Leveraged life insurance plans and a muted call to arms

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It seems like with every passing day I read another interesting and provocative article about issues in the premium funding space, the life insurance products they fund, or both. Much like the articles I read on the news, some have a statesmanlike quality to them while others are clearly political. I don’t know how all this interesting and provocative talk is going to play out. I have a hunch, however, that the answer is suggested by the lyrics of a 1960s song, universal soldier.

While not approaching the same level of coverage, I am quite certain that the headwinds that are rocking some third party premium finance deals are also two dollar plans.

I followed this article with some thoughts on how planning teams can identify problematic plans and doing something while doing it is good.

Looks Dark, by Dickens.

Hard to fix broken plans

The more I read and hear about the problems with leveraged life insurance plans or the policies themselves, the more reluctant I become about when the great minds in the industry will turn their attention to fixing these broken plans. I concluded that I shouldn’t hold my breath. I now think Godot or the Iceman will arrive long before we see the plan’s rescue squad charge.

After all, just look at all the materials, programs, systems, technologies, and intellectual firepower behind marketing and implementing leveraged plans. But when things go wrong, as they often do today, it’s a whole other story. Why? Because the sum of multidisciplinary skill sets, time commitment and communication between professionals who don’t understand each other’s terminology well enough to be on the same page, and attention span needed for a rescue team far outweighs the possibility of the respective parties being adequately compensated for their time and effort. With all the potential new sales and planning projects on the table, why bother with this stuff? Okay, maybe, just maybe, there’s an opportunity to replace a policy or sell it in a life settlement. But the remuneration for these transactions falls to the life insurance professionals. Other advisors will need to bill the customer directly for the time it takes to show them that there is a fire in the theater and that all exits are clearly marked “expensive”. Good luck with that.

It’s getting worse.

Professional turnover

Besides all the reasons that make a rescue operation so difficult in nominal terms, three things are happening there that make it even more difficult in real terms. First, with each passing year, it is more likely that the life insurance professionals who sold the business are no longer around. This is also true of any estate planners and tax advisors who were initially involved. These professionals were the reservoir of institutional memory on how and why the plan was developed in the first place and how it was going to be managed. They were also the repository of original illustrations and sometimes even original documents. In some cases, the successors of these professionals have maintained everything so well that the business has not moved. But in the future, this will be the exception, not the rule. In most cases, the “new” team will have to start from scratch, which will involve new conversations with clients about fees.

Lack of artwork support

Second, it will be increasingly difficult to obtain illustrations and administrative support for aging policies. Depending on the carrier, product series and vintage, and even the market space in which the policy was designed and sold, I suspect there will be less and less ability to render artwork from different perspectives or under different assumptions or constructions. Their systems can’t do much. But the lack of illustrative support will certainly hamper the rescue team’s ability to make “what if” analyzes of alternative solutions.

Unhappy customers

Of course, there is one more thing that makes this whole situation more problematic. A client who hears (what he claims to be) the first time that the policy and plan are in jeopardy will ask very simple and straightforward questions. “How did it happen?” “Why didn’t anyone tell me about it years ago? “You mean it’s going to cost me that much to fix it?” Are you serious?” I suspect there won’t be any crowd control issues among advisors lining up to have this conversation with the client.

It’s not transient.

Problems with deteriorating life insurance plans will only get worse. And the solutions, if there are any, will only involve an ever-increasing economic and fiscal cost. I’m afraid it will take many more observers than this single solitary voice to spread the word. Perhaps laudable efforts to induce policyholders to review and manage their policies, whether or not they are leveraged and whether or not for the real purpose of replacing or selling the policies, will attract at least attention to the problems associated with these leveraged schemes. Hope is eternal, even in the fall.

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