This is a subject that has gone from a peripheral nuisance 10 years ago to having a wide ranging impact on the way we do business today.
Being in impaired risk with the bulk of our clients being moderately to highly rated when they buy their policies, we have had to add to our discussions about the aspects of their life insurance that the life settlement lure may come their way one day. A small health change to someone who has had a good impaired risk agent working on their behalf can make them a hot target for life settlement sales. We have had to add to the policy delivery talk advice about how much more valuable a policy is if kept in force than sold. Also how they should never make those kind of decisions without consulting the family and beneficiaries. In most cases if the case is profitable for STOLI (Stranger Owned Life Insurance) then it is worthy of a family discussion about putting the policy in a trust, converting it and keeping the entire benefit in the family.
Another area that STOLI has impacted and has been detrimental to our clients is the subtle actuarial shift that has happened because more policies are converted than used to be the case. This has caused several companies to pull their best conversion options out of the loop, often being replaced by options that no life settlement company would find acceptable, for instance a UL with a 10 year guarantee. While this may have solved the company’s problem actuarially, it created a problem for those who bought term as a tool that could be used for conversion as their long term needs became clearer. We’ve had clients who bought term to lock in their insurability and moved to convert within a few years only to find out that the conversion guarantee was shorter than their term guarantee. Those who have been in good enough health can apply for a new term or UL and get the best products, products no longer offered for conversion. Those whose health had changed were forced into situations where the options that they were sure would be available weren’t there anymore.
It has impacted greatly one of the best options for permanent insurance since, well, forever. The no lapse UL with an external guarantee took the cash value out of permanent and finally made permanent insurance an affordable option. In smaller amounts it became a cost effective alternative to final expense policies that were pillaging the seniors in our country with high costs and terrible guarantees. For estate purposes it finally provided an affordable option for estate tax protection, whether on an individual life or second to die. Before the no lapse guarantee estate protection had to be done with costly cash value policies when in the end, the death benefit was all the clients needed or got.
With the onset of AG38 on 1/1/13, prices have gone up, guarantees shortened, products altered to have pay periods to age 121 and in many cases, companies have chosen to just discontinue offering the products at all. While we don’t have any evidence that this is solely due to STOLI’s impact on actuarial determinants, it is odd that at a time when long term prices have continued to go down because mortality experience has improved, the only product impacted was an absolute gift from life insurance companies, a gift that life settlement companies probably only dreamed about, a more affordable conversion option.
And now, after 100 years of favorable tax treatment for life insurance, with the leverage provided by STOLI and COLI’s (Corporate Owned Life Insurance) total disregard for insurable interest, Congress is taking its’ most aggressive run at life insurance tax status ever. It was insurable interest that won over Congress and Woodrow Wilson to allow life insurance cash value and death benefits to be tax exempt. With more and more policies showing up daily that no longer have any scent of insurable interest Congress is poised to change the tax status so that life insurance can be treated the same as investments.We don’t think it is too far-fetched to wonder if the day is coming, as the trillions add up on our national debt, when a death benefit would be taxed as an investment. The premium paid would be the basis and the difference between that and the benefit paid would be subject to capital gains.
The ultimate adverse selection situation has been found with COLI, where a company owns policies on employees and can pick and choose, as employees leave, which to keep and which to sell. Where is the insurable interest? Where is the benefit for the employee? Why is a company allowed to make a new profit center by owning life insurance on their workers? Why is this kind of ownership being given insurable interest status with no checks or balances.
How does this affect agents? It thrashes good long term planning and relationships we have with our customers. Planning is for the short term with the option to convert to affordable long term needs is becoming less of an option. The potential of taxation of insurance proceeds would be called an opportunity to sell more by greedy agents. It would be called a lie by our customers. While we take customer service very seriously because of our own values, the majority of agents don’t. That leaves information starved orphan clients as easy prey for life settlement sales.
As for us, the more teeth companies can put into making sure ownership changes aren’t changes in insurable interest, and the more impact they can come forth with when insurable interest disappears, the better of our clients will be. If you have questions about the downsides to life settlements that you will never hear from someone who sells them, call or email us directly. We think you need to know.
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