuana use. What is important to note, however, is the 55 plus age group is showing the greatest increase in use. Males outnumber females in use by 2 to 1.

At present, marijuana is legal for recreational use in nine states and the District of Colombia, and for medical use in 29 states and the District of Colombia. Though its use is widespread, marijuana is still an illegal drug under federal law, and life insurance carriers are struggling with how to handle marijuana use for underwriting purposes. Aligned with the data showing usage is on the rise, one large insurance lab recently reported their hit rate increased to 5% of those tested over the past three years.

While many carriers continue to be fairly conservative in their underwriting of marijuana, we are seeing aggressive postures with some. These more open approaches are proving to be valuable as we evaluate medical and recreational users, and even those applicants employed in the marijuana industry who seek personal needs coverage.

As with any new underwriting criteria, marijuana underwriting will continue to evolve as state and federal laws change and marijuana mortality emerges. Below is some useful information on marijuana and carrier underwriting positions that exist today.

What risks are there in the use of marijuana?

Several risks have been attributed to the use of marijuana in its various forms — smoking, vaping, eating, oils, waxing, etc.  Risks commonly brought up include cardiovascular disease, cancer, lung disease, mental illness, cognitive dysfunction, drug tolerance/dependence/abuse, and other maladies. There are also risks associated with operating an automobile or activities that involve a degree of coordination and awareness. However, while there is anecdotal evidence and even some hard data supporting these impairments, the true long-term risks are unknown. It will be some time before mortality emerges and becomes clear enough to understand the risks presented by marijuana.

How do carriers identify marijuana use?

Many if not most carriers believe marijuana use is under-reported and a hit or miss proposition. The typical ways for identifying marijuana use include asking a question on the application, finding incidence of use in an APS report, and discovering marijuana in an insurance urine specimen.

To offer the best rates possible, carriers require complete candor during application completion. Carriers may rate and in some cases decline if evidence of use is discovered in a urine specimen or APS without prior application disclosure.

At present only a minority of companies test for marijuana during the insurance exam process, but that number is increasing—along with the marijuana positivity rate.

How do carriers approach medical marijuana use?

There is no consistency for qualifying conditions in the states that have approved medical marijuana, although typical uses include arthritis, chronic pain, Crohn’s disease, Green leaves of medicinal cannabis with extract oilseizure disorders, fibromyalgia, migraines, nausea due to chemotherapy, terminal illnesses and other illnesses and diseases.

Patient access to medical marijuana often follows this path:

  1. A physician visit is required to acquire certification for a qualified condition that may benefit from medical marijuana. Included is a history and physical along with informed consent to understand the risks and benefits of marijuana.  The physician cannot legally prescribe marijuana, only certify its benefit.
  2. Medical marijuana is obtained from a dispensary or treatment center. It cannot be dispensed by a pharmacy due to being an illegal Schedule 1 drug

Carriers typically underwrite medical marijuana on the condition(s) for which it is prescribed, with one industry carrier offering as favorable a classification as preferred nonsmoker in certain situations. Most often, though, carriers will consider standard or standard plus at best, with some offering smoker rates if marijuana is being smoked.  In addition, carriers require that medical marijuana use be indicated on the insurance application, often require an APS from the dispensing facility, and watch closely for any adverse medical, driving or financial histories.

How do carriers approach recreational marijuana use?

As with medical marijuana, there are differences in how individual carriers view recreational marijuana use.  Often the best rates are offered to very infrequent, minimal users who have no associated adverse drug, alcohol, driving or psych histories.  In addition there may age limitations, with some carriers only willing to offer acceptance to those age 21 and older.

At present, for social use up to one time per month or less, one industry carrier will offer top preferred nonsmoker rates. The same carrier will also offer preferred nonsmoker for use up to two times per week or less.

However, the carrier landscape is mixed with most offers for recreational marijuana use varying from standard to standard plus at best. In addition, like medical marijuana use, some carriers differentiate between smoker and nonsmoker rates depending upon whether marijuana is smoked or ingested.

What about people who work in the marijuana industry, will any carrier insure these applicants?

Since marijuana is illegal on a federal basis as a Schedule 1 controlled substance, carriers Scientist checking hemp flowerswill typically not offer coverage to anyone employed in the legal growing, manufacture, distribution or sale of marijuana/cannabis—whether as a business owner, employee, consultant or associated with a medical clinic dispensing medical marijuana.

However, there is one industry carrier today that will consider these individuals for personal coverage—not business coverage—if an applicant’s background and circumstances are acceptable. In addition, this same carrier may allow any amount of coverage the insured may qualify for, up to best nonsmoker rates.  The carrier needs to evaluate specific information before considering an application for coverage, including:

  • A cover letter overview of the business
  • Verification that the business has its own bank account
  • The proposed insured’s role within the company including any ownership
  • Confirmation that premiums are paid from a personal account, and the source of the premium dollars
  • The purpose of coverage with a clear indication that it is for personal needs (the business will not be involved in the coverage)
  • Financial and Drug questionnaires, tax returns, APS information and the usual age/amount requirements

Bottom line, this is an incredible opportunity when coming across potential applicants associated with the marijuana industry!

If you would like to learn more about carrier marijuana practices, please contact us at Windsor.  We keep our finger on the industry pulse and are always here to help!

marijuana bush on a background of sky at su

Navigating the New Tax Act

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The Tax Cuts and Jobs Act of 2017 introduced some big changes in the tax law, creating both confusion and opportunity for financial planning professionals.  You will find links at the end of this blog to several excellent resources that will help you navigate through the three broad categories of life insurance planning that are most dramatically impacted by the new tax laws:

  • Personal insurance
  • Estate planning
  • Business-related insurance

But to begin, a review of important tax laws that didn’t change.

  1. Life insurance death benefits remain income tax-free, with rare exceptions (e.g. transfer for value).
  2. Life insurance cash values continue to accumulate income tax-deferred while the policy is in force.
  3. Non-MEC life insurance policy loans are generally not subject to income tax as long as the policy is in force.
  4. Non-MEC life insurance withdrawals are generally treated as basis first, earnings last.
  5. Annuity cash values continue to accumulate earnings income tax-deferred.
  6. Annuity payments benefit from being taxed using the exclusion ratio.
  7. Tax treatment of long-term care insurance and riders, as well as related coverages (e.g. chronic illness) is unchanged.
  8. Death benefits paid on life insurance policies owned by individuals or entities other than the insured are excluded from the insured’s estate tax bill.

Personal Insurance

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While there was a head-spinning number of changes to the tax laws regarding individual income taxes, very few of those changes have much impact on the practice of personal life insurance planning.  Prudential’s Insights and Ideas publication sums it up by simply saying that the beat goes on –

‘Life insurance can provide the potential to accumulate cash value that can be used to supplement retirement income accumulation vehicles such as annuities and investments in the client’s portfolio.’

An excellent resource summarizing the individual tax law changes is Principal’s Individual Income Tax Provisions Highlights.

Estate Planning

Anyone acquainted with estate planning knows that one of the most changeable numbers in the US tax lexicon over the past century has been the amount of the estate tax exclusion.  Sure enough, that number has changed again.  Doubling the estate tax exclusion to $11.2 million per individual, $22.4 million per married couple, may seem to have a dramatic impact on the application of life insurance solutions to wealth transfer problems.  But, as the commentary below observes, the increase is temporary, casting yet another shadow of uncertainty on what exactly a client should do now.

‘Estate planning involves more than just planning for federal estate taxes. Even though the exemption is set at a relatively high level, many needs often addressed by estate planning remain. Life insurance, owned inside or outside of the estate (depending on your situation), may help solve many other wealth transfer problems.’ – Principal

‘For those clients with more than the federal estate tax exclusion amount ($11.2 million for single taxpayers, $22.4 million for married taxpayers), the additional amount that they are now allowed to gift provides many opportunities. Including . . . establishing new trusts to help accomplish their planning objectives.’ – Prudential

‘With the uncertainty in the estate tax environment, now might be an appropriate time to help clients engage in planning for any asset and estate transfer, aiming for flexibility. Planning with life insurance is still valuable to address possible state estate taxes, needed liquidity at death for business purposes, charitable giving and wealth transfer to family members. Knowing that these provisions sunset after 2025, care should be taken before reducing any death benefit face amounts or canceling any existing coverage.’ – AXA

Business-Related Planning

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Both Corporations and Pass-Through Entities are likely to benefit substantially from the new tax laws, opening the door for increased uses of life insurance in business continuation planning, executive compensation, key employee insurance, and retirement planning.  The new tax bracket disparity between the highest individual and corporate rates will make business-funded arrangements, such as COLI and Split Dollar, more attractive.

‘For clients’ businesses that are incorporated with net income over $50,000, the new lower tax rate could offer tax relief – leaving more of their profits to be allocated to other assets such as Key Person and/or Executive Benefit programs such as Non-Qualified Executive Benefits and the permanent funding of buy-sell arrangements. The rate differentials may drive more interest into Split Dollar plans.’ – AXA

‘With a lower business tax bracket, some business owners may revisit their qualified plans if these plans are the primary vehicle for their retirement funds. With the sunset provision for lower individual income tax rates, business owners may be receiving qualified retirement distributions in a higher tax bracket. A simple nonqualified bonus plan funded with life insurance may be attractive as a supplement to qualified plan benefits.’ – Principal

Riding into the Next Sunset

We can think of no better way to sum up the opportunity at hand than this from Principal –

Life insurance, owned inside or outside of the estate (depending on your situation), may help solve these needs (among many others):

  • Creating liquidity for the payment of state estate and inheritance taxes
  • Providing for spouses, children and other loved ones
  • Addressing special needs planning
  • Protecting multi-generational planning
  • Providing liquidity planning for income taxes
  • Equalizing inheritances
  • Protecting assets in an estate
  • Navigating second marriages
  • Planning for same-sex couples
  • Protecting non-citizen spouses
  • Augmenting supplemental retirement income
  • Increasing charitable giving
  • Planning for education
  • Supporting healthcare planning (e.g., chronic illness)
  • Funding business protection and business succession planning

Stay tuned for more from Windsor, as we introduce a wealth of new marketing ideas and campaigns for 2018, centered on new opportunities and the enduring advantages of life insurance.

Prudential Advanced Markets Insights and Ideas – Congress Passes Tax Cut Act – Overview, Observations, Initial Action Steps

Lincoln Advanced Sales Overview – Tax Cuts and Jobs Act

AXA Final Tax Bill eNotice

Principal Individual Income Tax Provision Highlights

Principal Estate and Gift Tax Provision Highlights

Principal Business Tax Highlights

 

Moving the Ball

-by Woody Wodchis

American football game

I recently had a conversation with Dusty Farber regarding a business case – one that moved from being “stuck in the mud,” to being a bigger deal than originally anticipated. We talked about how so many routine cases could chew up time, often because all the necessary information isn’t readily available for clients and advisors to make an informed decision.  Dusty gave me an example of exactly this scenario, and the approach he took to get his clients to take action and move forward with not only their business planning but their personal planning as well.

Dusty was introduced to two partners who had started a clothing distribution business approximately eight years ago. They had implemented a buy-sell agreement a couple of years into the business, based on the estimated business value and a multiple of compensation. As a result, both partners (one in her thirties and the other in her fifties) purchased $1,000,000 of term insurance. As time passed and the business became more successful, the partners asked Dusty to review their buy-sell agreement and any other business protection needs.

Knowing that the business was on the small side, Dusty was prepared for the “valuation discussion,” one that he previously had hundreds of times in his career. “Business owners always overestimate the size of their business,” says Dusty, “and based on my gut instinct, I knew there was no way they would be willing to pay $10,000 – $15,000 for a proper valuation. But since the referral source was a good one, I wanted to help these clients.”  Still, it was difficult for Dusty to make recommendations without knowing more about the business, including how much it had grown over the past several years.

Having been in this situation before, Dusty pulled an arrow from his quiver that he had used several times previously – a business valuation/buy-sell review service, offered by a leading and highly respected life insurance company.  The clients agreed to do the review and Dusty was not only able to bring a valuable process to the table, but also a professionally done deliverable. Having used this service many time before, Dusty offered this: “My best guess is that these valuations are within 10-15% of the real value, and are light or heavy based on the industry and relevant expertise. The recommended death benefit can always be adjusted based on what we know about sales and revenue trends.” Both the clients and advisors were pleased with the report and, as a result, implemented $2,000,000 of term life insurance on each partner. Football Equipment and Chalk Board Play Strategy BackgroundThe business valuation/buy-sell review helped to quantify their protection needs and bring context to the planning process or as Dusty puts it, “The report moved the ball and the price was right.”

And there’s very good news about that price.  The Business Valuation/Buy-Sell Review is a complimentary no-cost service from the Principal Financial Group.  The process is easy as Dusty attests. “Everything is submitted electronically – you just need three years of financial statements or tax returns, and then press a button. Principal’s attorneys and CPAs in their Advanced Solutions department review and have an informal business valuation back to you in five to seven business days.” Dusty also added another important point.  “The cool thing is that, besides coming up with a valuation number, they also review the existing buy-sell documentation and recommend important updates and changes.  Those reviews take roughly 20 business days.”

There’s more to the story. The clients asked Dusty to review their personal and estate planning needs as well. The legal work to update the buy-sell agreement, and draft trusts and wills resulted in fees of $15,000, which went to the attorney who first brought Dusty into the case.  Additional life insurance  purchased by the clients and spouses brought total commissions earned on the case up to the $40,000 range. With a smile, Dusty reminded me that, “we haven’t put the DI in place yet.”

Dusty has used the Principal service six times and sold insurance to the respective clients five times – not a bad batting average.  Even though this professional service is at no cost, Dusty never felt pressured to sell Principal products. “I never felt any heat to recommend or sell Principal’s product – it just never came up in the process.”  In this case, because of competitive pricing combined with flexible underwriting, Principal did earn the bulk of the $40,000 in life premium and is looking good for capturing the Disability Income business as well.

Football Player

Need to move the ball on a business case?  Take advantage of the Business Valuation/Buy-Sell Review service from the Principal Financial Group. Let us know how we can help!

 

Underwriting – Where are we today? Where are we headed?

-by DuWayne Kilbo

Being fed by our aging producer population, the under-insured and under-served markets, the $15 trillion plus insurance gap, and the search for new and easier ways to access markets—especially the technologically inclined millennials— life insurance companies are beginning to turn the traditional underwriting process on its head. And early results indicate that they are finding some success.

Much of what we have seen so far has been positive and a welcome transformation of an otherwise archaic, invasive and time-consuming insurance acquisition process.  However, these changes have implications both for distribution and for how business will be processed and underwritten in the future.  So where are we today?  What major underwriting process change are we seeing now? Where are we headed down the road? What implications do these changes have for you and your clients?

Solution and Strategy Path

The top underwriting process change we are seeing today is “Triage” or Accelerated Underwriting (AU). While there have been other successful efforts to use predictive analytics (such as lab scoring) in underwriting during the past few years, the AU process takes predictive analytics to new levels where traditional underwriting tools used to qualify applicants for coverage, such as paramedical exams, vitals and fluids are being replaced with noninvasive third-party data.

Anecdotal carrier information indicates that up to 50% of applicants who go through the AU process may forgo traditional exam requirements and be issued coverage in as little as two days. However, this number is a bit misleading since younger applicants, those age 45 and lower, qualify at a disproportionately greater rate than older applicants.

AU has taken a firm hold in the industry with carriers adopting it as a standard underwriting process or studying it closely with the idea of rolling out the process within a short period.  Within a couple of years this could be “the” underwriting process that distribution must adhere to for all carriers up to a certain applicant age and face amount.

So what are the pluses and negatives for AU?

Overall, this process is a positive for distribution. It’s a win if on average up to 50% of our insureds, within an age and face amount range, are not required to complete a paramed exam, or blood and urine specimens, avoiding the potentially adverse findings that sometimes come from these requirements. This abbreviated underwriting process can also cut days or weeks off the underwriting approval time, which is always a good result.

On the negative side, we lose some control over the application and underwriting process. AU usually requires a carrier teleinterview, and, due to the third-party sources of information and algorithmic modeling used in this process, we cannot be 100% sure that an applicant will qualify for coverage without the need for traditional exam requirements.  In view of this, it is important to serve up these types of programs as a possibility, and not as a promise that an applicant will not need to submit exam requirements.

What about the future?  It started with AU, but where is underwriting going? What’s coming down the road?

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One of the most profound risk assessment paradigms being discussed today is the concept of Underwriting Agility.  This model suggests that applicants should be underwritten and priced independently, based upon their unique set of risk factors. In addition, underwriting requirements will be based upon the risk profile and available information for each applicant rather than the typical age/amount underwriting chart. With this model, insurers will request more information on higher risk applicants and less information on lower risk applicants. When combining this information with third-party data sources and analytics, Underwriting Agility will provide a more complete and holistic underwriting assessment.

Bottom line, with Underwriting Agility not everyone will follow the same process and applicants will be priced on a continuum according to the risk they represent, with premium being specific to the individual – much like auto insurers do today.  This is unlike the current underwriting rating bucket system we have today that attempts to match and price an applicant in a category of similar individuals.

Here’s an example of what we are talking about:  Let’s say an age 60 male with a heart attack history five years ago applies for coverage.  Before putting the applicant through a medical exam, the carrier downloads a copy of his electronic medical records and/or medical record codes and finds his records are thorough and complete with all necessary follow-up doctor care. Other than the absence of a urine result, the applicant has had reasonably recent and favorable EKG and blood results, vital signs and other medical results comparable to those required for an insurance exam.  His data search indicates several positive risk attributes which analytical modeling suggests provides a mortality “lift” or enhancement. Based upon the information at hand, the carrier will only request a current urine specimen.  If the results of the specimen are normal, a premium quote can be tailored uniquely for this applicant, based upon the combined medical history and risk attributes.

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This model will require an enormous amount of R&D to get right, along with new data elements, data sources (electronic health records, etc), predictive modeling and other things.  So it may take some time to develop and roll out. However, as the industry accumulates more information and access to new data sources, it will be here sooner than we realize.  Also, there may be an opportunity with this type of model to provide pricing incentives for the continuation of a healthy and active lifestyle, which can have a positive impact on product performance.

So what are the pluses and minuses of Underwriting Agility?

This process certainly has positives for distribution. Like AU, it’s a win if we don’t need to expose an applicant to the time and hassles of an unneeded paramed exam and the potential adverse findings that may come from these results. It can also cut days or weeks off the underwriting approval time, which for many reasons is always good.

However, this model also has significant negatives in that we may lose negotiation leverage with underwriting due to the amount and reliability of data collected and the ability of analytics to predict outcomes with a high degree of certainty.  In effect, the “price will be the price.” Risk classification and underwriting exceptions may be made, but based upon different criteria, relating to individual characteristics and the analytical modeling completed.  This model will require us to be well educated about data and analytics before it is implemented so we understand the pitfalls and potential areas for further underwriting discussion and opportunity.

It is important for us all to stay ahead of the winds of change and understand what these changes may mean to us and to our customers. We have seen more change in underwriting the past two years than in the previous decade.  Technology will be a driver of change and the pace of change will accelerate as new data sources are discovered or connected in new and unique ways, and as predictive analytics becomes even more dependable and refined. As all this comes together, it is certain that underwriting will become more “personal” and specific to the individual, along with premium pricing as well.  It is imperative to find ways to adapt and thrive as we push ahead in any new paradigm.

Golden key and puzzle

Throughout our 40 year history, Windsor has responded and evolved by creating unique advantages for our customers. As with any potential change there comes opportunity. We are committed and will stay engaged, keeping our finger on the pulse of our business to create advantages for those around us, no matter what the change may be.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Navigating 101(j) – an ounce of prevention can avoid a ton of liability

-by Ron Bielefelt

 

I was very annoyed.  It was the first application that I took for a key-person life insurance policy after August 18, 2006.  The underwriter kicked the application back because the insured-employee did not sign the “Notice and Consent” form, acknowledging that the employer was both the owner and beneficiary of the policy. When I suggested to the underwriter that we get this signature at delivery, he informed me that the policy would not be issued until the signed “Notice and Consent” was received.  This was bull, I never had to get this form in the past.  So, what was the big deal?

It turns out that this is a very big deal.  The rules had changed, and a new subsection had been added to §101 of the Internal Revenue Code.  The general rule of that subsection is that employer-owned life insurance death proceeds are taxable to the beneficiary to the extent they exceed cost basis, unless the requirements of 101(j) are met.  So where did this subsection come from?  Previously, my knowledge of 101(j) was non-existent – I even thought it might be an off-ramp on the famous 101 freeway in Los Angeles.  Knowing that I couldn’t change the map, I needed to learn more and find a way to navigate my client through 101(j).

Pensive businessman with maze

Here is what I found out.  Congress adopted these rules to prevent the perceived abuses of what was sometimes referred to as “janitor life insurance,” issued  for windfall profits.  These plans proliferated in the 1980’s as a form of Corporate-Owned Life Insurance, or COLI.

In a typical broad-based leveraged COLI transaction, a corporate employer would purchase policies on masses of lower-level employees, sometimes without the employees’ knowledge or consent. When an insured employee died, the company received the death benefits, and the employee’s family typically received either a small portion of the proceeds or nothing. These policies could remain in place even after the employee quit or retired.

In 2006, this all changed.

The COLI Best Practices Provision within the Pension Protection Act of 2006 became law on August 17, 2006. This provision was designed to codify industry best practices regarding employer-owned life insurance and amend the Internal Revenue Code by introducing conditions that must be met in order to exclude from gross income the proceeds from business-owned life insurance. The Act amended Section 101 of the Internal Revenue Code by adding subsection (j), “Treatment of Certain Employer-Owned Life insurance Contracts.” Briefly, the new subsection treats all employer-owned life insurance death benefits as taxable income, to the extent the proceeds exceed the premiums paid.  It also provides for exceptions to this rule, most notably requiring that the insured-employee sign a “Notice and Consent” form acknowledging that the employer is the owner and beneficiary of the policy.

[Related: The New Law for Business Life Insurance: Understanding Section 101(j) and Repairing Noncompliance]

Because of that change, employers today who purchase key person insurance and other forms of employer-owned life insurance need to watch out for a potentially costly trap — if the proper forms aren’t completed before the policy is issued, the death benefit is taxable, when it would otherwise be tax-exempt.  “The result is draconian,” says Jonathan Forester, a tax lawyer with Greenberg & Traurig in McLean, VA.  “If you’re expecting a death benefit of $10,000,000 and the IRS says you owe taxes, giving up 50%, if you’re a widow counting on these proceeds, that’s devastating.”

In a recent conversation with a hedge fund manager who bought $100 million of corporate-owned life insurance on his partner, but hadn’t complied with the rules of §101(j), we mulled over the options available to remedy the problem:

  • Go back to the carrier to get the policy reissued – providing that the carrier is willing and able to do this.
  • Cancel the original policy and issue a new one hoping that the employee is still insurable.
  • Do nothing and hope for the best – a gamble you do not want to take.

As you can see, the options are limited, difficult and potentially downright dreadful.  Now, I am no longer annoyed and have accepted reality. IRC Section 101(j) is far more important than my original take, and compliance with its requirements before policy issue is imperative for both you and your client.

An ounce of prevention avoids a ton of liability.

An excellent resource on §101(j) is a “White Paper” from Principal Financial Group.  It is a comprehensive piece that covers most of the details of IRC Section 101(j) in a “Question and Answer” format.  For example:

  • If the general rule of Section 101(j) is that employer-owned life insurance death proceeds are taxable, then how do death proceeds payable to an employer, from employer-owned contracts, qualify as tax-free under the general rule of IRC Section 101(a)?
  • Are death benefits from employer –owned policies payable to an insured employee’s heirs eligible for tax-free treatment under 101(j)?
  • What information must be furnished to the IRS in order to meet the new information return requirements?

As you complete annual reviews for your business clients there may be opportunities where replacement of non-compliant policies could save your clients thousands if not millions in income-taxable death benefit.  It will be worth your time to know the rules.

Download the “White Paper” and become familiar with Section 101(j). There are opportunities waiting for you.

 

Hire a World Class Marketing Organization – for $1 a Day

-by Marc Schwartz

With September’s arrival around the corner, our industry once again celebrates Life Insurance Awareness Month (LIAM). Created and produced by LIFE Happens and promoted by carriers and industry organizations, LIAM is a purposeful effort to raise consumer awareness with respect to client vulnerabilities and the solutions we deliver. Go to LIFE Happens to use all of the tools and resources available to help promote LIAM.  Danica Patrick is back as LIAM spokesperson with all-new videos promoting financial fitness.

Life Happens

For one month each year our industry makes a concerted effort to shine a spotlight on our products and the services we provide.  But what about the other 11 months of the year? How do we maintain, and take advantage of, the momentum generated by LIAM? Just as important, where do we as advisors fit into the equation? If a consumer is motivated to take action and handle their protection needs, who will they call and why? Millions of Americans need help — but will they ask you for direction?confusion1

As much as the internet might help consumers research their protection needs and potential solutions, the majority still turn to life insurance professionals to help them navigate the maze of companies and products.  And there remains a very important role to be played by a trusted advisor: simplifying what is complex and helping consumers sleep at night. How are you and your firm positioned given this enormous opportunity?  Think about the ways you need to market to Generation X and Millennials who now represent 145 million wallets.  (Related:  Millennials overtake Baby Boomers as America’s largest generation – Pew Research Center)  Marketing is now a multi-faceted, comprehensive and ongoing process that is a critical addition to efforts that are event driven.  You need to be and remain visible and available to clients and prospects.

If you are interested in expanding your business by addressing the protection needs of a huge and affluent, yet untapped market, then you need to be constantly  connecting with prospects and building your brand.  LIAM is a one-month program to soften the beaches, so to speak, but your disciplined and ongoing consistent push will ensure success. But how to do this?

 

Did you know you could plug into a cutting edge and comprehensive marketing platform for a cost of next to nothing? To me, what the Life Happens organization has built is one of the most powerful yet under-used marketing engines available in any industry.

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Specifically, the Life Happens Pro package gives you the tools to push your brand, educate consumers, and establish yourself as a trusted advisor. Keep in mind that this is all about helping consumers understand their protection needs and vulnerabilities, be it life, disability or long term care, and there is never a product or carrier push. Fully customizable resources include:

 

  • Flyers, brochures and infographics
  • Social media content
  • Real life video stories
  • Turn-key email marketing campaigns
  • Need calculators
  • Insurance planning tools

Although there is a base level of tools available at no cost, the Life Happen Pro Plus package at $39/month is really where you want to start – and it offers a 30-day free trial so you can kick the tires. If you are truly interested in the future of your business and helping an underserved market, then I highly recommend this package. You will easily expand your brand without your budget taking a beating.

You can contact Life Happens directly at mailto:support@lifehappens.org or (844) 824-5433; and feel free to contact me directly at mailto:marc@windsorinsurance.com or (800) 410-9890.