Luke Cosme

Crowdfunding Since 1883

There is an opinion among some that crowdfunding has the potential to disrupt the insurance industry;  that younger people, disillusioned by the financial crisis and the belief that the financial game is rigged in someone else’s favor, will have more faith in the ability of their family, friends and community to help them financially. That a GoFundMe page that depends upon the kindness of strangers is a viable alternative to buying life insurance, health insurance, even car insurance. I find this argument both sad and ironic. Sad because our industry has done such a poor job of communicating the value of the good we do, that some of our potential future clients have instead turned to the internet for that help. Ironic because the very solution that they tout as revolutionary is not new at all and, in fact, has been the foundation of the insurance industry since its very beginning.

Contrary to popular belief, crowdfunding is not a new phenomenon. For centuries groups of people with common economic and social interests have pooled resources to develop new products, new processes or to support a cause. A great example is the Statue of Liberty. The money to build the pedestal on which it stands was raised through an appeal organized by a newspaper and the artist community in New York. In effect, the same huddled masses that she welcomes to America are those that gave her a place to stand. This is one example from the late 1800s; however, our bias toward the present leads us to believe that the idea began with websites like IndieGoGo, Kickstarter and GoFundMe.  

The irony I reference above is another example of crowdsourcing from way back when. One of the earliest forms of crowdfunding is a mutual insurance company. If you think about it, at its core a mutual insurance company is crowdfunding at its most basic and most efficient.  An individual with a need, in this case the need to provide for his family in the event something happens to him, contributes to a collective that pools the funds of people with similar concerns. When a member of the group dies, that member’s family receives the prescribed amount from the pool of funds. It doesn’t get much simpler than that. I would also argue that it doesn’t get much better, because rather than waiting and hoping for the kindness of strangers, a mutual insurance company guarantees the benefits that it will pay and guarantees that those benefits will grow over time for the member, who through his participation, also becomes an owner of the organization.

The title of this article draws upon this idea. Mutual Trust Life Insurance Company began as the Scandinavian Mutual Aid Association in 1883. A group of people gathered in a small Lutheran church in Galesburg, IL, because they had recognized the impact that the death of a parent and breadwinner could have on a family. They came together as a community to create something that would draw upon all of them to protect each of them. That spirit lives on today at Mutual Trust. As part of a mutual holding company that is owned by our policyholders, protecting our policyholders is our first priority.

A year ago in this space I spoke of the Dawn of a New Day at Mutual Trust. At that time we had just completed our merger with Pan-American Life Insurance Group and I spoke of the opportunities that lay ahead for our policyholders and our distribution partners as a result of that merger. We saw some of those opportunities come to fruition in 2016:

• A.M. Best upgraded our rating to A (Excellent) with a stable outlook and Fitch reaffirmed our A rating.
• We introduced Horizon Value, a participating whole life product with a substantially improved dividend scale, improved flexibility in our Paid-Up Additions riders and one of the best early guaranteed cash values in the industry.
• We maintained our dividend scale for in-force policies–no small feat in a challenging interest rate environment.

As we look ahead, we see more opportunity in 2017. As it has been for well over 100 years, our focus will continue to be on participating whole life, the guaranteed benefits and the guaranteed growth it provides to clients. We will continue to share the whole life story and the opportunities for growth that it offers for agents and agencies. Finally, we will continue to advocate for mutual insurance companies and the good that we do. Crowdfunding didn’t begin on a website. We have used crowdfunding to protect families and businesses since 1883. [LC]

Reference:
http://www.libertyellisfoundation.org/statue-history

Clients have never had more options for saving money than they do today.  Consequently, today’s advisor must add the role of navigator to counselor, sage and prognosticator, among many others.  That is no small task, given the numerous vehicles available.  The life insurance marketplace is a microcosm of that financial services universe with hundreds of carriers, each with multiple products, riders and endorsements providing multiple features, benefits and opportunities for clients to save and accumulate wealth.  Such a wide array of choices provides opportunities for success and growth for just about every client and their wide array of hopes and fears.  However, with those same myriad choices come many opportunities for dissatisfaction and second-guessing.   

Our products are more customizable than ever before, providing our clients with ever-more-affordable death benefit coverage, ever-more-valuable cash value accumulations and ever-more-flexible income options.  Yet despite all of the innovation in product design and pricing that our industry has brought to the market, we still have clients who are dissatisfied because their policies have underperformed what was originally illustrated for them.  In some cases, declining interest rates are to blame.  In others, inconsistent premium payments have played a role.  In still others, overly optimistic illustrated rates of return contributed.  Those are all reasons.  However, to the client looking at an underwhelming statement of account, they just sound like excuses. 

We have the ability to do so much good with the products that we offer.  We can help a family send their children to college and plan for retirement. We can help a small business owner protect what he has spent a lifetime building and reward those who have helped build it.  We can help create a safety net for unexpected expenses after retirement and a path toward creating a legacy that outlasts our lifetimes.  With so much potential good to be done, how do we help those clients who have become disillusioned with our industry because of past experiences?  Just as important, how do we prevent more clients from joining their ranks?  Put another way, how do we add to the ranks of clients who are satisfied—by far the majority?

We can start by setting proper expectations.  We know that most life insurance products will work if properly funded and positioned.  If we accept that, then in running illustrations we must focus on the probable or even the guaranteed, rather than the possible, and fund based on that.  Is there a client in today’s environment that would be disappointed with a consistent five to six percent long term return?  Sure there is—the client that was promised seven percent.  If the client funds based on a lower rate of return and gets that rate of return, then we look like the sages they need us to be.  If the rate of return is a little better, then we look like heroes.

Another step we can take is to stop propagating the “silver bullet” sales philosophy and acknowledge that no one single product or product design is the right solution for every client all of the time.  Be your client’s navigator.  If the right solution is IUL, sell IUL.  If the right solution is whole life, sell whole life. Match the right product to the right client and promote the benefits of life insurance as the solution to your client.  Promote, don’t disparage.  Tell them why this solution is right, not why other solutions are wrong or bad.  Clients don’t distinguish among types, to them it’s life insurance.  Placing negative thoughts in their heads about life insurance only lends credibility to the person who tells them “you don’t want life insurance.” 

It is with these thoughts in mind that I invite you to take another look at an old friend—participating whole life.  Not in place of what you’re currently selling, but alongside it.  The product on which many in the industry cut their teeth can be your source for organic growth in your practice or your agency.  The story of strong guaranteed death benefits and cash values along with potential dividend returns still resonates.  There are many clients whose primary concern is what will be (guarantees) rather than what might be (potential returns).  Certainly many of those clients who have become disillusioned with our industry fall into that category.  Focus on the guarantees built into participating whole life, and the first day of your client’s policy is the worst day it will ever have.  With potential dividends, the only changes will be positive. For the client who has become disillusioned with our industry because of a policy that didn’t perform, is there any better message?  Even among those clients who look for and demand higher rates of return, there are some who are not entirely comfortable with all of their eggs in one basket.  A participating whole life policy in combination with another solution may garner additional business that otherwise would have gone elsewhere.   

According to LIMRA, 35 percent of individual life premium written through the third quarter of 2015 was whole life.  What part of that was yours in 2015?  What part of that could be yours in 2016? 

The Dawn of a New Day
On October 30, 2015, the merger of Mutual Trust Holding Company and Pan-American Life Mutual Holding Company was approved, and we officially became Mutual Trust Life Insurance Company, A Pan-American Life Insurance Group Stock Company. For seven months prior to this date, we spoke often about the benefits of the merger as Mutual Trust became a part of the Pan-American Life Insurance Group (PALIG). Some of the advantages we knew would be immediate and easy to recognize, while others were longer term and less clearly defined.

Today, our combined company operates as a mutual insurance holding company with approximately $1billion in revenues, $5.5 billion in total assets, 1.5 million covered lives and 1,650 employees.  Additionally, it has $850 million in total capital, providing a sound foundation for the future growth of the organization. These numbers place us firmly in the medium-size category among life insurance carriers, which is important in an industry that values size. 

Throughout the process of merging, however, we knew that until we could translate these numbers into tangible benefits to our policyholders, our distribution partners, and even the industry, the advantages of the merger would not fully resonate. The developments that followed and the ones we anticipate in the future have inspired confidence that a new day is dawning for Mutual Trust and PALIG and that the future is bright.

Ratings and Dividends
Shortly after we announced the closing of the merger, Fitch Ratings announced that they had assigned Mutual Trust an “A” Insurer Financial Strength rating with a Stable Outlook. This is significant because Mutual Trust did not have a rating from Fitch previously. They cite “[Mutual Trust’s] stand-alone credit profile reflects its adequate competitive position in the U.S. life insurance market, strong balance sheet fundamentals and modest earnings profile” as being consistent with the assigned rating. However, they specifically cited the completion of the merger as the driver of the rating action.

The good news continued the next day when A.M. Best announced that they had affirmed the financial strength rating of A- (Excellent) for Mutual Trust and revised the outlook to positive from stable. Per the release from A.M. Best, “the revised outlook for [Mutual Trust] reflects the potential for rating enhancement as [Mutual Trust] is integrated into the operations of its affiliates under [Pan-American Life Mutual Holding Company]”. 

The revised outlook to positive is great news on its own. The fact that we are now talking about a potential ratings enhancement is extraordinary when you consider that prior to the merger we had been told that an increase in our rating was highly unlikely because of our size. This development, more than any other, captures the essence of what the merger represents – possibility. 

The merger positively affected our 2016 dividend payout too. Despite ongoing turbulence in the economy and continually falling interest rates, in 2016 Mutual Trust is increasing its dividend payout. This is due to our excellent financial results through the first three quarters of 2015, improved mortality experience on our currently issued products, and the additional capital flexibility resulting from our merger with Pan-American. 

Sometimes 1 + 1 = 3
When two companies merge, the ultimate goal is to create a combined organization that offers more advantages than either company could provide alone. That is certainly the case here. Mutual Trust’s successful new business engine and emerging technical platform re-establishes PALIG’s presence in the U.S. individual life market. The improved access to capital provides Mutual Trust with the ability to expand that presence, support new investments in the business and finance future growth. Today, our combined organization is financially stronger and better able to offer more products to a wider range of people, as well as provide its policyowners, partners in the field and employees with more opportunities for growth than either company could do alone. By combining our forces and resources, we haven’t just benefited our organization; we’ve provided advantages to the industry as well.

While this has been a year of change and transition, much also remains the same. We will continue to be “The Whole Life Company”. Our commitment to participating whole life and the markets which it serves remains firm. The members of the Mutual Trust team, who have built our reputation for excellent service, will continue to serve you from our headquarters in Oak Brook, Illinois. Since its founding in 1904, Mutual Trust has always believed that life insurance should be the cornerstone of every family’s financial plan. We continue to embrace this goal today and look confidently to a bright future as a proud member of the Pan-American Life Insurance Group. [LC]

Providing Solutions Instead of Predicting Rates of Return. In 2015, the insurance industry will continue to face two major challenges: low interest rates and the potential for more government regulation. While none of us have control over either of these situations, we can control the methods we use to market our products and the expectations and ultimate satisfaction our policyholders derive from them. If you’re like me, you’ve probably been in several meetings recently in which you’ve discussed the most advantageous way to illustrate products, how best to explain their rate of return to potential clients, and maybe even how to price new products in an environment of continuing low interest rates. However, while many of us may be deeply involved in trying to develop the most advantageous strategy to explain the future performance of our products, maybe we’re actually just creating more problems for ourselves when we try to follow this route to sales.

As insurance providers, our goal is to solve our clients’ problems. But in a continually low interest rate environment, if our main selling point for our products is rate of return, can we really expect to satisfy customer expectations, or are we setting ourselves and our clients up for disappointment? Imagine if you asked a group of consumers what rate of return they would be satisfied in receiving. What answer do you think you’d get? I think most people would say, “The best rate I can get.” But in today’s continuing low interest rate environment, with its accompanying low investment returns, the expectations of an insurance company and most of its customers probably aren’t the same. So if we’re selling based on a product’s rate of return, we are most likely setting ourselves and our customers up for disappointment.

What’s the solution to this dilemma? At Mutual Trust, we’ve implemented a conservative, concept-focused approach to sales. We give clients what they want and need—solutions to their problems rather than illustrations filled with unconvincing projections of future product performance. We sell our products using a sales-concept approach, and we train producers to use these concepts by offering them extensive, free online training on the concepts, as well as providing them with consumer-designed materials that explain and illustrate them. Producers can personalize these concepts with their own contact information and then email, mail or distribute them at meetings with potential clients.

As of January 2015, Mutual Trust has developed 22 Personalized Product Concepts and more are in the works. The concepts range from our Smart Money solution to how consumers can use the living benefits in their policies throughout their lives. We also have concepts on the potential benefits of a two-premium, non-MEC policy for clients and their businesses, as well as concepts on saving for college and creating a family legacy.

By using a sales concept approach rather than relying heavily on illustrations or in-depth discussions of rates of return—which are both complicated to explain to consumers and offer uncertain projections—producers who sell our products are able to concentrate on satisfying their customers’ needs and providing them with the guarantees they want. Thus producers and Mutual Trust are not making promises to people that they might not be able to keep. With a sales concept approach, producers can look like heroes because they are satisfying immediate needs rather than setting people up for disappointment by promising them returns that in all likelihood will not occur. As I’m sure we’ve all experienced in life insurance sales, when results turn out to be better than what we’ve predicted, our clients’ confidence in us and the insurance carrier increases. This confidence can lead to better persistency rates and more referrals. However, when results are less than expected, policyholders are disappointed. This can lead to lower persistency rates and no referrals.

As the financial services industry knows all too well from recent experience, when an industry like ours promises more than it delivers it can also lead to increased regulation. And this is justifiable. If a client is expecting a 6 percent rate of return because this is what he saw on the sales illustration when the policy was purchased, then he will be disappointed with a 5 percent rate of return. Yet think about the last 20 or 30 years. Over this period of time, how many sales illustrations match the current in-force illustrations? How many products produced a higher rate of return than what was predicted? Because of these inevitable discrepancies, due in large part to 30 years of continually falling interest rates, Mutual Trust has made the decision to focus on the guaranteed aspects of the products we sell. In addition, we emphasize the advantages of our products’ early cash value and the access, liquidity and control of the money our products provide clients.

As a thriving industry that cares about helping people financially, life insurers tend to be optimistic and often focus on what is possible rather than what is probable. Although this philosophy might appear to be useful for accomplishing some goals, for the last 30 years this approach hasn’t worked for life insurance sales. As we can see with many universal life products, assuming the possible rather than the probable has only led to a drop in sales, unhappy customers and stricter regulations.

At Mutual Trust, we’ve gone back to the basics—we’re selling our whole life insurance products through concepts that illustrate benefits and show solutions to the potential problems people face every day, throughout their lives. We specialize in the design and distribution of participating whole life insurance—it’s our expertise and the focus of everything we do. The real benefit of MTL products is the guarantees they offer policyowners. These guarantees reflect what will happen, rather than what is possible to happen. This is an important distinction.

Bringing the Guarantees of Whole Life to the Marketplace. According to LIMRA, during the second quarter of 2014 individual life insurance sales edged up 1 percent—due in large part to a 6 percent increase in new annualized premium of individual whole life insurance. While annualized premium for universal life and term insurance decreased, sales of whole life have grown 19 of the past 20 quarters. These statistics suggest that the public is hearing the message and whole life insurance and its guarantees are winners.

Since it first opened its doors 110 years ago, Mutual Trust Financial Group has believed strongly in the benefits and guarantees whole life insurance offers people. That’s why we’re proud to be known as “The Whole Life Company.” Today, approximately 65 percent of independent marketing organizations are not partnered with a whole life company. Our mission is to provide agencies and agents with opportunities to add whole life insurance to their portfolio of products. Consumers need and want our products. Mutual Trust is ready to help you fulfill your clients’ needs. [LC]

This quote has been attributed to Will Rogers and to John Maynard Keynes, but both were actually quoting Mark Twain, who said it first in 1835. I reference the quote and its attribution not to give you an edge should you ever decide to compete on Jeopardy, as cool as that would be, but rather to illustrate that truth is often said in jest. Mark Twain was a humorist of the first order, but his words, said tongue-in-cheek almost 200 years ago, have never been more true than they are today. For many of our older clients, those who are retired or approaching retirement, the top priorities for their savings or emergency funds are safety, access and control. How do we know this? Because they keep those funds in CDs, savings accounts, money market accounts, etc., earning next to nothing. They know this, yet they keep the funds there because they know that they will be there and that they will be accessible. Every other priority is a distant third at best.

So what can we do to help these clients? The answer may lie in a very simple question: What is the purpose for this money? For some clients the purpose may be to help subsidize their income; a fund to help in case the roof starts to leak or their property taxes increase unexpectedly. For others the answer may be that these funds are for the kids or grandkids, unless… And that unless is almost always some combination of  “…unless I have a medical emergency, unless I fall and need someone to help me at home, or unless I need to go into a nursing home.” This is what is called the client’s “safe money.” For the clients who fall into the former category, it’s probably best to let it be. For the clients who fall into the latter group, there may be a better option, one that provides the safety and control that they desire while also giving them benefits that a financial institution vehicle does not.

Before we begin to discuss solutions, let’s look a little closer at our client profile. As we said earlier, we are talking to people who are approaching retirement or who have already retired because they are the people most likely to have accumulated and identified money that they may not need for current expenses. This is very important. If the client anticipates that he or she will need the money to pay bills or buy gas or groceries, etc., then this is not the right solution. Similarly, a younger client may not have accumulated these funds yet, or may not yet be confident that they won’t be needed. The easiest way to determine whether or not they fit is to ask: What is the purpose for these funds? Clients will not be shy. If they think they need the funds, they’ll say something. If they are using it as a safety net, they’ll say something. If they intend to leave it to their kids, they’ll say something.

There are other indicators as well. In some cases the client may have multiple accounts and joint owners on those accounts, usually a son or daughter. These accounts will be designated “transfer on death” or “payable on death” and are intended to do exactly what the designation suggests. It allows the client to ensure that his or her money goes to a son or daughter without having to go through probate. For us, this should be a flashing red sign that says “I have money that I don’t think I’ll need.” These are the clients with whom we want to speak.

So we have identified that the client has money that he or she probably won’t need for current expenses. Their priorities for that money are safety, access and control, with the rate of return on the money further down their list. They’ve said that they would like to leave the money to their kids or grandkids, unless… Which tells us why they have the money sitting in the bank—it’s safe, it’s liquid and it’s easy to access. Are there other options? They may have already said no to an annuity because of the surrender charges. They won’t look at a brokerage account because of the risk. While it sounds funny now, their parents may have considered burying it in the yard or stuffing it in a mattress. Removing these as options leaves us with a solution that they have probably never considered: participating whole life insurance.

Let’s look at a female client, age 65 and in decent health, so we will give her a standard non-tobacco rate class. She has $100,000 in four CDs at her local bank. She has a pension and Social Security, which provides enough income for her monthly expenses and a little extra that she either saves or uses for occasional weekend trips with friends or family. She doesn’t anticipate needing the CD money, so she has her son and daughter as joint owner on two CDs each. Assuming the scenario that we outlined above, why would she look at participating whole life when she has rejected other options? In a word, “guarantees.” Participating whole life insurance gives her a guaranteed death benefit, guaranteed cash value, guaranteed increases in cash value and guaranteed access to her money. For example, if we were to take $50,000 of the money that she has in her jointly-owned CDs and purchase a participating whole life insurance policy, her initial guaranteed death benefit could be $106,102.* Given that she has already acknowledged that this money will most likely go to her children, we have immediately more than doubled the amount that she can leave them.

What about access? At the end of the first year, her guaranteed cash value is $47,920, and by the end of the third year her cash value has increased to $50,989, all of which is available to her at any time, for any reason. The cash value continues to grow, guaranteed, each and every year. What about the “unless…”? You’ll recall that in many cases the money in these CDs may be the client’s safety net in the event they need extended at-home care or nursing home care. Many life insurance products give the client the ability to access death benefits, income tax-free, should either event occur. In our example, the client would have access to the better part of $106,102, rather than the $50,000 she had in her CD. So this client has guaranteed protection and access, the ability to leave a larger legacy for her kids, and protection for that legacy should she experience the “unless…”

This is an effective solution for a client who looks like the example we have given here. However, it is not the right solution for everyone. Safe money only works if the client truly does not need the money for current expenses, so thoroughly profiling clients is a must. Also, no solution should be or can be all or nothing. In our example above, the client is very sure that she does not need these funds for current expenses, but she does not have a crystal ball. That’s why we only used $50,000 of the $100,000 that she had in CDs. In an emergency she still has $50,000 in the bank, in addition to the cash value and death benefit in the policy. If she decides at some point that she would like to use some of that remaining $50,000 in her safe money solution, there are options. We can structure the existing policy to accept future premiums or we can purchase another policy, provided that she is still relatively healthy. By taking a conservative approach, we can ensure that the client always has options.

Properly applied, safe money is an excellent solution for clients with money that they would like to leave to their kids, unless… The problem is that the overwhelming majority of those clients have no idea that this solution exists. That’s where you come in. Look at your book, your desk and your calendar. Do you have clients with money in CDs that they haven’t touched? Under “purpose of funds” on their annuity application did they indicate “leave to heirs”? Do they have bank accounts that are jointly owned by their children? Have they come into money from an inheritance or a sale of their home and don’t know what to do or where to put it? Here’s a good one: Do you have clients with parents who fit any of these scenarios? If you answered yes to any of these questions, then you may have clients or potential clients who need your help. Pick up the phone, call them and ask, “What’s the purpose for these funds?” Then call your participating whole life carrier and ask for their safe money solution. Mark Twain would be proud.

Good selling!

*Amounts determined from illustration run on Mutual Trust Life’s Century II illustration software, version 4.73.

We have entered a new era of innovation. Today a business owner can dictate an email to his phone; tell the phone to send the email; add an appointment to his calendar; and receive a reminder from his phone, computer or tablet to pick up milk on his way home-all while sitting in a car that parks itself-and that’s not even the tip of the iceberg. The technology and software that is out there now to assist businesses is beyond what anyone would have expected. For example, business owners can now run their business and work with employees completely remotely, via software such as Wandera that has zero-trust network access, by using software that allows them to share all they need for the job via one portal. The sky is the limit for business owners in this day and age.

The thought leadership of the business world is bringing creative solutions to problems their customers never even knew they had in the first place. Business owners live and breathe creative solutions-particularly when it comes to increasing the livelihood of their businesses and, in turn, increasing their own paychecks. Many LLCs and C-corporations try and save money on small business taxes by opting to be taxed as an S-corporation. As S-corporations are pass-through entities, they don’t have to pay corporate tax. And, in turn, their taxes are lowered. If you are an entrepreneur, you could opt to learn to file form 2553 online for your S-Corp election and make an educated decision about your business. Many companies, such as manufacturing companies, use ERP (Enterprise Resource Planning) in order to get the most of their business. These consultants help to grow your business in relation to your employees and your technology. There are many ERP consultants out there, such as SYTE and many more, that assist businesses in the rise of efficiency and ultimately, pay checks.

While new gadgets, technological advances and ever-expanding reach in today’s social media make the process of doing business more efficient than ever, there are many business owners out there who still have one potential problem that they can’t seem to solve, or may not even be aware of-business continuation planning.

Today’s business owner appears to be sorely underprepared for the endless amount of “what ifs” that could strike a business at any time: death, disability, divorce, retirement, illness or any other trigger that could leave the business in need of a way to fund the recovery from any of these situations. According to The New York Times, 87 percent of business owners surveyed in 2008 didn’t have a written plan in place.¹

Most business owners are aware that they are not immortal and that the day will come when tough decisions will have to be made about the continuation of their business beyond their life. So why are they hesitant to take action?

Typically, it’s the same type of objection heard by those who may lack sufficient retirement plans: If it doesn’t appear to be an immediate problem, put it off for now. Business owners, in particular, tend to be more concerned with revenue, growth and operations rather than an abstract “what if” situation that doesn’t appear to need solving right now.

In addition to protecting the life of their business, there is also the nagging question of exit strategies, particularly around how current business owners plan to fund their own retirement. According to USA Today, about one third of business owners have no plan in place for retirement and about the same amount don’t even know how much money they’ll need at retirement age.²

While funding retirement is a concern for many Americans today, the pressure is perhaps more significant for business owners-particularly those of the smaller, independent variety who don’t have a ready-made corporate 401(k) plan already in place for them.

Business owners are generally more often the maverick type of thinkers, too busy running a company to deal with planning for the unknown. This is precisely why they need your help. It’s crucial that financial representatives make business owners aware of the potential problems, before the business is brought to a screeching halt. Some of the basic steps include:

?1.?Drafting a Buy/Sell Agreement. Think of a buy/sell agreement as a kind of will for a business. First, it’s a legally binding contract and one that is very specific to the particular business (this isn’t a one-size-fits-all deal), so an attorney must carefully draft and review this type of agreement with all parties involved.

Second, a buy/sell agreement needs to be reviewed periodically (just like a will) to cover the continually changing nature of a business-from changes in valuation, future goals or as ownership structures shift.

And finally, there needs to be a plan in place for how to fund the agreement when one of its triggers occurs.

?2.?Funding a Buy/Sell Agreement. One common strategy is to fund a buy/sell agreement using a “term and invest the rest” strategy. Basically, this means that the owners of a business agree to purchase each other’s interest in the business with separate term life insurance policies on each other’s lives, with each owner being the beneficiary of his partner’s policy. This covers the death trigger of a buy/sell agreement, so that if an owner dies, any remaining owner is paid the life insurance death benefit proceeds. The surviving owner(s) use the death benefit proceeds to buy out the deceased owner’s shares in the business.

But what about other triggers of a buy/sell agreement? For example, if one of the owners is ready to retire, where will the business owner(s) get the funds to buy out the retiring owner’s shares? The “invest the rest” part of this funding strategy essentially means that whatever funds the business owners don’t use with the term life insurance, they can put into some type of investment to fund the transfer of business shares from one owner to another, buying out the retiree.

The type of investment could be an annuity, a certificate of deposit (CD from a bank or other investment vehicle. In some cases, business owners may fund other triggers of the agreement by getting a small business loan from companies such as Qualia Credit. Regardless of which investment vehicle business owner(s) decide to use, the following risks should be considered:

One of the most glaring is an issue that can hurt even the best-intended “invest the rest” scenarios-the owners don’t actually follow through on investing the rest.

Market risk can be another concern. A downturn in the market can ruin the best of plans, especially if there isn’t enough time until the date the funds are needed to overcome the loss of value in the investment fund.

If the intention is to finance a buyout, many business owners may find that financing is not easy to come by-if it is available at all.

What about liquidity? If an owner decides to retire prior to age 591/2, then there could be tax implications in accessing funds. Will the returns on annuities or CDs be sufficient to help make an investment cost-effective? A low return for an extended period of time could require a larger investment-one that the business owners may not be willing or able to make.

Term life policies are designed to provide protection in case you die within a specified period of time. What if the level premium period runs out before the owner decides to retire? What about the return on that portion of the expense? Term life policies do not build cash value, so the premium paid is a “sunk cost,” meaning that once the policy expires, the money sunken into it cannot be recovered.

This is not to say that traditional solutions don’t work. When properly administered and structured, these solutions can be an effective method of funding buy/sell agreements. However, there are other strategies that could address a variety of triggers in a buy/sell agreement.

?3.?Two Birds. One Stone. Permanent life insurance can offer a comprehensive solution. First, there are some basic advantages: protection against early death, plus death benefit proceeds to help fund an exit strategy. What about the risks listed above?

Permanent insurance can act as a forced savings vehicle. The premium payment covers the cost of the death benefit protection while also contributing to and building cash value in the policy.

With fixed universal life insurance, there is no market risk. With an indexed universal life (IUL) insurance policy, your client is not directly participating in the stock market. A zero percent floor and annual reset helps to protect your client from a negative interest rate credit.

By selecting a product that waives surrender charges, your client may have the ability to access the surrender value in the policy without penalty, mitigating concerns about the availability of financing.

The current low interest rate environment has had an effect on rates everywhere, but fixed universal life products generally offer returns higher than most other fixed vehicles, with minimum interest rate guarantees of 2 to 3 percent. IULs offer potentially higher rates of return. Many 30-year look back rates exceed 7 percent.

The internal buildup in permanent life insurance can provide cash accumulation and a generally income tax-free stream of income. Some IUL policies may credit interest on the cost of insurance charges, which may further limit the “sunk cost” of your client’s death benefit.

Keeping in mind that business owners are highly concerned with saving money, particularly on things that aren’t seen as a direct investment into the business, a cost-benefit analysis can be helpful. Funding a buy/sell agreement is not an inexpensive proposition, regardless of the option chosen, so it is important to point out that the goal is not to exceed the business owner’s needs. Instead, look to help meet the client’s needs for less out-of-pocket expense. Here’s an example of an IUL policy providing a “two birds, one stone” solution.

Tom and his twin sons, Steve and Lou, run an auto detailing business. Tom is 50 years old, in fair health, and his sons are both age 25 in excellent health. Tom owns 50 percent of the business (valued at $500,000), and his sons each own 25 percent. They have a buy/sell agreement in which the death of an owner would trigger an immediate cash need. Additionally, Tom would like to retire in 15 years, and the buy/sell agreement calls for his sons to buy out his 50 percent share of the business at that time.

In addition to the death benefit coverage, each of these business owners has different secondary objectives. Tom is looking for a way to help supplement his retirement income. His sons are seeking a way to accumulate cash value in order to buy out their father as he approaches retirement. With extra premium funding of life insurance on Tom’s life, they can potentially generate significant cash value to be used for the buyout of Tom’s share of the business.

Indexed universal life can be a product of great interest for these cases and can offer the following features:

??Zero percent premium load, which allows for quick access to cash value and faster cash value growth potential.

Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a modified endowment contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent cash value of the contract exceeds premium paid.

Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10 percent additional tax prior to age 591/2, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. You should advise your clients to consult with and rely on a tax advisor or attorney for their specific situations.

??Waiver of surrender charge, which is an optional benefit that waives surrender charges unless the policy is surrendered as a 1035 exchange. This can help give peace of mind in knowing funds are available, even if an unexpected early need arises (e.g., a buy/sell trigger that isn’t otherwise fully funded, such as a disability).

Surrender charges vary by product, issue age, sex, underwriting class and policy year. Withdrawals or surrenders may reduce the ultimate death benefit and cash value.

??Table shave feature, which can be used when a waiver of surrender charge option is elected.

When a person applies for life insurance coverage, his health is evaluated and a corresponding underwriting rating is applied. A table shaving feature allows certain substandard underwriting rates (known as “table ratings”) to be improved to a “standard” rating. A standard rating generally indicates average health and involves a lower life insurance premium than do substandard ratings.

? Guaranteed interest rate bonus on an index account. While short term cash value is a desire, longer duration cash value performance is also an issue. This feature can help the policy perform for the longer durations as well.

Some companies offer a conditionally guaranteed interest bonus to further help your clients build long term cash value accumulation. Interest bonus may be earned when a company declares a current interest rate that exceeds the guaranteed interest rate. Interest bonus percentages are not guaranteed and subject to change; however, once a policy is issued, the percentage will not change.

What Objections Might You Encounter?

Fully funding a buy/sell agreement with permanent life insurance can be expensive. Alternatively, term life premium is a “sunk cost.” Life insurance policy surrender charges can decrease that amount, potentially causing a business to book a loss at the end of the year.

A key to overcoming this objection is to consider a carrier that provides options, such as an early cash value accumulation. A waiver of surrender charge option can help eliminate those charges.

What if money is tight? If the business owners do not have the cash flow to fully fund their life insurance policies, then this option does not work. If they like this option but can’t afford it now, then you need flexibility.

Term life insurance can provide a lower cost option in the short term, but it’s important to consider an option that provides conversion privileges that can help solve an immediate need for death benefit protection, while also providing the ability to convert as cash flow improves. The clients can benefit by locking in their insurability now and guaranteeing that a permanent life insurance solution remains an option in the future. The agent can benefit by earning a commission now, along with the possibility of another sale if the client converts the policy later.

By providing your client with more features, flexibility and benefits than the alternatives, using permanent insurance to fund a buy/sell agreement can help benefit your practice’s bottom line. Present it with your regular menu of products and services for the small business clients in your book and help increase your revenue without increasing your marketing and prospecting efforts.

Footnotes:

?1.?”Are Baby Boomers Ready to Exit Their Businesses?” Barbara Taylor, The New York Times, February 10, 2011. Retrieved from http://boss.blogs.nytimes.com/2011/02/10/are-baby-boomers-ready-to-exit-their-businesses/

?2.?”Many Small-Business Owners Aren’t Prepared for Retirement,” Laura Petrecca, USA Today, March 1, 2012. Retrieved from http://usatoday30.usatoday.com/money/perfi/retirement/story/2012-03-01/small-business-retirement-options/53324004/1

The opinions and ideas expressed by the authors of this article are their own. North American Company does not endorse or promote these opinions and ideas.

Neither North American Company nor its agents give tax advice. Please advise your customers to consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

IRS Circular 230 Notice: Any U.S. tax information included in this written or electronic communication, including any attachments, is not intended as tax advice, was not intended or written to be used, and it cannot be used by you or any taxpayer, (i) for the purpose of avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code or applicable state or local tax law provisions, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Index Universal Life products are not an investment in the “market” or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance.