Dave Wickersham

When was the last time you wanted to reach out into the business market with a new sales idea?  We have all worked through the process of “funding” buy/sell plans and as soon as the agreement is drafted we typically have sold a term policy to complete the process.  I would argue that this is a disservice we have all brought over the years.  There are a number of other moving parts to consider when making sure that the agreement plan is fully funded and you can help differentiate yourself with the advisor and attorney/accountant by bringing the full package to bear.  The part we don’t usually focus on is what if all parties live to the time the buy/sell transaction has to occur?  

Most business transfers actually don’t include a death, but rather some other reason for an owner to leave.  As anyone who has read one of my articles knows, I am a big proponent of VUL solutions and believe they should be part of the solutions offered even if the ultimate sale is not variable.  However, the solution presented needs to be simple enough that it can be explained to all parties in such a way that they don’t need to be experts.  Many businesses are growing rapidly and the funding products for those types of firms need to have the ability to grow in value as the business grows.  VUL is the solution that can best create cash value appreciation at a high enough rate to keep up with rapidly growing value.  If the owners are able to agree on the valuation method to be used at separation, it is easy to tailor the products to satisfy that need.  A number of carriers offer an advanced market or business advisers software program to help you get to a solution that can be agreed upon by the attorney and/or accountant. 

The important part to know with a VUL sale, in these cases, is that the sub accounts in the product need to be matched to the need in order to create the potential to reach these goals.  A no-lapse guarantee product is no better than straight term unless you are sure the buy/sell transaction will be triggered by a death—such as a parent-child transfer where they agree that the parent is going to be an owner until death.  Also, if the company has a slower growth horizon, an IUL product may be as good as or better than VUL to satisfy both appreciation death benefit needs.  

Other conditions that will differentiate you from the average advisor are disability and critical illness. Both represent significant issues, particularly for a professional organization where the owners are generating billable hours.  If one of the owners is disabled or contracts one of the critical illnesses, they will expect to continue to be paid even though they may not be able to generate any revenue for the firm.  These issues have the potential to be more financially crippling for a company than the death of an owner.  These coverages can be added as a rider or a separate policy sale for each of the owners to help cover these needs.  

If the only solution you can bring to the table for these opportunities is limited to a 20 or 30 year level term, you are going to miss chances to look better than the cheapest solution and create relationships that will lead to future successes.

We have all heard the statistics, during the last 50 years the number of life insurance policies issued has continued to decrease.  However, according to LIMRA statistics, the face amount per policy has increased over five times during the same time period.  The surprise is that the amount of premium has only increased three times on a per policy amount.  This is because the number of term cases has grown to a much larger percent of the policies placed.  

If you have been in the industry long enough, you remember when the bulk of all policies sold were whole life, term was occasionally sold, and the only option was annual renewable term.  The sale of whole life had been based on the idea that life insurance was a forced savings to help create a pile of money for unknown future needs and retirement.   In the early 1980s we saw the creation of “buy term and invest the difference,” and that changed the way we have been selling life insurance ever since.  The “returns” in whole life were not enough to compete with the concept of term with a mutual fund “side fund.”  The only problem with that philosophy has been that very few people funded the “invest the difference” part.  With the elimination of almost all defined-benefit pension plans, there are fewer and fewer people that will reach age 65 and be able to retire because they have not funded their own retirement plans.  As an industry we have created the products that can change this dilemma, but we have to return to the sales process of yesteryear to help young Americans realize the value of cash value!

Over-funded VUL is the best alternative to create the modern nest egg (buy term and invest the difference) that we no longer sell.  The rates of return are similar to the best mutual funds and the growth is tax deferred or tax free depending on how it is accessed in the future.  This is one of the areas that was not touched by the Tax Cuts and Jobs Act of 2017.  We can help young people realize their dreams of a secure retirement if we will just tell them the story.  The “baby boomers” saw their parents save money for most of their lives, but they also learned in the 80s and 90s that you can have everything you want if you charge it now and pay later.  As a result, they are the first generation in America to face retirement with a mortgage and outstanding credit card debt with no pension plan to be able to create a process for paying those off and paying the living and medical costs associated with retirement.  

We have had the solution in our briefcase, but chosen to focus on the death benefit side of life insurance instead of offering the living benefit side of “forced savings.”  Consider: If I can offer the returns and tax benefits of an IRA, along with the assurance that it will be funded if my client doesn’t live to complete building the pool of money, why wouldn’t my client choose that in addition or instead?  We have forgotten that this was the reason many policies were purchased in the ‘50s, ‘60s and ‘70s.  The side fund in a VUL policy is included and not an additional obligation for our clients to have to keep up.  It also gave us a reason to go back to the same clients and help them buy additional policies as their lives evolved and changed.  This is what career life agents were trained to do, and as they evolved into “financial advisors” they forgot this critical part of the financial advice process.  

If we compare the modern VUL policy to the 1980s “buy term and invest the difference” strategy, we find that the sub accounts are significantly better and the cost of insurance is less, yet we don’t often talk to the public about this marvelous product as the solution to many of their retirement needs.  We can help create less death benefit and more cash value to make sure we are focusing on our client’s best interest, without being subject to the Department of Labor’s Best Interest Rule.   

VUL is truly an “engine for growth” that we can provide.  Today the variable annuity market is down significantly from its peak in 2007, however, even at this low ebb of sales there is approximately $11 billion of VA premium per month.  If the same amount was going into VUL, it would create approximately 16 percent more after-tax income and assure that the income would be there for families if the insured person dies along the way.  If we used a MEC instead of non-MEC we see similar after-tax returns as annuities, but the death benefit is tax free so the amount passed to the beneficiaries is almost 53 percent  more—because the annuity death benefit is taxed as ordinary income at the highest marginal rate.  It also helps assure that those beneficiaries turn to us as their advisor instead of looking for someone new since we helped their parents create the expected benefits.  

This story of future income can help us replace estate planning as the number one reason people buy life insurance and help the younger generation of Americans start looking to life insurance as a savings vehicle just like their grandparents did.  

What is the difference between the affluent and the ultra-affluent when it comes to wealth thinking?  Most of the time, the affluent are trying to build more wealth while the ultra-affluent are trying to keep the wealth they have. In today’s market, the typical solutions that are presented to the ultra-affluent are private placement life insurance (PPLI) and private placement variable annuities (PPVA). This marketplace is growing and offers more carrier solutions than ever before. The minimum client suitability for these solutions is around $20 million in net worth and $5 million in liquid net assets. Advisors have a tendency, when given these two options, to default to the PPVA solution because of two primary reasons. Either it offers ease of issue and a more transactional sale, or they are concerned with the insurability of their primary client, so they tend to disregard the life insurance option. What they should evaluate, before defaulting to that annuity solution, is a survivorship MEC PPVUL because it aligns better with the primary client concerns. 

One of the biggest values of PPLI is the fact that each policy is specifically designed for the customer.  This allows for the client to have input on the asset management selection and gives them options in the way the policy is priced and structured. PPLI policies being placed today are not designed to maximize the death benefit, since a primary focus is minimizing the cost drag on the investment portfolio. The usual policy design is for a minimum non-MEC death benefit if they want to maintain the tax-advantaged nature of withdrawals and loans down the road. However; ultra-affluent clients typically care more about the accessibility of that cash value if they need it, and care less about its ultimate tax treatment. Their first priority is to maximize cash value accumulation within the policy in order to offer a large, tax-free death benefit to their heirs. This goes back to their main concern being maintaining the wealth they currently have for their family, as opposed to building it or accessing it. In the situations where the primary insured is highly rated or uninsurable, there is the option of survivorship products as well as PPVAs. Most of the large financial institutions sell private placement variable annuities because they don’t want to worry about face amount retention or underwriting issues, but this is doing a disservice for most of these clients as the ultimate death benefit is taxable and that is part of what the clients and their families are trying to avoid. Using a MEC policy maintains the tax-free death benefit for heirs while keeping costs low and reduces the net amount at risk for the insurance company. Enhancing the insurability of the overall policy by bringing in the spouse with a survivorship option keeps the tax-free transfer of wealth on the table for the family (if it is an option). 

Private placement products aren’t designed like traditional products, so the marketplace has always been small. At times there have been only a handful of agents in the whole insurance industry that actively worked on PPLI.  The compensation is designed as an “Assets-Under-Management” model, so over time it is very lucrative if you are consistently writing business—but if it is a single case, the time and cost is prohibitive for most producers. Given all the hurdles that are naturally in the way of selling life insurance, PPLI is very easy to place with the people who need and want it.  Almost every family office is aware of it, even if they have not yet used it, and more trust companies are open to the discussion for their most important clients.

Today there are a number of insurance companies active in the market and actually, for the first time, there are a number of companies that are looking at it for the first time.  It is the perfect tool for the appropriate client and situation where the ultra-affluent are looking to “not lose money” and everyone should be aware of how it works.

As we look at a world in flux, it’s important to remember that the only constant is change. Technology is a good example, as it has a far-reaching impact on other industries. Look at Uber, a simple app that revolutionized and dominates the taxi industry. Airbnb achieved status as the leading hotel alternative without owning a single property.  In our own industry technology impacts everything from marketing to distribution to underwriting–including the way people buy and sell life insurance. Technology will continue to change the way we do business, and we either participate or get left behind.

I personally can’t imagine owning a driverless car, but the auto industry believes that within a generation there will be a huge demand. In one generation we’ve seen the replacement of the life insurance agent by the “financial advisor” and continued growth in platforms used to sell term insurance. But in that same amount of time, little progress has been made towards the automation of the permanent insurance process. This presents an opportunity to create the next industry norm.

I didn’t expect to stop using my camera because using my cellphone is easier and results in a better picture. The efficient delivery of a solution can easily change what we consider the norm. For instance, there are medical testing programs in which select carriers allow insureds to visit a supermarket or pharmacy to get measurements like blood pressure, weight, and pin-prick blood tests that are all electronically transmitted to the insurance company to get real-time underwriting information and skip the need for a blood draw or full paramed exam. 

We need a shift to identify more efficient processes to move the product, as industry research and analysis point to the increased need and want for life insurance in the consumer market. The industry is paying attention as carriers embrace the use of technology to change business processing including John Hancock’s Vitality program and Lincoln’s LincXpress featuring a 12-page application with simplified underwriting. Both have been well-received by consumers.

Revisions to the actuarial guidelines will continue to change and, as interest rates begin to rise, there could be more regulatory calls for increased reserve requirements to compensate for falling bond prices.  This will open the door to creating new products based on current assumption and equity participation.  With the current AG 37 and 38, it is still less expensive for the insurance companies to price variable products than indexed or traditional UL products.  This has led to most carriers adding indexed subaccounts into their variable products to give the ability to take advantage of the volatility reduction that indexed products bring with the lower cost structures that variable products have.  If you fear declining markets, you can put money into the indexed subaccounts and still have the chance to participate if the markets move higher than the caps or participation rates of the stand-alone IUL policies. This feature, coupled with a simpler underwriting process, will increase consumer demand.

The DOL fiduciary rule has caused most financial advisors to begin creating financial plans for all of their customers and most are required to include “risk assessment” as part of the plan.  This small change provides a huge opportunity to introduce life insurance to advisors and their clients, but we have to make the process simpler than it has been.  This means we must embrace an evolution from being the processing center to that of a marketing engine.  Instead of worrying about the future of estate taxes, we should be taking the time to educate brokers and consumers about the trend to speed up the life insurance placement process.   

For the time being, there isn’t an automated platform to replace our distribution system—so there still exists the demand for our knowledge to help consumers evaluate their needs and identify possible solutions. Carriers are racing to the finish line with more simplified issue processes to make our jobs easier.  We need to work with them to position life insurance, once again, as part of the foundation of financial planning. As distributors, we need to take the opportunity with younger consumers to teach the value of permanent life products and pursue methods to reach this segment through non-traditional means. It’s our job to direct the conversation and position life insurance as a viable alternative.

This is what we heard in 1978! We were told there would be no more deduction for policy loan interest.

It’s easy to fall into the naysayer’s pit of despair. Often our clients want to tell us what they have heard, wanting our assurances that the world is changing but not coming to an end. To be clear, there is still no other financial tool that has the business applications of permanent life insurance. Whether it be for funding buy/sell agreements or creating deferred compensation to act as “golden handcuffs” for valued employees-permanent life insurance continues to be a solid solution with flexible applicability.

Simply stated, there’s more to business life insurance than the claims it pays. Today’s life insurance policies cover myriad risks and offer financial advantages that other contracts cannot duplicate. Businesses own life insurance to cover obligations such as deferred compensation, to pay off debt and to indemnify the loss of key employees. Many businesses benefit from the tax, accounting, and cash flow advantages of the product, and own multiple policies on multiple executives. These needs will continue regardless of proposed business tax law changes. To learn more about business tax laws look here.

I believe that variable life insurance is a tool that many of us, as producers, have not used as a focus for the business market. Many of us have overlooked the use of variable life insurance as the perfect solution to myriad business problems. For the situations that require a guaranteed death benefit, guaranteed VUL products make a better solution than guaranteed UL because it offers some cash value flexibility down the road and is still cost effective from contract inception. Most of the true COLI products are based on a variable chassis today because of the carrier pricing rules that make them more efficient for accumulating cash value and also maintaining the needed death benefit. The newer COLI hybrid products are also primarily variable-based for the same reasons. With the addition of index sub-accounts, the options to use these products in a corporate setting are almost endless.

If we will look at all the costs, an accumulation VUL product can provide both the needed death benefit and significant cash value accumulation. For a preferred male between 40 and 55 years of age, the total average annual cost can be less than the total average annual cost of a variable annuity over the same life expectancy.* The annual after-tax investment return is competitive with most other registered and non-registered products, but with a transparency that isn’t available from fixed or indexed products. If there is a premature death, the IRR is obviously significantly higher than that of an investment-only account. With proper positioning, VUL products can have a huge impact on the long-term cash flow planning of any business.

Historically, every time we have seen these products come out of favor, fully funded VUL products end up outperforming our expectations. This is due in great part to the fear and uncertainty that lead to short-term market timing efforts. Today, the new subaccount options and pricing structures built into current VUL products lead to risk mitigation in a down market but continue to have more after-tax growth potential than any other financial asset in the corporate setting. Businesses could get a tax lawyer, to ensure that they are still aligned with the tax laws, new and old, and by using legal advice, businesses could start saving more money. Using companies like sambrotman.com could help to guide businesses in the correct direction when it comes to paying tax, gaining tax returns, and more.

While the Trump administration has promised a “significant” business tax cut, the use of life insurance and specifically VUL as a business planning tool will continue to provide benefits that aren’t available in other products. At the same time, those changes promised for corporate America will lead to a continued increase in earnings, economic recovery and valuation for the equity markets. If the business owner has confidence in economic expansion, VUL will be the most appropriate product for his needs. However, if they are not convinced that the economy will grow, it is even more reason why they should be turning to the guarantees provided exclusively by life insurance.

The one thing we know for sure is that business and personal income taxes and the economy will continue to change. As a result, business owners, employees, and executives will continue to need access to the benefits exclusively available from permanent, cash value life insurance. That need can only be satisfied by life insurance professionals that are willing to help them look for new ways to use the tools that only we can deliver.

*This is based on a hypothetical illustration for a 40-year-old male, preferred non-smoker, 5-pay $20,000 premium with $500,000 face amount. Authorized for broker use only, not to be distributed to the public. The data shown is taken from an illustration, the purpose of which is to show how the performance of the underlying investment accounts could affect the policy cash value and death benet. It assumes a hypothetical rate of return and/or current interest crediting rate and may not be used to project or predict investment results. Unless indicated otherwise, these values are not guaranteed. The illustration for this hypothetical example was run at a gross seven percent, net 6.69 percent return. The underlying sub-account portfolio used in the illustration had a cost of .31 percent and consisted of four index funds and one specialty fund. Compared to an investment only variable annuity with equal premiums, sub-account weightings and return assumptions.