In this month’s Tier One Interview, we are changing the format in order to share our answers to frequently-asked questions we receive from clients, producers, carriers and other participants in the high-net-worth life insurance market.
Don’t worry – we will be back in March to feature a Tier One Interview with an up-and-coming superstar who is quickly becoming nationally recognized!
PETE: It was a smart idea to use this space to answers a few of the questions we receive all the time. I often hear you on the phone giving the same feedback several times a day so maybe having this interview to email out will help clear your calendar and keep you focused on our clients.
No one likes to be questioned by their General Counsel but since I have been collecting topics for this interview for months, you will have to suffer through it. Let me throw you into the deep end right away. What do you think about the concept of “infinite banking?”
JAY: You have definitely been overhearing my phone calls because we have had a number of clients in the past two months who have been pitched the idea of infinite banking by a career agent. I have a strong, negative opinion about this.
Using a cash value life insurance policy for accumulation and, way down the road, taking withdrawals and loans from the policy for liquidity needs is a fantastic use of a policy. Infinite banking takes this too far by suggesting a policyholder use the policy – usually a whole life contract – as a bank, taking withdrawals and loans as you would access a bank account for cash.
Setting aside the surrender charge and resulting penalty with many of the policies incorporated into infinite banking as well as the (often) 8% whole life policy loan rate, I don’t know many non-insurance professionals who would know how to track all the loans, premium payments, and cash value properly. This administrative nightmare will inevitability lead to a higher lapse rate resulting in a large tax bill for any loans, but also the potential to having to make large, unexpected premium payments later in life to keep the policy afloat.
When buying a cash value policy for accumulation, have a goal in mind when you will take income from it. Maybe it is for retirement or to buy a second home. Then, even if the policyholder has an emergency need for cash, one or two changes to the original plan can be accounted for the policy’s funding adjusted.
I could go on and talk about the suitability of whole life versus VUL for the type of sophisticated buyer who makes up our individual client base, but we don’t have time.
PETE: Your mention of VUL brings me to the next couple of questions involving variable policies, both retail and private placement. Is it true you talk more folks out of buying a private placement contract than to pursue one?
JAY: Absolutely! Back in the day, one of the buying motivators for PPLI was institutional pricing. That doesn’t fly any longer since the latest generation of retail VUL products often have better pricing, particularly in longer premium pay modes. These new products have around 100 or more investment choices and the ability to purchase all sorts of guarantees.
There are even individual COLI VUL contracts out there with early high cash value. Fantastic stuff!
At the very least, we expect our clients to have investible wealth of at least $30 million and be able to commit a minimum of $10 million to PPLI. Although the policy will usually be structured as a non-MEC to allow for future loans and liquidities, our clients should never need the funds invested into PPLI. It would surprise me if one of our clients ever touched their policy. As an aside, in my career, I have ever only seen seven PPLI policies that were surrendered or accessed for cash.
After financial suitability is met, someone considering PPLI should be putting customized investments that are highly tax-inefficient into the policy. If that isn’t the situation, there may be a case of looking at retail VUL where the investment expenses are pretty low – especially when an investment manager for a PPLI policy could be charging anywhere from 40 to 150 basis points.
PETE: Not all producers have variable licenses, and you are taking note of that, aren’t you?
JAY: About a year ago, I was asked to speak to a group of ten super-producers. During my presentation, I started discussing exactly what I just mentioned – that new VUL products are so competitively-priced. I noticed a bit of disinterest and it occurred to me that I was with a group of non-variable licensed folks who made their money by financing whole life and IUL. Before I could compensate, the head of the advanced markets unit for a major producer group who was in the room, stood up and told the group that they really couldn’t call themselves producers if they did not have variable licenses and could offer the clients the full scope of products that might fit. It was a real life “Game of Thrones ‘Shame’ moment”!
First, that advanced markets leader is still employed after saying what he did to that specific crowd. More interesting is that the group around the table all looked down and seemed a little embarrassed because what was said was true.
Look, I know no one likes the hassle of having a broker-dealer. We all have a few broker-dealer compliance stories to share. Our position at LISG is that is we are vetting a producer for one of our clients, it would be quite rare if a producer without variable licenses made the cut. This sort of circles back around to the point about the new VUL contracts. The sophistication of our clients often demands that a variable solution be considered.
PETE: When it comes to PPLI, is the industry pushing the envelope on investor control?
JAY: Yes. The other day, I had three in-bound phone calls involving a scheme with the same carrier that, in my mind, screams an investor control violation. That wasted my morning and I was pretty pissed. Given the popularity of private placement life insurance at this point in time, it is time there was a reminder about what dictates a violation of the prohibition against investor control. A violation of investor control can result in the policy deemed to not be life insurance, meaning that taxes should have been being paid each year on any cash value growth. The policyholder would be on the hook for back takes and penalities.
I’ll probably sound like a tease but, for more on this topic, attend Finseca’s Advanced Markets and Advocacy Summit in Washington, DC on March 20-22. In my break-out session, I will be spending time on this issue, complete with examples. I guess what I will say right now is that private placement life insurance is to create tax-efficiency for investments that will be made with the inception of the policy and not to create tax-efficiency for investments already made. This is where people are getting themselves into trouble.
PETE: Your life insurance first love was executive benefits. Is that still the case?
JAY: I think I am most associated with foreign national coverage and private placement because of my international career. What many people don’t know is that I started in the business after law school when some Life Investor Agents and I formed a member firm of the M Financial Group and I dove right into selling split dollar and non-qualified deferred compensation cases.
Life insurance is a fit for so many planning challenges but, for executive benefit purposes, life insurance is often the perfect fit. Right now, I see all sorts of opportunity for using split dollar arrangements to deal with the compensation excise tax on tax-exempt employers. Most have heard about this via the application for college athletic coaches where pay can easily exceed $1 million annually, hitting the university with a 21% tax. Yikes!
Also, remember that the money received from Section 457(f) plans counts toward that $1 million threshold so this is a case where switching up your executive benefit program can be meaningful.
Obviously, talking about college sports is interesting to a segment of our population but let’s not forget how this split dollar planning applies elsewhere….like with healthcare organizations and big, national non-profits like the American Red Cross, the American Cancer Society and many others. The opportunity is almost endless.
PETE: I have left the “elephant-in-the-room” question for last. How are you feeling about financing the premiums of life insurance policies at the moment?
JAY: This is an area where my thoughts have been unchanged for over two decades. The math has to work for the client. You can have high lending rates like we do right now and financing can still work if the client’s liquidity is tied up elsewhere and is, or will, yield enough where high interest payments on policy loans makes sense.
At this moment in time, it should come as no surprise that those situations are fewer and fewer as lending rates go up, so we hear about the floor dropping out in the premium financing space. That sort of ebb-and-flow is to be expected – sort of like when corporate tax rates fluctuate and split dollar goes up-and-down in popularity with the changing arbitrage.
You have heard me say it many times, and here is my list of financial qualifications for our clients:
Clients should accept that premium financing is a long-term strategy with fluctuations in performance over at least 20 years.
Clients need to have at least $20 million in investable net worth so that the financing loan and the resulting policy asset do not make up a majority of a client’s liabilities or assets. This is not a strategy for a high earning professional who is considering borrowing money to pay premiums on a maximum funded life insurance policy purchased to supplement retirement income.
Clients should have some familiarity with using leverage. This could be from using leverage in their investment portfolio or with real estate dealings. At the very least, there should be a full understanding of the risks and rewards of applying leverage in a financial matter.
Clients should be able to pay, without financial injury, all planned premiums out-of-pocket instead of borrowing the funds should conditions make financing imprudent, or a loan cannot be obtained.
My last point is that we really do not get involved with selecting lenders when our clients engage us to either sort out a new or existing financing situation. We leave that to the professional life insurance producer, though, we do provide a bit of oversight. This means that all of the premium financing lenders can stop calling our firm to try to position their products.
PETE: This interview definitely acts a bit like a position paper from LISG! I want to remind all our readers to follow us on LinkedIn, Instagram, TikTok, Facebook, YouTube and Twitter to keep up on the latest trends in the high-net-worth life insurance space by watching “This Week In Life Insurance” every Friday.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.