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Análisis de Estabilidad Financiera de Aseguradoras

En Copperstone Partners, comprendemos la importancia de evaluar la fuerza financiera de las aseguradoras que representamos. Con más de 5,200 aseguradoras registradas en los Estados Unidos, Copperstone selecciono un poco menos de 100 aseguradoras que cumplen y exceden el criterio y la estabilidad financiera requerida. Firmemente creemos que estas aseguradoras son financieramente las más estables y han demostrado constantemente una estabilidad corporativa alineándose con los intereses de sus asegurados. Además, como verdaderos asesores de seguros independientes, tenemos la capacidad y habilidad de representar cualesquier aseguradora que seleccionemos y nos mantenemos neutrales en nuestra selección. La obligación selectiva de Copperstone, consiste en 8 factores que deben de estudiarse y determinar si las aseguradoras son apropiadas para nuestros clientes:

Perfil y Análisis de las Aseguradoras

Factor 1: Posición en el mercado y nombre
Factor 2: Distribución de producto
Factor 3: Diversificación de mercados
Factor 4: Calidad de activos en su Fondo General
Factor 5: Disponibilidad de capital para fondear pasivos
Factor 6: Utilidades y liquidez
Factor 7: Administración de activos/pasivos
Factor 8: Flexibilidad Financiera (Privada/Publica)

Los analistas independientes (Moody’s, S&P, etc) asisten en proveer el análisis de estabilidad financiera y utilizamos esta referencia para incluir o excluir las aseguradoras que consideramos. La grafica que exponemos, muestra que solo aquellas aseguradoras que califican hasta la categoría 7, dentro de 25 disponibles, calificaran para análisis posterior. De este modo, no solo nos apoyamos en estos calificativos. Las grandes aseguradoras que se cotizan en la bolsa de valores, requieren reportar anualmente con la (SEC) Comision de Seguridad y Valores, sus estados financieros. Esto incluye: Historial de la compañía, Giro, Estructura, Factores de Riesgo, Ganancias, Subsidiarias y Estados Financieros Auditados. Copperstone Partners analiza cada uno de estos reportes anuales y toma también en consideración los reportes bursátiles, así como noticias actuales y relevantes de publicaciones tales como The Wall Street Journal, Fortune y Business Week.

Quien se Responsabiliza en la Regulación de Aseguradoras?

La responsabilidad de proteger a los asegurados, cae sobre los reguladores de seguros estatales. Desde las últimas décadas del siglo XIX,  ninguna aseguradora estadounidense ha negado el pago de una póliza de seguro de vida, debido a insolvencia financiera. La Asociación Nacional de Comisario/Reguladores de Seguros (NAIC) es la asociación que coordina las regulaciones de seguros estatales con sus comisarios. Las aseguradoras requieren de reportar detalladamente su información financiera con los comisarios estatales y estos estados financieros deben de seguir medidas conservadoras en su habilidad de poder cumplir con las obligaciones de sus asegurados de acuerdo a los Principios de Contabilidad Obligatorios. (SAP)

Que Sucede con “AIG” y Otras Aseguradoras en Aprietos?

Foreign nationals face distinct challenges when owning U.S. based assets and/or have U.S. beneficiaries. Often times, these clients are unaware of the taxation or eventual taxation demands of the IRS. These complex situations require a thorough knowledge of international tax law. With the correct approach, these clients can shift and protect tremendous wealth. Copperstone Partners works with a number of international tax firms on the structuring of life insurance plans for high net worth foreign nationals. These structures are designed to not only protect wealth but also to help shift wealth to future generations while minimizing or eliminating gift taxes, estate taxes, and throwback taxes.

In the following newsletter, we will address two different scenarios that are common problems for foreign national planning:

Scenario One – Throwback Tax

The U.S. government employs special tax rules upon the distribution of assets to a U.S. beneficiary by a foreign non-grantor trust. Specifically, since the assets have accumulated over time, the undistributed net income will be subject to a “throwback tax” (ordinary income tax) as well a non-deductible interest charge or penalty on the delay of payment to the IRS. These taxes/penalties can effectively eliminate the entirety of the trust assets. In addition, the distribution of the trust assets (whether during the lifetime of the grantor or upon his/her death) will not only subject these assets to throwback taxation but also potential creditors/liabilities and transfer taxes for future generations.

A U.S. beneficiary of a foreign trust is subject to the U.S. Throwback tax if:

- The foreign trust is a non-grantor trust for U.S. income tax purposes (e.g., it is irrevocable)
- A beneficiary is or becomes a U.S. person (e.g., U.S. citizen or resident alien) and (a) has the right to receive undistributed net income or (b) actually receives undistributed net income from the trust
- Settlor is/was a non-resident alien/non-U.S. citizen at the time he or she funds/funded the foreign trust

Below are the specific non-deductible interest rate charges that will be assessed on the foreign non-grantor trust assets.

- Accumulations “non-distribution” of income in a foreign non-grantor trust are subject to the U.S. Throwback Tax rule as well as an accompanying interest charge thereon.
- For the years prior to 1996, the interest on the Throwback Tax is computed at a fixed annual rate of 6 percent with no compounding.
- For the years beginning January 1, 1996, the interest rate applicable to the Throwback Tax is the floating rate imposed on underpayment of tax with compounding.

The solution for this throwback tax issue is the investment of the trust assets into a life insurance contract through a specially structured US sub-trust of the foreign non-grantor trust. The end results provides for:

- Income tax free growth under U.S. & Foreign regulations
- Income tax free withdrawals / borrowing under U.S. & Foreign regulations
- Income tax free death benefit under U.S. & Foreign regulations
- Tax-Free distributions may not be subject to the U.S. Throwback Tax rule

Scenario Two – Outright Distributions

Below are two common scenarios for Non-US Citizens with significant foreign assets:

- Non-U.S. citizens (or Non-U.S. trusts) that will ultimately distribute or transfer assets outright, or at various ages to U.S. beneficiaries, subject these assets to unnecessary taxes and liabilities.
- Non-U.S. Citizens planning to immigrate to the U.S. will subject their assets to unnecessary taxes and outright liabilities without proper planning.

Clients in either of the situations above, without proper planning, will unnecessarily subjects the assets to the following:

-U.S. transfer taxes in perpetuity
-Estate taxes
-Generation skipping taxes
-Gift taxes

In addition to taxation, the assets are also subject to:

-U.S. and Foreign Creditors
-U.S. and Foreign Liabilities
-Loss of assets due to potential divorce

The solution is a specifically structured U.S. Trust for the U.S. beneficiary or immigrant that MUST be established and funded prior to the immigration and/or distribution event.  This trust will accomplish the following objectives:

-Avoid transfer taxes in perpetuity
-Avoid estate taxes
-Avoid generation skipping taxes
-Avoid gift taxes
-Provides asset protection against US and Foreign creditors/liabilities
-Protect from loss of assets due to potential divorce for future generations

The use a life insurance contract funded and owned by this specifically structured U.S. Trust provides these additional benefits:

-No income tax
-No reporting requirements
-Leverage
-Tax-free loans (no withholding)
-Tax-free death benefit for US beneficiaries

Note that the life insurance contracts can be used at the grantor’s level or at the U.S. beneficiary’s level.  Account deposits to purchase U.S. Life Insurance may be:

-Purchased outright using funds from the foreign trust account
-Financed using the trust values as collateral for a margin loan or a loan from a third party. The loan can be re-paid using the life insurance death benefit proceeds, and or remaining trust assets

The client has full control over the US trust assets through an appointed trustee and total decision power and authority to choose how to invest assets (through appointed trustee).

CIRCULAR 230 DISCLAIMER
Pursuant to Internal Revenue Service Circular 230 governing written tax advice, unless otherwise expressly indicated, any tax advice contained in this communication may not be used or relied upon for the purposes of (i) avoiding any penalties that may be imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending any tax-related matters addressed herein to another party.

Summary

The process of obtaining life insurance coverage for high net worth individuals brings a whole host of issues beyond that of a typical procurement process. This is usually due to the fact that coverage is or should be divided across multiple carriers. Here in lies the issue; all insurance carriers only retain a maximum amount of coverage “on their books.” If a client applies for more than the retention limit, the balance of the coverage must be obtained through the reinsurance market. When a reinsurer is involved, they often have the right to underwrite the case on their own and thus “trump” the original insurance carrier’s health assessment. The key is to never give them the opportunity to exercise this power. This is where assembling the lowest cost portfolio of multiple policies across multiple carriers becomes more of an “art” than a simple submission.

Objectives

- Create a portfolio of guaranteed life insurance products to spread the risk and capitalize on the subjectivity of the underwriting health assessments

- Negotiate underwriting to suppress premiums and increase the internal rate of returns (IRR) to the estate

- Submit to 40 of the nation’s largest and top rated carriers to create health assessment competition

Step One

We submit the case on an “informal” basis to the top 40 carriers on a trial basis. This trial application, along with the medical records/exam results, is accompanied by a cover letter, which our in-house underwriter will draft to address or alleviate any concerns related to health. By submitting “informally”, the carrier isn’t required to approach the reinsurance market. (PLEASE NOTE: If two or more competing agents submit the case to the same carriers, knowingly or unknowingly, the cumulative amount of coverage will exceed retention limits and thus be sent to facultative reinsurance. Because reinsurers service multiple carriers, this means that the reinsurer will have the ultimate determination on the client’s health rating for multiple carriers and this could cost the client millions in added premiums over the course of their lifetime.)

All of the 40 carriers will then provide preliminary/informal underwriting offers. We take the most competitive offers from the top 10 to 15 rated carriers and rank them in order of “cost per million.”   This is an important step because sometimes the cost of insurance for one carrier with a “Preferred Health” rating will be more expensive than a “Standard Health” rating with another.  Ranking them by cost, removes the perception that one policy “should” be cheaper than the other by title alone.

Step Two

The initial offers can and often due range greatly due to the subjective nature of health AND the fact that carriers are constantly pricing themselves in and out of the market for a specified age/health risk. For example, if a carrier has too many insured’s in their mid 40’s with standard health, they will raise the price dramatically to avoid having too much of their risk pool concentrated on this class.

Once the initial informal offers are in, we rank them by cost and call the underwriters that are not competitive to inform them that they need to improve to be considered. It is during these calls we determine how the underwriter arrived at their initial decision and address any outstanding issues found during the exam or in the medical records. Often times, we will have the client’s Doctor(s) address those health issues via letter (or provide an additional exam) so that the underwriter will feel more comfortable in offering a better health rating. Keep in mind, each level or jump in health rating represents approximately 20% in annual premium savings.

Step Three

Once we have done everything in our power to negotiate the best health ratings, we once again rank the carrier on “cost per million.”  Then, we select the least expensive carrier to submit formally and “auto-bind” the maximum amount of coverage without going to facultative reinsurance. This approach avoids the reinsurer having the opportunity to re-underwrite the case and disagree with the health rating we have negotiated.

We then approach the next cheapest carrier on our list and bind coverage up to their maximum retention limit again avoiding the reinsurance market. We repeat this process until the entire desired amount of insurance is obtained.

Summary

The negotiation and methodical placement of multiple policies across multiple carriers results in the following:

- The lowest cost of insurance for each carrier in the portfolio and the highest maximum amount of coverage with the least expensive carrier in the portfolio

- The highest internal rate of return (IRR) portfolio for the estate

- A diversified portfolio of multiple policies (carriers), leaving flexibility in the future

CIRCULAR 230 DISCLAIMER
Pursuant to Internal Revenue Service Circular 230 governing written tax advice, unless otherwise expressly indicated, any tax advice contained in this communication may not be used or relied upon for the purposes of (i) avoiding any penalties that may be imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending any tax-related matters addressed herein to another party.

THE DILEMMA:
Most high net worth individuals assume they don’t need “Long Term Care” insurance because they can “Self Insure” the risk.  This approach makes little financial sense and in this newsletter, we will outline a different and far superior approach.

We undersand the dilemma; you don’t want to throw away money on Long Term Care premiums but you also don’t want to risk having your retirement and savings drawn down by Long Term Care costs or become a financial burden to your family members.

As Americans continue to live longer, we have a greater change of eventually needing care.  Long Term Care can include a Nursing Home, Assisted Living, In Home Care and Adult Day Care.  At least 60% of people over age 65 will require some long term care services at some point in their lives.

THE 3 MAIN OPTIONS:

1. Self Insure – You’ll need to set aside significant liquid assets and you will risk depleting these assets.  Keep in mind, you will aslo be paying these costs with AFTER TAX dollars.

2. Traditional Long Term Care – Premium payments are very expensive and if you never need the care, the premium payments are typically lost forever.

3. Money Back Long Term Care – This program requires a single premium payment and provides four, five or even six times your deposit in TAX FREE Long Term Care benefits.

High net worth individuals, who would otherwise self insure their Long Term Care needs, will find better leverage using a Money Back Long Term Care product whereby they can make a single premium deposit (i.e. $100,000) and get all their money back if they no longer need or want the coverage.  There are no surrender charges or waiting periods.

Copperstone Partners and its subsidiary, MoneBackLTC.com, offer long term care solutions for high net worth individuals.

Visit Money Back Long Term Care: http://www.moneybackltc.com/

CIRCULAR 230 DISCLAIMER
Pursuant to Internal Revenue Service Circular 230 governing written tax advice, unless otherwise expressly indicated, any tax advice contained in this communication may not be used or relied upon for the purposes of (i) avoiding any penalties that may be imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending any tax-related matters addressed herein to another party.

The “pitch” goes something like this: “Why would you use your own cash to pay life insurance premiums if you donʼt need to? By financing the burden of life insurance premiums, you can still protect your loved ones and plan for your estate without having to sacrifice critical assets.”

Fundamentally, the less you pay out of pocket for the greatest amount of coverage will result in the highest return to your estate/heirs. In addition, by using the bankʼs money you retain capital in existing investments and for other opportunities. However, life insurance premium financing is far more complex and involves many moving parts.

There are few premium finance programs that are great for the client and many programs that are better for the agent and/or lender. Like any large financial transaction, you must understand which parties have your best interests in mind. In the following document we will discuss the risks and rewards of financing your life insurance premiums.

How it works

Many wealthy people require a substantial amount of life insurance for business planning, estate planning, or for income replacement but would rather not part with the cash.

There are many different premium finance programs in existence. Some good, some bad. We will explore these a bit later. In general, in order to qualify for life insurance premium financing most insurance companies require you have a minimum net worth of $10 million. In addition, you must use a bankruptcy remote entity to own the policy such as a Limited Liability Corporation (LLC) or an Irrevocable Life Insurance Trust (ILIT). Most lenders require the use of an ILIT, which is good for estate planning purposes and minimizing any gift taxes.

Below are the steps involved in a premium financing arrangement:

1) In a normal premium financing arrangement, you would apply for a policy at the same time you apply for a loan. The loan can often be arranged by the insurance carrier or a 3rd party lender that handles only the financing component of the deal. In todayʼs tight credit markets, a private financing arrangement may have superior terms and less risk. This would include using an existing line of credit or a low interest facility collateralized by a portfolio of marketable securities.

2) While you are being medically underwritten for the life insurance policy, your loan is being processed. Assuming you pass the medical exam and qualify for the loan, the policy and financing are put into place at the same time. Depending on the loan program, a personal guarantee and/or other collateral will be required (i.e. a Letter of Credit). In some rare cases, the policy will serve as the sole collateral. The loan is made directly to the ILIT or LLC.

3) The loan terms can range from 2 years to a lifetime loan. You can usually select to pay the interest current or defer the interest payments for a time. Some programs require the loan to be satisfied at a future date while others are structured to be repaid upon death. If the loan is to be repaid upon death, the net difference is paid out to the beneficiaries.

Tax Implications

In general, the proceeds from an insurance policy are tax-free (depending on the size of the estate and who receives the proceeds). If an Irrevocable Life Insurance Trust (ILIT) owns the life insurance policy, estate taxes on the death benefit may be avoided. This will be different for each family so please consult a tax advisor.

One great benefit of premium finance is the minimization of gift taxes. This is because you donʼt need to “gift” large premiums into the Irrevocable Life Insurance Trust (ILIT). If any gifts are made, it is usually only the interest on the loan. This can be a significant benefit considering gift taxes can be as high as 45%.

Please note, interest on a life insurance premium financing loan is considered to be personal interest, and therefore, not tax deductible.

Dangers

By now we have covered the basics and benefits of premium financing. So what is the downside? Before we answer this question, you must understand some basics on the types of policies used.

The loan, or premium, will be placed into the policy and the policy will have cash value build up. These cash values will serve as the partial collateral to the loan. The higher the cash values in the product, the less outside collateral will be required. Some products are fixed in that the cash values are guaranteed to grow. Other products are tied to the performance of stock market indices and this presents additional risk to the client. Not coincidentally, these products are also the ones that pay the highest commissions. They key is to minimize risk and use guaranteed or fixed products if necessary.

Since the loan is to be repaid by the death benefit, some carriers have recently developed policy “riders” which are intended to grow the death benefit by the amount of the loan and, in some cases, also the interest. This is called an “increasing death benefit” or “return of premium death benefit.” This is actually a very important component in every transaction as it is this feature that pays the loan back at death. However this creates a scenario where you have an increasing loan balance (liability plus interest) and an increasing death benefit. But what if the rising loan balance outpaces the increasing death benefit?

In short, your biggest risk is that there is NO GUARANTEE that the insurance policy will be able to repay the entire loan first and still provide the coverage that your heirs require. This happens when the loan and the interest accumulate more quickly than the policy can perform. Again, this often happens when the product used is one tied to the performance of the stock market OR the terms of the loan are unfavorable. We have reviewed numerous programs that rely on fictitious assumptions using “constant” annual returns from the stock market when this never occurs.

A couple other risks you should consider are related to the terms of the loan. First is the interest rate risk. Some programs/lenders use variable rates that float and without the ability to lock the rate, the balance may compound and become too large too quick. The second risk is the terms of the loan. There are many two, five and ten year loan programs on the market however many are annually renewable. This means you may have to re-qualify each year in order to receive the next premium payment loan. What if the lender decides they no longer want to be in the business of lending to life insurance policies? What if they call the note or have provision to do this? Third, all of the loans today require personal guarantees and dollar for dollar collateral which could add insult to injury in a poorly performing policy.

Exit Strategy

Premium financing works best when the loan is short (7 years or less) and/or there is an exit strategy or liquidation event to satisfy the principle repayment. The exit strategy can be death for the older ages however for younger ages (70 and under), loan balances can compound in dramatic fashion. As a general rule, we would not recommend premium financing for the younger ages without a short-term exit strategy.

Private Financing

Private Financing involves loaning your trust (ILIT) the money instead of using an outside party. This can be done in many different ways but the most common involves using a “Line of Credit” collateralized by real estate holdings or a loan against a securities portfolio held at a large wire house. There are many advantages to doing this not the least of which is the cost of money and the low AFR rates. Loan rates using your own assets as collateral are often 2 to 3 percentage point lower per year. In addition, there are no origination, structuring or prepayment fees.

Another distinct advantage is not having to assign the policy as collateral. Lastly, the terms of the loan are up to you and will therefore will be much more favorable and without certain risks (i.e. renewability).

Summary

Life Insurance premium financing can be a great tool or your worst enemy. Be sure to uncover and mitigate all the associated risks and perform a cost analysis to determine if you would be better off purchasing the insurance without leverage.

CIRCULAR 230 DISCLAIMER
Pursuant to Internal Revenue Service Circular 230 governing written tax advice, unless otherwise expressly indicated, any tax advice contained in this communication may not be used or relied upon for the purposes of (i) avoiding any penalties that may be imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending any tax-related matters addressed herein to another party.

While we would expect 99% of all Term policies to lapse, why is that 89% of Universal Life and 70% of Whole Life policies will also lapse or be surrendered to the carrier? In short, because most policies do not perform “as sold.” Most people buy a policy based on future assumptions. Assumptions that are sold as “constants” but are in fact ever changing. These factors include the performance or crediting rates of the cash value, administrative fees and the cost of insurance.

In more recent years, life insurance rates have fallen sharply. Crediting rates have decreased on fixed products while policies tied to the securities market have collapsed. Let’s just say that the landscape has transformed. So where does your policy stand?

To maximize the value of your investment, a life insurance review should be performed every 24 months to make sure that the policy is still suitable, competitive and performing to expectation.

Below are some staggering statistics to consider.

• 92% of existing trust owned policies could be restructured or reissued to provide 15% to 20% greater economic benefit

• Term life insurance rates have fallen nearly 50% in the last 15 years • 84% of trustees surveyed said they lacked the tools and procedures for evaluating trust owned life insurance

A Copperstone Policy Review involves an in depth review of 8 key components. This information will give you and your advisors the information you need to make an educated decision to either retain the current coverage or consider replacement coverage.

- Contextual Analysis – First and foremost we must establish if the policy is still suitable for the current estate plan as circumstances are constantly changing in applicable tax law as well as in the clients’ lives.

- Underwriting Assessment – We assess the policy’s health rating when obtained and whether or not this was indeed accurate and negotiated well during the underwriting process. We also assess whether or not a lifestyle/health change has occurred which could create room for improvement and lower rates.

- Lapse Analysis – Unbeknownst to many clients, their policy(s) will eventually lapse due to poor policy performance. It is important to analyze the current crediting/earning rates (guaranteed and non guaranteed) and their impact on the policy’s cash values.

- Cost/Fees Analysis – Many policies have excessive fees that need to be compared against industry benchmarks. These fees include surrender charges, mortality/expense charges, subaccount management fees (loads), and other hidden management fees.

- Performance Analysis – During this process we look at the relationship between the policy’s cash values, fees, crediting rates and ongoing premium. For Variable Policies, we will also look at the subaccount performance and choices. For Whole Life, we look at dividend payments and how this affects the policy. Ultimately, we look at how the performance stacks up against industry averages.

- Carrier Stability Analysis – With hundreds of carriers in the marketplace, we provide an assessment of the carrier’s financial stability (Moody’s, S&P, A.M. Best, Comdex) and we also provide an objective view of the financials and underlying exposure. Lastly, we look at anything in the news that should be of interest or concern.

- Market Comparison – With life insurance rates at historical lows and newer features available, it is important to assess whether there are savings and other guarantees available to the client should they choose to switch to a new carrier. We will provide a market comparison from 40 of the top carriers.

- Secondary Market Analysis – A high percentage of policy owners will lapse or surrender their policy(s) in their senior years due to a variety of reasons including a change in circumstance or a dramatic increase in cost. They may be able to achieve significantly more by selling the policy to a third party institution in exchange for an immediate cash settlement (aka life settlement).

Summary of Options – In summary we will outline the client’s options along with our recommendations to either stay in the current policy, make changes within the current policy, or acquire a new policy.

CIRCULAR 230 DISCLAIMER
Pursuant to Internal Revenue Service Circular 230 governing written tax advice, unless otherwise expressly indicated, any tax advice contained in this communication may not be used or relied upon for the purposes of (i) avoiding any penalties that may be imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending any tax-related matters addressed herein to another party.

MISCONCEPTION #1: If I pay my premium on schedule as shown in the sales illustration the policy will never lapse and stay in force.

TRUTH: Most Universal Life policies are flexible in their premium schedule and non-guaranteed. In exchange for flexibility, the policyholder is responsible to make sure the policy is funded adequately and actively managed. Therefore, when the policy is initially “sold,” the premium amount is simply an estimate of the amount required to keep the policy in force based on a variety of assumptions. Statistics prove that premium estimates “sold” are nearly always lower than what will be required and thus will eventually require a large cash injection or be lapsed or surrendered back to the carrier for whatever cash value remains (if any).

MISCONCEPTION #2: My trustee is watching over my policy and its performance and therefore I donʼt have to worry.

TRUTH: A study by Trusts and Estate Journal revealed that 84% of Trustees lacked the tools and procedures to manage trust owned life insurance. In recent years, policy performance has fallen dramatically, thus putting a lot of policies at risk of lapse due to inadequate funding. Another study shows more than 25% of trust owned life insurance will lapse during the insuredʼs lifetime and this number is on the rise.

MISCONCEPTION #3: The health rating on the policy I currently own is accurate and the best available to me.

TRUTH: The process of “shopping” a policy to multiple insurance carriers is cumbersome for both the agent and the client. With multiple applications, seemingly endless signatures and extensive medical records, most agents choose one carrier, which just so happens to be their “favorite.” Being that health is somewhat subjective, underwriters at different carriers tend to look at health issues differently and thus its crucial to get underwriting offers from at least 3 carriers.

MISCONCEPTION #4: The premium I am paying is the lowest possible premium available (or close to it).

TRUTH: This is perhaps the most startling misconception of all with nearly 80% of individuals overpaying for their life insurance. The reason is two-fold. First, life insurance rates have fallen to all time lows over the last 15 years due to lower mortality rates and greater competition. Many people are simply unaware of the savings available to them by making a switch. Second, the system is somewhat flawed in that agents are paid as a percentage of the premium. The higher the premium, the higher the commission. This is why itʼs not in your agents best interest for you to receive the best health rating. Also, if one were to “shop” rates in todayʼs marketplace, the rates on the same exact policy type can vary by as much as 100% between carrier A and carrier B. Although most agents can work with multiple carriers, its not unusual for an agent to have a “favorite” carrier with which he/she has higher compensation contracts and other ancillary benefits such as incentive trips.

MISCONCEPTION #5: Life Insurance is a great investment vehicle.

TRUTH: This one is a bit tricky. Life insurance can be a great “investment” vehicle from the standpoint of the beneficiaries. When structured correctly, life insurance can yield double digit IRR upon death. However, when sold as an investment vehicle for its cash value attributes (i.e. a supplemental retirement plan), life insurance can be a horrible investment vehicle. Regardless of the type of investment, the impact of management fees will greatly impact the long term growth of your cash. When all fees are taken into account (commissions, admin charges, sub account fees, cost of insurance, taxes etc….), life insurance policies can often run as high as 3% annually on the invested cash value or premium.

CIRCULAR 230 DISCLAIMER
Pursuant to Internal Revenue Service Circular 230 governing written tax advice, unless otherwise expressly indicated, any tax advice contained in this communication may not be used or relied upon for the purposes of (i) avoiding any penalties that may be imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending any tax-related matters addressed herein to another party.