Thursday, March 28, 2024

Probate: What To Expect And How To Avoid It

Over the years, I witnessed a few families that experienced a loved one’s death and had to go through the probate process. A couple of decades ago I actually had to go through the probate process. Not only did we go through probate, my dad died without a will—also known as dying intestate.. That is what I call “probate on steroids.” So, over the years I have become painfully familiar with the process of probate and can say that it can be an absolute nightmare for family members to deal with. It creates a time drain and a huge amount of stress for the heirs of the deceased. In some cases, it can lead to family members having disagreements and becoming estranged from one another.

To me, what was once just a nice cherry on top for those products and strategies that “avoided probate” has become an extremely important benefit that I always communicate with my agents and clients.

Obviously, if I can help consumers avoid this nightmare I will. There are great tools that enable consumers to avoid probate, as we will discuss.

What is probate?
Probate is the process after somebody dies that a person‘s transfer of assets usually goes through. At a minimum you can figure on six to 12 months for the probate process and it can last years. The probate process is administered by a court and seeks to ensure the orderly transfer of assets to the heirs that have a right to inherit the property while at the same time making sure that all of the creditors are paid off from the estate. In short, probate protects the rights of the heirs and also the creditors.

Why does the world need probate?
Imagine a world where when somebody dies, the families were not required to go through a formal process for paying off the decedent’s mortgages, loans, etc. How could banks and mortgage companies get over the fact that when a person dies, they could be left high and dry? Furthermore, what if the distribution of property to each of the family members was not supervised? It would be chaos! You would have cage matches of siblings fighting over property without any legal supervision. The above are reasons that we have the probate process.

Do Wills avoid probate:
No! The process of probate is made a lot easier with a Will (Last Will and Testament), which is basically a roadmap for the judges and the attorneys to follow as the probate process progresses. Many people believe that a Will avoids probate. This is not true. Wills merely provide a roadmap for the probate process. Additionally, if you have minor children, a Will is where you would also state who should take your children in the case of you and/or your spouse were to pass away! Nobody wants a court to determine who will be the guardian of their children, which is what would happen if you died without a Will and no obvious guardian like a spouse, etc. So a Will is a good thing, but it is the very minimum that one should have as an estate plan.

Again, dying without a Will is known as dying intestate.” Dying intestate also uses the probate process but is made a lot more difficult because there is no roadmap/Will.

Methods of Estate Transfer:
Not all property needs to go through probate when one passes away. Generally, the assets can be transferred in four different ways. And if one has a great estate plan, the top three ways are how their assets pass:

  • By Contract: Think of a life insurance policy, annuity, or an IRA which has a named beneficiary or “payable on death.” Probate is generally avoided. (Note: If “Estate” is listed as the beneficiary, it will go through probate!)
  • Ownership Titling: Think of a piece of property owned “joint with rights of survivorship.” Or a piece of property owned by a “revocable trust” that has named beneficiaries. Probate is generally avoided.
  • Rule of law: Some states (nine of them) are “Community Property States” where property acquired during marriage is considered jointly owned by the other spouse. In these states, when one spouse dies, the other spouse gets all of that “Community Property”. Probate is generally avoided.
  • Probate!

The Probate Process:
For most estates, there is estate planning that can be done through the use of PODs (Payable on Death), TODs (Transfer on Death), beneficiary designations, and Trusts, that can completely avoid probate or make probate a very painless process. But, in the absence of such planning, what does the process look like?

Again, one can plan on a minimum of six months—at least in the state of Iowa—when it comes to dealing with the probate process. (Note: For smaller estates, there is a “Simplified Probate Process” that can be quicker.)

  • Hire an Attorney: In the state of Iowa, the probate process requires the heirs to work with a licensed attorney.
  • Open up the “Probate Estate.” This is the process of filing the Will with the district court in the county of residence, at least if there is a will. At that point in time a petition for probate is filed, and there is an executor that is appointed. The executor of the estate is somebody that was indicated in the Will. If there is no will, then the court will appoint the Executor of the estate. It is the Executor that manages the estate through the probate process until the end.
  • Notice must be sent to all beneficiaries that an executor has been appointed for the process of managing the estate.
  • Once the petition for probate is filed with a court, a “Notice of Petition for Probate” will need to be published in the newspaper where the deceased resided. That notice is basically a “Calling all creditors! Come and get your money.” It notifies creditors that if they have a claim to make against the estate, they must do so. In Iowa, they have four months from that point in time to make a claim against the estate.
  • The executor must also file an inventory of all of the assets with the court. As I went through a couple of decades ago, understanding what all the assets were, how much they were worth, where the titles were, etc., was a daunting task. Rifling through your loved one’s mail is not a fun thing to do. This can take weeks, or months.
  • After all the creditors have been paid off, the property can be distributed to the beneficiaries. This can be easier said than done if there is real estate and automobiles that need to be retitled.

The above does not even include the activities outside of probate, like filing final tax returns and paying any estate/inheritance taxes (if applicable).

Much of the above can be avoided by consumers speaking with a financial professional that understands estate planning. For instance, virtually every piece of property that my dad owned could have been owned by a Revocable Trust. This would have allowed him to keep 100 percent control of all of his assets but at the same time avoid any of the above probate processes.

What about the cost? In the whole scheme of things, a Revocable Trust can be very cheap. Depending on the amount of assets, the trust can cost anywhere from a few hundred dollars up to a couple thousand dollars. This is actually very cheap considering the cost of probate. In the state of Iowa, probate can range between two percent and five percent of the probate estate! The attorneys and judges do not work for free!

At a very minimum, you need a Will! In Iowa the Will must be “witnessed” by two competent people and also notarized.

Again, the Will is oftentimes the bare minimum as it does not avoid probate. Oftentimes a complete estate plan includes four items: 1. Revocable Trust; 2. Pour-Over Will; 3. Durable Power of Attorney; and, 4. Advance Directives (regarding care and end of life treatment). These documents are a topic for another article.

We are currently conducting an Estate Planning Webinar Series for financial professionals. If you find the above content useful, send me a message and I will add you to our invite list.

The Financial Arena

On a Tuesday morning in November, I took my car in for repair. All of a sudden it had begun displaying a series of warning lights and messages:

  • Check Brake System!
  • Check ABS!
  • Check VSC System!

Ruh-roh.

While I waited for the repairs to be done, I walked down the street to a Panera Bread restaurant where I met a friend. We enjoyed bagels and coffee and conversation.

The dealership called to say they needed to collect a replacement part from another dealership and that my car would not be ready for another three hours. My friend left and I stayed and got some work done.

A married couple in their seventies came in and occupied the booth next to me. They had a pleasant conversation between them about repairs they were making to their home in anticipation of putting it on the market. They were getting ready to move into a single level, smaller, courtyard home.

Then in walked a man wearing a Cincinnati Bengals cap, a Bengals shirt, and jeans. He said, “Hey Mom and Dad, been waiting long?”

Dad: “Nah. We looked for you in the stands during Monday night’s game between the Bengals and Bills. Were you there?”

Son: “We were. We loved the feel of the arena that night!”

(He said “arena.” I liked the sound of it. Very Roman.)

Dad: “What was it like when Damar Hamlin came out onto the field?” (Hamlin suffered a cardiac arrest during a Week 16 game between the Bengals and Bills in the 2022-23 season. This was the first time Hamlin had walked back onto the field where he nearly died.)

Son: “The crowd expressed great empathy and warmth for him. He seemed to reciprocate.”

Dad: “Amazing, and on top of that, it was a great game!”

Mom (Switching subjects): “Are you still getting married in January?”

Son: “Yes, for sure.”

Dad: “Thank you for coming to meet with us. Your upcoming marriage has prompted us to think about our finances and the plans for our estate.”

I am admittedly a Bengals fan and had listened to this point in their conversation with casual interest. Suddenly, when estate planning came up in the conversation, I began exercising my best ease-dropping skills.

Here is what I learned about the family:

  • The married couple has two sons.
  • The older son is very successful and owns a business he built from scratch.
  • The younger son, in Bengals gear, is not so successful. His first marriage ended in divorce. He has had a few different careers. The woman he planned to marry in January is not someone his parents are thrilled about.

Point: All financial and estate planning occurs within the arena of vital family dynamics.

The Financial Arena
The English word “arena” dates back to the 1600s and has its origins in the Latin word, harena, meaning “sand, or a sand-strewn place of combat.”1 According to the dictionary, the word “arena” has various definitions:

“1: an area in a Roman amphitheater for gladiatorial combats
2a: an enclosed area used for public entertainment
b: a building containing an arena
3a: a sphere of interest, activity, or competition, the political arena
b: a place or situation for controversy, in the public arena”2

Question: In what sense is there a “Financial Arena?”

Answer: In this sense: “a sphere of interest, activity, or competition.”

Point: Financial planning is an ongoing process designed to guide people to make sensible decisions in the sphere of money that can help them achieve their life goals by competing against forces like inflation and market volatility. The activities that happen within this arena include the following:

  • Establishing life goals–short, medium, and long term
  • Identifying current assets and liabilities
  • Evaluating the current financial position–and the distance remaining between now and to achieving financial goals
  • Developing the plan–creating a clear path for achieving specific goals
  • Implementing the plan–making the necessary spending, saving, and investing changes in order to make goals happen
  • Monitoring and reviewing the plan regularly and making necessary adjustments

Sidenote: In Orlando, Florida, on the main campus of the University of Central Florida, there is a sports and entertainment arena named “Addition Financial Arena.” It was constructed beginning in 2006 as a replacement for the original UCF arena. Addition Financial is a credit union with a history of helping clients for more than four score years. On May 1, 2019, CFE changed the arena’s name to Addition Financial. Effective beginning August 18, 2022, UCF announced that Addition Financial had extended their naming rights for the facility through 2034. The arena is home to the UCF Knights men’s and women’s basketball teams.

The Financial Arena Is a Scene of Contest
Allow me to return to the family I overheard at Panera discussing financial and estate planning decisions. Recall that there are two sons. There is also a finite estate that the parents intend to pass on to these two men.

I do not feel in any way unethically responsible for knowing the details of this family’s financial picture because they loudly, and openly, discussed this with each other after I was already in place before they came in and sat down next to me. (Who doesn’t enjoy a little eavesdropping with their coffee?) Listening to the conversation, however, I made specific mental note of these sometimes-controversial factors:

  • Dad retired and rolled over his retirement plan assets into an IRA now held by a large investment firm. He estimated the current value at $700,000. It was initially significantly higher, but they have been living off the IRA over the past several years.
  • The house is owned outright and has an estimated market value north of $500,000. When the couple acquire a smaller home, they expect to have no post-sale, post-purchase surplus left over.
  • Dad described having another significant account (nonqualified) being managed by an independent financial professional (IFP). He estimated the current market value to be in excess of $400,000.
  • Dad and Mom want to pass on their existing funds to their sons while alive and not in testamentary fashion.
  • Problem #1: They are not interested in their younger son’s second wife benefiting directly from their gifts. They demand that he have a prenuptial agreement that specifically excludes her from receiving his inheritance.
  • Problem #2: They are unwilling to take into account the comparatively disproportionate financial standing of their sons in the division of assets between them.
  • Problem #3: The older son and the couple’s IFP (a woman) had previously dated, and now totally dislike each other. He does not trust her and frequently asks his parents to move the money to an IFP he uses.
  • Problem #4: The older son was not present at this meeting. He, however, has instructed his parents to only give him financial gifts in years that would coincide with favorable investment market conditions.
  • Problem #5: The younger son thinks his older brother is so successful financially that a greater portion of the estate should go to himself.
  • Problem #6: The older son is the favorite offspring of both Mom and Dad and the younger son knows it.
  • Problem #7: There are no grandchildren. This is a problem because Mom believes without grandchildren there really is no lasting legacy. She would prefer to give the money to charity.

Point: A successful IFP must help clients navigate economic factors of course, but there are often familial factors, sources of intense emotional contest and conflict, which often prove much more intransigent.

Blood and Money
There is a reason why the word arena came from the Latin word for “sand, or sandy place.” The broad open areas of Roman amphitheaters were strewn with sand to soak up the blood.

In the Old Testament, in Leviticus 17:14 we read that “the life of every creature is its blood.” That is why God said to the Israelites, “You must not eat the blood of any creature, because the life of every creature is its blood; anyone who eats it must be cut off.” Blood equals life.

But then we hear the expression “bloodshed.” Bloodshed is the destruction of life, as in war or murder, slaughter. It is death.

Point: When engaged in the arena of financial and estate planning, the IFP must remember both aspects of life and death when helping clients make plans. Money has utility during life and must be properly and responsibly passed on at death. In both instances, the IFP must address a wide array of issues such as taxation, inflation, risk, and multiple alternatives for accomplishing stated goals.

Application
Returning to our family in Panera, how might an IFP begin guiding them in their estate planning goals?

  • Meet separately with the parents away from either son.
    • In this meeting, gain full understanding of how they feel about their investment advisors and management.
    • What will they need by way of income to last their entire lives?
    • How much should they retain in an emergency fund?
    • What principles are guiding their preferences? Specifically, why do they wish to treat each son equally? Why do they not want their future daughter-in-law to benefit from their son’s future inheritance?
    • Ask the parents if life insurance might be a way to accomplish estate equalization.
    • Is a Grantor Trust perhaps indicated by the family dynamics? A properly drawn trust could supplant the need for a prenuptial.
    • Should they consider their older son’s feelings about their IFP?
    • What gives them the greatest joy when they think about their financial legacy?
    • Is there an opportunity to achieve Mom’s charitable aspirations?
  • Meet with the sons together and with both parents present. At this meeting both sons need to know that they are beneficiaries and not benefactors. This means that:
    • They will receive the gifts and/or inheritance when and in the manner that Mom and Dad prefer.
    • They need to plan for how they will utilize these gifts, and what steps they will take to multiply the gifts’ effectiveness and extend their longevity.

Summary
The Financial Arena is not a place for the timid to go to find refuge and safety. Every seasoned IFP knows that it is frequently a place to battle economic, societal, and familial contenders.

President Theodore Roosevelt, who left office in 1909, delivered a speech in Paris on April 23, 1910, which would become one of the most widely quoted orations of his career. Although he had labeled it, “Citizenship in a Republic,” it would become widely remembered as “The Man in the Arena.” At 3:00 PM in front of the Sorbonne, where an estimated 25,000 people packed the streets, Roosevelt criticized people who have “an intellectual aloofness which will not accept contact with life’s realities.”

Dr. Brené Brown paraphrased Roosevelt’s speech in a TED Talk and used his phrase “daring greatly” as the title of one of her books.

As this article concludes, let us remember that our business is not conducted in the realm of theories, but in the actual lives of real people with real problems.

From “The Man (Person) in the Arena:”

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”3

For every IFP battling in the Financial Arena of sweat and blood, I applaud you and hold you in great esteem. Keep striving to do the daring deeds of assisting people in their quest to live financially successful lives.

P.S. The conversation between the son and his parents took a strange turn when he suddenly, and with a surge of energy, announced in non sequitur fashion, “I bought my future wife a gun!” Dad said he had much to say about this. At this same moment the dealership called and informed me that my car was finished. I almost hated to leave before I heard where the conversation was going to go next!

Footnotes:

  1. https://www.etymonline.com/word/arena.
  2. https://www.merriam-webster.com/dictionary/arena.
  3. https://www.mentalfloss.com/article/63389/roosevelts-man-arena.

Pioneering Technological Advances In Life Insurance Underwriting

Life insurance underwriting technology has undergone significant transformations in recent years, reshaping the landscape of the insurance industry. This evolution is driven by the integration of advanced technologies such as artificial intelligence (AI), machine learning (ML), big data analytics, and the Internet of Things (IoT). These innovations are not only enhancing the efficiency and accuracy of underwriting processes but also improving customer experiences and expanding the reach of life insurance products.

Traditionally, life insurance underwriting has been a labor-intensive and time-consuming process. It involved extensive data collection, including medical histories, lifestyle information, and financial backgrounds. Underwriters would manually assess these details to determine the risk profile of applicants and set premium rates. This process could take weeks, sometimes even months, leading to customer dissatisfaction and higher operational costs.

The advent of digital technology has revolutionized this process. AI and ML algorithms are now capable of rapidly analyzing vast amounts of data, including non-traditional sources such as online behavior, wearable device data, and even social media activity. This not only speeds up the underwriting process but also allows for a more nuanced understanding of risk.

Predictive analytics, a key component of modern underwriting technology, uses historical data to predict future outcomes. In life insurance, this means more accurate risk assessments. By analyzing patterns and correlations in large datasets, life carriers can identify risk factors that were previously unnoticed. This leads to more personalized insurance policies, where premiums are more closely aligned with the individual risk of the policyholder.

Automated underwriting systems (AUS) are another breakthrough. These systems use predefined rules and algorithms to evaluate applications. In many cases, they can approve policies instantly without human intervention. This automation not only speeds up the process but also reduces the potential for human error and bias.

The IoT and wearable technology are also playing a growing role in life insurance underwriting. Devices like fitness trackers provide real-time data on an individual’s health and lifestyle. This information can be used to offer more tailored insurance products, such as policies with incentives for maintaining a healthy lifestyle.

The integration of technology in underwriting has significantly enhanced the customer experience. The process is faster and more convenient, with many life carriers offering instant quotes and online applications. Additionally, the use of data analytics allows for more personalized policies, potentially leading to lower premiums for healthier or lower-risk individuals.

These advancements are not without challenges and ethical considerations. The use of personal data raises privacy concerns. Life carriers must navigate the fine line between leveraging data for better risk assessment and respecting individual privacy rights. Additionally, there are ethical considerations regarding data use and the potential for discrimination based on health or lifestyle data.

Swiss Re “Underwriting Ease”
The Swiss Re team has developed an underwriting visualization platform that will revolutionize the process between brokerage general agencies and carrier underwriters. I met Nanditha Nandy, SVP of Underwriting Solutions of Swiss Re, in 2023 at a LIMRA Conference. She later showed me a demo of Underwriting Ease. I was impressed because it wasn’t an underwriting workbench, yet it was a dashboard that provided all the necessary information to make it easy for an underwriter to make a decision. Dan McKinney, VP of Data Driven Underwriting at Swiss Re shared additional information about the platform. I believe this is a game changer in the industry.

Underwriting Ease enables the digital consumption and visualization of digital health data (DHD), expediting manual underwriting workflows for brokerage agencies and for carriers.

In recent years, the concept of digital health has gained significant momentum. The advent of digital health has allowed healthcare providers to deliver better patient outcomes, improve disease management, and reduce healthcare costs. The introduction of digitally generated health-related data such as medical records, biometric data, and personal health data, has opened up new opportunities across the life insurance industry ecosystem as well.

Data is one of the most valuable assets for the insurance industry. The underwriting process, which is used to assess an individual’s risk profile and determine the premiums they will pay, requires significant volumes of relevant data. Traditionally, BGAs and insurance underwriters used paper-based forms to collect information about their clients’ health history, lifestyle, and other factors. However, today, the advancements in digital technology and the ubiquity of digital health data have paved the way for a streamlined underwriting process, from initial application intake to policy issuance.

Digital health data is increasingly being used by agents and carriers to evaluate a client’s risk profile. However, the process of compiling and analyzing data and subsequently transferring that information can be time-consuming and cumbersome, requiring significant human effort. That is where the integration of digital health data into a visualizing SaaS platform comes into play.

SaaS, or software as a service, is a cloud-based model for delivering software applications over the internet. SaaS platforms can be accessed through a web browser, eliminating the need for locally installed software. The integration of digital health data into a SaaS platform can provide agents and underwriters with a clear and easy-to-understand visualization of a client’s health history and risk profile.

The benefits of integrating digital health data into a visualizing SaaS platform are many. Here are some of the advantages that can be derived for agents and carriers from this integration:

Improved efficiency: Integrating digital health data into the Underwriting Ease platform can significantly reduce the time and effort required to evaluate a client’s risk profile. Agents and underwriters can quickly and easily access relevant health-related data, reducing the need for manual data collection and analysis.

Accurate risk assessment: The use of digital health data ensures that agents and underwriters have access to a rich source of relevant data that can help them make accurate risk assessments. The use of the Underwriting Ease allows underwriters to identify patterns and correlations that might be difficult to detect otherwise, leading to more informed decisions.

Reduced costs: By eliminating the need for manual data entry, analysis, and interpretation, the integration of digital health data into Underwriting Ease can reduce the time and cost associated with finding the applicant the right carrier for their policy.

Enhanced customer experience: The use of Underwriting Ease allows agents to provide a seamless customer experience. Clients can simply provide access to their digital health records, reducing the need for invasive and time-consuming medical exams.

Increased transparency and trust: The use of Underwriting Ease in the underwriting process can increase transparency and trust between agents and carriers. Agents can see the data that underwriters are using to make decisions about their policies, leading to greater confidence in the process.

The integration of digital health data into a visualizing SaaS platform can also offer agents and carriers significant competitive advantages. By streamlining the underwriting process, agents can offer quotes and policies more quickly, improving their ability to attract and retain clients. Additionally, the use of digital health data can help agents and carriers identify potential health risks and offer personalized health and wellness programs to their clients. However, the integration poses a challenge–the development and deployment of robust data analysis and visualization tools. To derive meaningful insights from digital health data, carriers must have the right tools and expertise to analyze data effectively. Carriers that lack sophisticated data analysis capabilities may struggle to take full advantage of the opportunities offered by digital health data.

To address that challenge, Underwriting Ease seamlessly connects via API or embeds into existing underwriting workflows and works with any automated underwriting engine and underwriting manual. It was designed by underwriters, for underwriters, to help the industry to take a technological step forward without radically changing the fundamentals of underwriting. A confluence of the data that matters, delivered in a focused, user-friendly visualizer that has already normalized and simplified the data. It is a single page view of all the available underwriting data disclosed by type and source. Allowing the underwriter to drill into the information needed to assess the risk. Empowering and enabling the agent and underwriters, while delivering cost savings by reducing manual UW efforts by 50 percent.* Additionally, the reduced per case review will help to address any backload of cases that manual underwriting has caused in light of the current industry wide UW shortage.

The integration of digital health data through the Ease platform has the potential to transform the underwriting process for life insurance. By streamlining the process and providing agents and carriers with valuable insights, Underwriting Ease can help life carriers improve risk assessment, reduce costs, and provide a better customer experience.

An industry leader in the underwriting innovation space, Swiss Re and its team of subject-matter experts continue to advance its underwriting capabilities. Through research and analytics, we aim to advance the capabilities of underwriting shops with speed and increased cost efficiencies. Swiss Re can help carriers and clients in developing and implementing these capabilities. Learn more about Swiss Re Underwriting Ease by visiting https://www.swissre.com/reinsurance/life-and-health/solutions/underwriting-ease.html.

Life insurance underwriting technology is at a pivotal point. The integration of AI, ML, big data, and IoT is transforming the industry, making underwriting more efficient, accurate, and customer friendly. As the technology continues to evolve, it promises to further refine risk assessment and policy customization, benefiting life carriers, policyholders, and insurance advisors.

An Interview With Eugene Cohen—Disability Insurance And The Small Business Owner…Do You Have Them Fully Covered?

2009 Honoree International DI Society W. Harold Petersen Lifetime Achievement Award

2015 Honoree of NAILBA’s Douglas Mooers Award for Excellence

With the help of Victor Cohen, this is part of our ongoing series with Eugene Cohen, founder of the Eugene Cohen Insurance Agency, Inc., 2009 Honoree International DI Society W. Harold Petersen Lifetime Achievement Award, 2015 Honoree of NAILBA’s Douglas Mooers Award for Excellence.

From time to time we will feature an interview with Eugene, who has dedicated 60 years of his life to learning, teaching, and supporting brokers in the agency’s quest to help consumers protect their income from the tragic effects of a disability.

Disability insurance (DI) is one of those products that can change the trajectory of an individual and a family’s life and is crucial for every financial planner and insurance professional to learn about and offer to clients.

Victor: We’re going to focus today’s conversation on what I know is one of your very favorite disability insurance topics—the small business owner.

Eugene: There are so many fantastic disability insurance products designed just for the small business owner. It’s exciting.

Victor: When you say, “small business,” how are you defining a small business?

Eugene: We’re talking about a business with usually anywhere from eight to twelve full-time employees. But it could have less. Here are some examples of the kind of small businesses we mean—a small clothing boutique, a small accounting firm, a small dental practice, law practice, architecture firm, an engineering firm, a small restaurant. The list of businesses is endless.

Victor: What makes the small business owner’s DI needs so different than let’s say a non-business owner’s DI needs?

Eugene: Great question. Let’s take a closer look at the small business owner. They have worked hard to build a business. They invested dollars and/or may have taken out a loan. The owner has often put in endless hours—night and day to develop and build their successful business.

That business may be the most valuable asset the owner has. It could be more valuable than their home and automobile. That business needs to be protected.

I want you to close your eyes and imagine what would happen to that business owner—the power that makes the business run—if they became disabled due to becoming hurt or sick? What would happen if they were out of work for six months, a year, maybe two years?

Victor: The business would likely be in trouble.

Eugene: That business could suffer terribly. It could even go away. But…it doesn’t always have to be that way—not if a business owner has perhaps a business overhead expense policy.

Victor: This is in addition to having an individual disability insurance policy, right?

Eugene: Absolutely. An individual DI income protection policy will take care of some of the business owner’s personal bills, what I call “Life’s noncancelable financial obligations.” We all have those expenses, regardless if one is a business owner or non-business owner.

We’re talking expenses, such as monthly rent, or a mortgage payment, utilities, groceries, loan payments, car payments, insurance premiums…those life expenses that keep coming. Every month.

Let’s say your client has an individual disability insurance policy with a monthly benefit of $10,000. With the premium being paid with after-tax dollars, the benefit will be most likely tax free.

I think of an individual disability insurance policy as a client’s silent business partner. It’s working when the owner can’t work because of their disability.

It’s very important to have those life expenses covered with an individual DI policy. But remember, your client is a small business owner. So what other expenses do they have?

Victor: Business expenses that they can be responsible for?

Eugene: Right—what I call, “business noncancelable financial obligations.” The monthly office rent, utilities, employee salaries, property and payroll taxes, perhaps rental equipment, and other qualified expenses.

A business overhead expense policy may even perhaps allow the salary of an employee hired to take on the owner’s duties while the owner is disabled, as a possible eligible expense. Of course, this would depend on the policy provisions.

The business overhead expense policy provides reimbursement of qualified monthly eligible fixed business expenses, like the ones I just mentioned and other expenses.

Visualize this. You have a client who owns a boutique clothing store with six employees and a store manager. The owner is the buyer, the owner is the store’s top salesperson, the owner trains and supervises their employees and the owner has other important responsibilities.

If the owner became sick or hurt, revenue could slow up substantially. It’s possible that the business could have a hard time surviving without the owner.

Soon, those bills would start rolling in. The business overhead expense policy will cover qualified business expenses for a short time—typically paying benefits for twelve months, eighteen months, or twenty-four months—depending on the benefit options offered by the carrier and of course chosen by the policyholder.

When I started my agency, I had to sign an office lease to guarantee the rent. I realized how important it was to have a business overhead expense policy. I already owned a disability income protection policy, but wanted a policy to assist with the office expenses I was assuming.

Victor: Another specialized DI product for business owners is a disability key person policy. Why do you think that is often important for a business owner to have?

Eugene: Many times a business owner will have an extremely important person working at their business—a key person critical to the success of the business. Often, this person has been with the business for a long period of time. If that key person were suddenly not working due to a disability, that could hurt the business tremendously.

Take a small computer company for example with a top salesperson with the connections and relationships that account for a large percentage of the company’s sales. If that key person were seriously disabled due to a sickness or accident, it could create a financial crisis for the business. To help protect a business owner from this type of situation, many business owners purchase a key person DI policy on their key employee.

The business owns the policy, with the business owner paying the premium.

If the key employee were to get sick or hurt with a qualified disability…after the policy’s elimination period, typically, the benefit would be paid to the employer and could be used for various purposes such as to hire and train a new employee to replace the disabled key person.

Victor: Eugene, I can’t believe how fast this conversation has flown by. Unfortunately, we have to wrap things up. Can’t thank you enough for sharing your invaluable insights.

Eugene: Thank you, Victor. Always a pleasure.

Victor: Are there any final thoughts you would like to add before we meet next time?

Eugene: In situations where you have two or more owners of a business, I highly recommend looking into disability buyout insurance policies for the owners. Just like a life buy-sell agreement may be funded by a life insurance policy, there is a disability buyout insurance product. When a business partner has a significant total disability which triggers the buy-sell agreement, the disability buyout policy could provide funds to assist in the buyout.

We encourage producers to talk to their disability specialists and learn about these products because they are often extremely important for small business owners to own.

A Blind Eye

In a distant past presentation I would begin by suggesting that you could take a prospect gently by the hand, lead them to the edge of a bottomless pit of risk and they would invariably ignore the obvious. The situation may have gotten a little better in 20 years but not much. A recently published consumer survey on the Affordability of Long Term Services and Supports from KFF Health news and the New York Times, November 14, 2023, again lays bare Americans’ stunning and at this point legendary ability to avoid what remains as our largest unprotected risk. We know the real burden falls on the caregivers yet half of those surveyed had ever talked to an aging loved one as to who will care for them when the time comes. Even fewer had ever discussed how in the hell that care would be paid for and 43 percent were unsure how they would pay when it does hit. I know many of us have grown hoarse screaming about the frustration of dug in consumer resistance. This research pours a large quantity of salt into that open wound.

“The overwhelming majority of adults say that it would be impossible to pay.” Ninety percent regard the estimated $100,000 for a nursing home or $60,000 from assisted living cost as a bill they have little chance of paying!

And to put a fine point on it the survey also concludes:

  • As has been repeated over and over again almost half of those surveyed still believe Medicare will pay.
  • 62 percent had difficulty even finding a facility to meet their needs.
  • A substantial number were unhappy with the care they could locate.
  • Half of those surveyed outlined the cost that splashed back on the family or loved ones providing care.
  • Much of the care provided in America is delivered with love but without compensation.

The truth blazed across the sky is Americans remain unprepared. Perhaps we need to reiterate the obvious in some form of financial braille. Why do we continue to hear a cane tapping down an empty hallway? The brick wall is real. What must be done to expose the solidity of that barrier? Medicare pays a very limited amount and the balance is shared between private sources and state run Medicaid. Consumers know they are unprepared and that the burden is likely to fall on them directly. Four in ten surveyed lacked confidence that they would be able to pay. Fewer than half surveyed had ever even had a conversation with their loved ones about who would care for them or how it would be paid. Two-thirds surveyed felt anxious about affording care when needed. There was a clear socioeconomic component to the findings suggesting the obvious that as average income fell, anxiety and stress compounded. The “statistic” we know all too well is that fewer than half were doing anything to even try to plan ahead.

What rattles me the most is that we could have, exactly like a brilliant contestant on Jeopardy, anticipated these responses . There are no revelations here we have not seen before. I am not going to give in, without some reservation, to the temptation that we may have always been plagued by the blind leading the blind. From reinsurance to claims adjudication a handy blind eye may have impaired our ability to see the true nature of the risk or unveil the depth of perception required to avoid the obstacles we know remain in our path.

Other than that I have no immediately visible opinions on the matter.

Naked

When I think of my friend Stephen Moses I imagine him as the proverbial town crier, speaking loudly with the courage of his convictions, who begins with what should be obvious that the earth is indeed not flat but concludes with the airtight conclusion that the Emperor has no clothes. Stephen was my first guest speaker in 1999 and the ingredients of his recipe to end the current long term care funding madness were already in the pot to boil. He was already clearly explaining that perhaps some of our basic assumptions concerning the source of our industry’s lack of sales success was our lack of understanding the true nature of the problem itself. That the threat of impoverishment was an illusion. That Medicaid was welfare which should be its only purpose. That perhaps a re-examination of our myopic vision of the risk itself must be at the beginning of potential reform. With assistance from the good folks at Paragon Health Institute he has recently released what can only be described as a very compelling manifesto based on a life of service to the same “Cause” I have attempted to chronicle in these columns for the last 20 years. Long Term Care: The Solution, October, 2023, should be mandatory reading for all stakeholders in the continuing struggle to blunt the still largely unprotected risk facing far too many Americans. In his previous work Long Term Care: The Problem 2022 and his preface to suggested reforms in the current work he carefully chronicles how we got here.

  • There has never really been a visible risk for consumers. How in the hell did we expect sales success in that environment?
  • The only real fuel burning anyone’s motivational fire is the robust and growing fire of state Medicaid costs. What’s worse is we sent out firefighters without sufficient water to change the course of events on the ground. The whole concept of possible mandatory impoverishment was pure fraud.
  • What’s even more crazy is the government kept trying to return the cost and risk to the middle class. As an example, extending the look back period to five years. Those who could and should pay, however, continue to slip the noose. We still have massive fraud in Medicaid usage to pay for inevitable custodial care.
  • Low interest rates only temporarily masked the financial pain which is returning to the political forefront. Experiments in yet another payroll financed social insurance cannot succeed as proposed. What the fire sale in Washington State has demonstrated is that, when the risk is clearly standing before you, private insurance will be the overwhelming first choice.
  • As long as Medicaid pays for the middle class to shelter assets, the solution to the long term care conundrum shall remain caught in a financing trap of our own making.

Stephen has laid out a blueprint that attacks the problem at its core. He has once again boldly confronted what might be best described as the Naked Truth. Lawmakers must take practical actions to stop the State funding mechanisms. Severe and definitive actions need to be taken to finally alter the current failed trajectory.

Step One: Eliminate the Moral Hazard. Shut down all planning tools used to avoid personal responsibility—to include purchase of exempt assets, eliminate home equity exemptions, prohibit asset protection trusts and Medicaid compliant annuities. And perhaps most importantly extend the look back period to 20 years and then “monitor and enforce compliance.”

Step Two: Publicize the now exposed true risk.

Step Three: Reconceptualize the actual size of the risk.

Step Four: Proselytize affordable planning at younger ages.

Although the obvious solution is to tighten and reinforce the fences around our unique risk encampment, these proposals must appear somewhat draconian. As an old cattleman I know you must maintain effective fencing perimeters and nothing works better than new barbed wire. If those within the wire are to prosper they must accept that the only exit is single file with only one gate in the corner.

If by some miracle there were to arise the political will to actually fix a broken funding system, Stephen has provided a clear and precise blueprint to make a real difference.

Other than that I have no opinion on the subject.

AI Dominates Discussions At Major Industry Conferences

I typically attend 15 to 20 industry conferences annually, spanning two main sectors: Insurance and Technology. The stretch from October to early November this year was a grueling conference schedule. My journey began in Tampa, FL, at the Life Insurance Direct Marketing Association (LIDMA) fall conference and business showcase. From there, I traveled to Portland, ME, for the International DI Society (IDIS) Annual Conference, followed by the LIMRA Annual Conference in National Harbor, MD.

During this time, there were other overlapping industry events that I couldn’t attend. However, as October transitioned into November, I was committed to participating in both Insuretech Connect (ITC) in Las Vegas and the NAILBA/Finseca Conference in Florida. To manage this I had team members present at both locations and I personally attended portions of each conference, taking a redeye flight from Las Vegas to Florida to make it possible.

A striking commonality across these conferences was the focus on AI technology. Whether it was a major topic in a session, a highlighted feature of an exhibitor’s platform, or a subject touched upon by nearly every speaker and panelist, AI’s presence was unmistakably pervasive and central to the discussions at these events.

LIDMA Business Showcase
I have attended LIDMA conferences since the time I worked at Genworth going back to 2011. It’s been one of my favorite conferences because of the format, locations, and the attendees. At the LIDMA conference this year, several pivotal sessions highlighted the role of AI in the industry. These included:

  1. The Future of Marketing: Harnessing AI and Digital Strategies in Life Insurance—This session focused on integrating AI with digital marketing tactics specifically tailored for the life insurance sector.
  2. Navigating AI Regulation and Risk Management: Essential Updates and Strategies—This discussion centered on the latest developments in AI regulation, addressing how these changes impact businesses. It also covered strategies for mitigating risks related to regulation, litigation, and reputation.
  3. The Evolution of Automated Underwriting: A Look from Past to Future—This session provided an insightful journey through the history, current state, and future prospects of automated underwriting in the industry which included AI.

LIMRA Annual Conference
The LIMRA Annual Conference saw an impressive gathering of industry leaders, offering excellent opportunities for networking, and featured 22 sessions encompassing all the critical topics in the life and annuity sector. Notably, seven of these sessions at the conference were specifically centered around Artificial Intelligence. Below are four of the seven AI sessions that had some very game changing information:

The Modernization Journey—Investigating Technology Investments for a Competitive Edge:
LIMRA and EY recently partnered to explore technology investments and future priorities of life insurance companies aiming to achieve competitive advantages. Join this session to gain valuable insights into the modernization journey of life and annuity carriers. We will explore the key challenges and complexities faced by these carriers in areas such as product development, marketing, sales tools and illustrations, underwriting, and claims. Furthermore, we will explore their current and future technology investments including advanced analytics, digital customer experience, core legacy systems, blockchain, and AI—and how they can provide a competitive edge.

Step Into The Future Harnessing the Potential of AI:
Experience the excitement surrounding Generative AI and ChatGPT in reshaping the industry landscape. Explore the rapid growth and limitless potential of these ever-evolving technologies, while tackling the challenges of legacy infrastructure. Hear from a panel of experts with diverse perspectives on navigating this intersection of innovation and practicality. Don’t miss this opportunity to expand your knowledge on this extraordinary topic and stay ahead of the curve.

A Canadian Perspective—Driving Growth in a Changing World:
As our industry continues to evolve, consumer expectations and economic conditions are shaping how business leaders are making key business decisions to fuel growth. Join us for an in-depth panel discussion of industry leaders and executives to learn about how technology, innovation, regulation, and other factors are impacting and reshaping the marketplace.

A Human Industry in an AI World:
The world is on the precipice of an AI revolution, a seminal technology moment the likes of which we have never experienced. AI brings with it the limitless possibilities to fundamentally reshape our industry across the entire value chain. Are we equipped to mitigate the risks? Are we able to capitalize on the opportunities? How can machines actually help us focus on the Human Factor within our industry? Join us as we delve into the role of artificial intelligence to learn more about the associated risks and opportunities that will shape the industry’s future.

(IDIS) International DI Society Annual Conference
The one conference that did not center its topics on AI was the IDIS conference. Instead, it offered a variety of sessions with different focuses. Key highlights included: Claims Stories: This session brought together experts to share insightful narratives and experiences related to disability insurance claims. Expert Insights on DI Sales: This presentation provided valuable strategies and tips from seasoned professionals in the field of disability insurance sales. The Current Landscape of the Disability Insurance Industry: A comprehensive presentation that offered an array of compelling statistics and insights into the state of the disability insurance sector. Motivational Speaking: The conference featured an inspiring motivational speaker, adding a dynamic and uplifting element to the event. The Magic of Behavioral Finance by Theron Schaub: This session stood out as particularly engaging. It uniquely combined entertainment—with actual magic and hypnosis—and practical applications of behavioral finance in business, making it a memorable and informative experience for attendees. Yes, this event was much more insurance focused than technology.

NAILBA Annual Conference
NAILBA/Finseca is one of the year-end industry conferences everyone looks forward to including me. It was a great event again this year. At the NAILBA Annual Conference, a notable breakout session titled Generative AI: What it is and what it means for the insurance industry was presented by Roy Goodart, VP of Product Management at iPipeline. This session delved into the intricacies of generative AI and its implications for the insurance sector.

Additionally, the conference featured a prominent panel discussion on the main stage, Artificial Intelligence and the Future of Life Insurance: The practical, the problematic, and the potential. This panel brought together a formidable group of industry leaders, moderated by James Wong, EVP of Partners Advantage. The panelists included Mark Holweger, president and CEO of Legal and General America; Michelle Dauphinais, VP, Head of Distribution at John Hancock Insurance Company; Harsh Singla, CTO of Integrity Marketing Group; Amanda Soho, CTO of Proformex; and Chris Orestis, president of Retirement Genius. They explored various facets of AI in life insurance, from practical applications to potential challenges and future possibilities.

The influence of AI was also evident among the technology exhibitors at the conference. Many showcased how AI is integrated into their platforms, demonstrating its growing significance in the industry. My company, InsurTech Express, was also present with a booth at NAILBA. We engaged in discussions about insurtech solutions incorporating AI for life insurance, highlighting our commitment to staying at the forefront of technological advancements in the sector. I felt it to be necessary to highlight how AI was a key component in some software solutions because it’s the hot topic of the moment.

Insuretech Connect (ITC)
The largest global insurtech conference of over 9,000 attendees gather every year in Las Vegas. This conference is very for heavy P&C insurance. The day before the conference there are kick-off summits that focus on life insurance: Sureify’s Life Insurance & Annuity Ecosystem Summit and Equisoft’s Life Insurance Lab. Yes, AI was discussed at these kick-off summits.

ITC had a Masterclass: A Deeper Dive into Generative AI for Insurance. Some of the key sessions were focused on AI, like: Preparing for the Data Evolution: Organizational Readiness to Maximize Analytics and AI Investments. Data and analytics offers great opportunities for insurance, but most insurers are still building out a foundation that’s needed to optimize these investments. This is challenging in light of economic pressures, talent shortages, new hype around emerging technologies such as Generative AI, and difficulty in measuring business impact. The fireside chat discussed trends and opportunities around the use of analytics and AI in the industry. These contributors were Mano Mannoochahr, chief Data and Analytics Officer at Travelers, and Kimberly Harris-Ferrante, vice president and Distinguished Analyst at Gartner.

Embedded Insurance of the Future: Turning Lessons Learned into New Innovations presented by Milliman was another AI session at ITC. What will embedded insurance look like over the next two decades? With huge technological advancements from Generative AI and LLMs to self-driving vehicles and smart cities—front-end insurance quoting and underwriting have been automated, further enabling the sale of embedded products and services across industries. The session demonstrated how we can apply lessons from the past to innovations of the future, with personalized pre-fill data, tech, and AI to seamlessly provide insurance.

Considering the hundreds of tech exhibitors at ITC, it’s no surprise that a significant number showcased AI technology integrated into their insurtech solutions. The reality is that AI is now a ubiquitous topic, discussed in contexts ranging from personal to business realms, far beyond just the insurance industry. It’s becoming increasingly clear that AI is set to revolutionize the world as we know it. Yes, this last paragraph was rewritten by ChatGPT…

Don’t Miss Your Opportunities During Enrollment Season

Individual Disability Insurance And Lost Opportunities To Help Your Clients!

When you hear, “the end of the year,” many of us think about Thanksgiving and the holidays while others think about enrollment season. They both can be fun depending on your point of view. For us, Thanksgiving is a wonderful family get together, the food, the football, and the conversations. For many firms, it happens to be enrollment season as well. Our other most-favorite time of year.

Many corporations have their annual enrollments for their benefits at the end of the year. The choices that one needs to make during this time can cause a lot of indecision as to the right benefits to take for a family. At the end of enrollment, the employees go back to their daily routines and the benefits departments start their mad dash getting ready for benefits to start at the beginning of the year.

For employee benefit producers, the opportunity to help clients is tremendous. We are assuming that most producers would recommend taking long term group disability (LTD) coverage to go along with other company benefits being offered. Employee benefit clients offering LTD may have employees who have additional “DI carve-out” needs as well.

We know when employers pay for the LTD benefit for their employees, the benefits are most likely taxable at claim time unless some other arrangement is made. We also know that LTD is capped at a certain amount, regardless of the employee’s income. This leaves many employees getting a net amount of benefit which can be significantly lower than they anticipated. In addition, depending on the provisions in the group LTD, some business owners who receive passthrough or K-1 income may discover their group LTD benefits could be reduced or not available at all.

Individual disability insurance is the answer for employees who are capped out on their group disability insurance. This is a very large marketplace that we see producers miss year after year. Any high-income earner who has group coverage or owner of a business is a client for individual plans. Higher income earners tend to have higher expenses to support their own and, more importantly, their family’s lifestyle. High-income earners tend to also be in need of other products that many of our firms support. From life to property and casualty, the opportunities can be endless… all from asking the right questions.

“What’s the longest vacation you’ve ever taken?” Most likely two weeks or less will be the answer. One may ask, “Why didn’t you take a longer one? If you had a sickness or accident that kept you from coming back to work, how would that affect you and your family?” A client may say that this is why the company gave group disability coverage at work. It’s important, actually very important, to keep asking questions. This is where many producers stop. You want to ask your clients if they know how much monthly benefit they have with their group LTD. Also, you need to ask them if they know that the monthly benefit could be taxable if there were a claim. Most likely they may not know, which will open up the reason for the conversation and the problem that can be solved with individual disability insurance.

Many high-income earners have a gap in coverage that they may have never even known about without someone asking the right questions. Questions can uncover need, and need, when identified, can prompt action to solve the problem. The need for individual disability insurance in this example is to fill in the gap between one’s estimated monthly living expenses and the estimated “net after taxes” income that would be paid by a group or other type of disability insurance for a qualifying disability.

Any producer who has clients going through the enrollment process has an opportunity to help their clients. Many times a client may even ask their producer about what benefits they should choose. So, during the enrollment season, don’t forget to mark your calendars in January and February to do an enrollment review with your clients. You may be surprised by what you find!
We wish you and your families a happy and healthy new year! Here’s to a great 2024!

Options For Decedent IRAs And Inherited NQ Money

Both of my kids play basketball at least 300 days a year. If it’s not the time of year for school basketball, then they are participating in AAU clubs. If they are not doing AAU or school ball, they are in the gym by themselves. For those of you that have (or had) young athletes, you know the amount of transporting kids, coordinating tournament schedules, etc., that happens. And everything is always evolving: What shirts they should wear at a certain tournament, who is bringing snacks, who is sponsoring what event, etc. With that, sometimes it’s so overwhelming that I just declare mental bankruptcy. That is, I erase all the minutia from my mind and tell my wife, “I will just go where you tell me to go.”

That is analogous to what has happened with many agents over the last five years or so when it comes to inherited IRAs, as well as inherited non-qualified annuities that have deferred gain. We had The Secure Act of 2019 that squashed the “Stretch IRA” in many situations, then we had the uncertainty around RMDs and the 10-year rule that the IRS keeps going back-and-forth on, now you have secure 2.0, and the list goes on. I have found that many financial professionals that work with annuities have just declared mental bankruptcy and figure they would navigate this bridge once they approach it and once the dust settles. Needless to say, that may not be a great strategy. So, I will briefly simplify the options below.

What is a Stretch?
I will oversimplify what a stretch IRA is first. Quite simply if one has $1 million in IRA money and passes away, for the beneficiary to cash out that entire $1 million in the first year, it’s not inconceivable to lose $400,000 right off the top. Hence, the inherited $1 million immediately goes to $600,000. Conversely, with a Stretch IRA option that existed prior to 2020, you can stretch that tax liability out over the beneficiary’s lifetime by just taking annual required distributions (based on a table). If you think of the way that compounding works, if the beneficiary’s required distributions in the early years are only three or four percent (based off the table) of the total value but yet the annuity is growing at five, six or seven percent, the beneficiary’s $1 million is not being reduced, it is getting larger and larger up to a point. So, over a 30-, 40-, or 50-year lifetime, that $1 million could very easily generate $2 million to $5 million in additional wealth to that beneficiary by “stretching” the tax liability. In 2019 Congress decided this option would no longer be available for many beneficiaries of IRAs when death happened in 2020 or later. So, let’s explain what the options are today.

Non-Qualified Stretch: What Changed?
Let’s forget IRA money for a second. If one passes away with a non-qualified annuity that has a significant amount of accumulated interest in it, what is taxable to the beneficiary? Well, if the beneficiary just cashed it out, the entire gain would be taxable in that year. However, congress has allowed for the gain to be “stretched” by utilizing the same life expectancy table as the Stretch IRA. What happened to this option with the recent legislation? Nothing. This still exists for most beneficiaries of that annuity today!

Many agents come to me as they are working with the beneficiary of a non-qualified annuity where the original owner just died. They often ask if they can move the inherited non-qualified money to another carrier. The answer is yes. Just note that as far as doing a 1035 of a non-qualified stretch IRA–after death has happened–not all companies accept it. Ask your IMO who does and who does not.

Stretch IRAs with Death Before January 1,2020: What Changed?
For “Decedent IRAs” where death happened prior to January 1, 2020, and the beneficiaries are currently “stretching” the IRA, nothing has changed. Basically, this money is “grandfathered in” and can continue to be stretched. However, again, not all companies accept Stretch IRAs to be transferred into them, regardless of when death happened. Some do, however.

Decedent IRAs with Death on or After January 1, 2020: What Changed?
This is where the changes happened. The Secure Act introduced us to two classes of beneficiaries: Eligible Designated Beneficiaries and Non-Eligible Designated Beneficiaries.

Class 1: Eligible Designated Beneficiaries which are designated beneficiaries of the IRA that are also:

  • A spouse, or,
  • A disabled beneficiary, or,
  • A child who has not yet reached age 21, or,
  • A chronically ill beneficiary, or,
  • A beneficiary who is not more than 10 years younger than the owner.

For this group, the Stretch IRA option still exists. However, for the spouse, he/she will usually leverage the additional option that the spouse has always had, to take it over as her/his own IRA (Spousal Continuance). So, for the spouse, the Stretch IRA is rarely used.

There is also an exception for the minor child who hasn’t reached age 21 yet. This exception says that once he/she hits age 21 then he/she must continue those RMDs, with a catch! He/she must completely empty the IRA by December 31 of the 10th year after he/she turns age 21. In other words, once he/she hits age 21, they are subject to “The 10-Year Rule.”

(Note: Money passing on to siblings often can be “stretched.” That is because oftentimes the sibling is not more than 10 years younger than the deceased.)

Class 2: Non-Eligible Beneficiaries which are designated beneficiaries of the IRA that are basically everybody else not on the previous list. For example, a 50-year-old son or daughter that has been named as a beneficiary.

For these folks, if the original owner died on or after January 1, 2020, then they are subject to the “10-Year Rule.” Again, if the original owner died prior to January 1, 2020, then they could have chosen the stretch. The 10-year rule says that they must cash out the entire balance of the IRA by December 31 of the 10th year after death. No more stretching over life.

Here is a question and a source of confusion that the IRS has gone back and forth on: For our Non-Eligible Designated Beneficiary, do they have to take Required Minimum Distributions in years 1 through 9? It depends. It depends on if the original owner was taking their required minimum distributions. If the answer is yes, then the answer is “yes, you have to take RMDs in years one through nine.” The RMD for the original owner must be satisfied in the year of death. But, thereafter, the RMDs are based on the beneficiary’s life expectancy reduced by one for each year that goes by. In short, if the owner was required to take RMDs, then the beneficiary will be required to as well, until they fully liquidate the account by the end of year 10. As Ed Slott says, “If the original owner had to turn on the RMD spigot, then that RMD spigot must continue, even after death.”

In the example, if the original owner had not yet been taking their RMDs, then no RMD is due from the beneficiary. However, of course the beneficiary would still need to liquidate the entire account by the end of the 10th year.

What about transferring the Decedent IRA that is subject to the 10-year rule to another annuity company? Can you do this? Yes you can but, as you might guess, some companies accept Decedent IRAs subject to the 10-year rule, and some don’t. For those that do accept it, they oftentimes will only allow it for certain products (with less than 10 surrender periods). Again, speak with your IMO.

What about Inherited Roth IRAs?
The 10-year rule applies. What does not apply is the RMDs between year one and nine for the beneficiary. This is because the original owner of the Roth IRA would never be subject to RMDs with a Roth.

This article is not all-encompassing as I did not get into recent RMD relief, estates as benes, the lump sum options, trusts as benes, etc. However, this should give you a fairly decent roadmap. If you would like a chart that lays this out “at a glance,” let me know.

Fine

“Fast is fine, but accuracy is everything.”—Wyatt Earp

“It is a fine thing to be honest, but it is also very important to be right.”—Winston Churchill

While reading in the Old Testament book of Exodus, my attention was riveted by the simple word, “fine.” For context, Moses successfully led the people of Israel out of Egypt, and they began their forty-year wanderings in the wilderness.

In Exodus 16, after one and a half months in the wilderness, the hungry, tired, and worn-out people of Israel began grumbling against their leaders: Moses, and Aaron. If you know this story, you are aware that God heard their complaints and began providing sporting fowl (quail) each evening, and something called “manna” each morning.

For us living 3400 years later it is hard to know what manna was like. Even back then it was a bit of a puzzle. “When the people of Israel saw it, they said to one another, ‘What is it?’ For they did not know what it was.”1

We read this description of manna: “In the morning, dew lay around the camp. And when the dew had gone up, there was on the face of the wilderness a fine, flake-like thing, fine as frost on the ground.”2

There it is. “Fine.” Repeated twice. The Hebrew word translated “fine” is Daq. It means a “very little thing, small, thin.”

Point: On occasion we benefit from taking a commonly used word and examining its application to our business practices, our personal character, and to the impact that we are having on others.

Financially Fine
How do we as independent financial professionals (IFPs) use the word “fine?”

I consulted a dictionary to learn the various meanings of the word. It is polysemous. (Like “run” or “bank” it has several meanings). Consider some of these various definitions of the word “fine:”3

  • All right, well, or healthy: not sick or injured
  • Superior in kind, quality, or appearance: excellent
  • Very small, very thin in gauge or texture
  • Very precise or accurate
  • Delicate, subtle, or sensitive in quality, perception, or discrimination

Let’s ask ourselves three very fine questions:

  1. Can we categorically state that our clients are doing fine? (All right, well, or healthy.)
  2. Can we describe the planning that we do, and the products that we recommend, as being fine? (Superior in kind, quality: excellent.)
  3. Do our clients experience the attention we pay them as being fine? (Very precise, detailed, accurate, discriminating, perceptive, of high quality.)

“We’re Fine”
As an IFP, you want to know how your clients are doing. At. All. Times. But how?
Here are several ideas:

  • Talk to them. With current technology, it is even easier to talk with our clients because we have countless ways to connect to one another. When we talk with a client, we should not be afraid to get a little bit personal. Fine means healthy, and that extends beyond just financial wellbeing.
  • Follow your clients across all social media platforms. You will discover that they are eager to post important events, milestones, celebrations, new purchases, and sometimes–they grow silent. That is when you really need to check in on them.
  • Remind yourself of their goals, dreams, and objectives and keep these same ideas in front of them. By doing so you become known as someone who is worth doing business with.

Point: Frequent, intentional, client-centered contact is the only way to know if your clients are fine.

“These Are Fine!”
An IFP delivers excellent service and products when the clients’ expectations are met or exceeded. How do we know when we have met that test?

  • Customer retention will tell us. If we are a fee-based practice, are our clients willing to continue to meet with us and pay the fees?
  • Repeat business is key to knowing that we enjoy continued trust.
  • Measure the clients’ enthusiasm with surveys.
  • Take client complaints seriously.
  • Measure client satisfaction by percentage of new clients earned through referrals.
  • Track the number of attorney, accountant, and insurance professionals you get introduced to by satisfied clients.

Point: It is easy to delude ourselves that we are providing fine, excellent service and products. Our beliefs need verification.

“Fine Work!”
Nobody likes to have someone else look over their shoulder. Being inspected or audited is uncomfortable. The regulatory environment in which IFPs operate demands that we invite scrutiny. We need to know that our recommendations and financial reviews are both precise and accurate. Like scientists.

“Precision and accuracy are two ways that scientists think about error. Accuracy refers to how close a measurement is to the true or accepted value. Precision refers to how close measurements of the same item are to each other. Precision is independent of accuracy. That means it is possible to be very precise but not very accurate, and it is also possible to be accurate without being precise. The best quality scientific observations are both accurate and precise.”4

Think of the game of darts. The goal is to hit the bulls-eye (center) of a dartboard.

  • The closer that the dart lands to the bulls-eye, the more accurate the throw is.
  • If you throw two darts and they are neither close to the bulls-eye, nor close to each other, your throws are neither accurate, nor precise.
  • If all of the darts you throw hit the board very close together, but far from the bulls-eye, there is precision, but not accuracy.
  • If you throw four darts and all four land an equal distance from the bulls-eye, your throws are accurate, but not precise
  • If the darts that you throw land close to the bulls-eye and close together, there is both accuracy and precision.

Point: Your service and the products that you recommend must be both precise and accurate. Your clients’ goals and objectives are the bulls-eye. Helping them reach their goals is the way to measure precision. Their risk tolerance, budget, and willingness to accept loss are each to be considered as a measure of accuracy.

Summary
When I checked where else in the Old Testament the Hebrew word Daq, translated “fine,” might appear, I was surprised and delighted with what I found.

In the book of 1 Kings, chapter 19, we find the prophet of God, Elijah, fleeing for his life. (He discovered that it is dangerous to criticize the King and Queen). He hid in a cave. God said to him, “What are you doing here, Elijah?”4 Then, “Go out and stand on the mount before the Lord.” And behold, the Lord passed by. Theophany can be startling because it is not what we would expect.

  • First, a great and strong wind tore the mountains and broke in pieces the rocks before the Lord, but the Lord was not in the wind.
  • Second, an earthquake shook the ground, but the Lord was not in the earthquake.
  • Third, fire blazed in scorching heat and flame, but the Lord was not in the fire.

No, after the strong winds, earthquake, and fire, there came the sound of a low whisper. (Literally, a fine silence.) God showed His presence in near silence. As the story unfolds, however, fine Divine silence does not mean Divine inactivity.

As an IFP you need to keep the idea of fine silence, quiet presence in mind.

  • You are not required to be wildly entertaining, come across as brilliant, become pesky, or force your opinions on your clients. Let your presence be fine.
  • Your products do not have to be heralded as the best, the cheapest, the highest performing, the leading one of its kind, etc. You are aiming for fine.
  • You do not have to have all the answers. There’s a big difference between demonstrating your abilities and acting like a know-it-all. Your mastery of the concepts already exceeds those of the client and is likely just fine.
  • Don’t try to impress through technical speech. Unless you’re absolutely sure the client understands the meaning of an acronym or what a buzzword means, stick to simpler terms. Don’t use words in your written communication (emails, planning documents, and text messages) that you wouldn’t use during verbal communication (in person or on the phone). People find plain vocabulary to be just fine.
  • Bite your tongue. No client relationship is perfect, and disagreements with clients are bound to occur. Rather than responding angrily or defensively to a client who is being rude, take a step back, show self-restraint, breathe, and stay away from offensive statements—even if they’re warranted. Loud vocal volume or intensity is never fine.

“Drawing on my fine command of the English language, I said nothing.”—Robert Benchley

If you are already exemplifying all of the above, I believe you are already a fine IFP!

Footnotes:

  1. Exodus 12:15, The Holy Bible, English Standard Version. ESV® Text Edition: 2016. Copyright © 2001 by Crossway Bibles, a publishing ministry of Good News Publishers.
  2. Ibid, Exodus 16:13-14.
  3. https://www.merriam-webster.com/dictionary/fine.
  4. https://manoa.hawaii.edu/exploringourfluidearth/physical/world-ocean/map-distortion/practices-science-precision-vs-accuracy.
  5. 1 Kings 19:9, The Holy Bible, English Standard Version. ESV® Text Edition: 2016. Copyright © 2001 by Crossway Bibles, a publishing ministry of Good News Publishers.
  6. Ibid, 1 Kings 19:11.
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