When Cost Recovery Is The Issue, Consider Using No-Load UL
In a recent presentation to a local Estate Planning Counsel, a Tampa trusts and estate planning lawyer warned of “Life Insurance Time Bombs.” His cautionary words spoke of policies affected by economic changes, legislative influences and contractual limitations.
These words fueled the fires of skepticism already burning in the psyche of many attending gatekeepers.
Fortunately, even though it is impossible to guard against legislative influences and most economic changes, it is possible to avoid certain contractual “Time Bombs.” I am referring here to taking a no-load approach to executive benefit life insurance plans.
Lets see how that can work. Producers often confront certain common objections to using life insurance as a funding vehicle for executive benefit plans. These objections include fixed premium requirements, pre- and post-retirement cost recovery, and contractual penalties.
In this market, CPAs and chief financial officers focus not only on the after-tax costs of benefit plans, but also the actual (not projected) cash-flow demands as the benefit plan matures.
Now, an employer may be interested in sponsoring an executive benefit plan and in committing to a projected annual expense. The problem is, there may be periods of time when funding the plan is not convenient. This is where a no-load (or an aggressively blended) universal life policy can help.
Consider: If the UL policy allows suspension of premium payments during lean years, as many do, that feature may persuade the decision-makers to proceed confidently with implementing a benefit plan.
Furthermore, if the UL policy is absent of surrender charges, this assures the benefit plan sponsor (employer) that the plan may be terminated at any time for any reason with little or no financial penalty. And that enables you to defuse a significant potential “time bomb”–namely, the hold on money that would have occurred had there been a surrender charge.
For this reason, you might call the no-load life policy a “bomb squad solution.”
The chart on this page illustrates how it works. It shows the UL proposals (projections) for a $1 million increasing death benefit policy with an annual premium of $21,000 and an annual credited interest rate of 6.5% in all years. The proposals are from two insurers–the XYX Insurance Company (which pays a standard sales load) and the No-Load Insurance Company (which pays no sales commission to the writing producer).
As you can see, the projected cost recovery occurs much earlier in the at No-Load Insurance Company (in year two!) than at XYX Insurance Company (year eight).
Of course, projections are projections and you can make what you want of them. But, the probability shown here of greatly reducing–or virtually avoiding–the risk of cost recovery is compelling. It may be the feature that completes the deal, whether it is a split-dollar or deferred compensation plan.
Producers who propose a plan like this need to keep in mind that, because the UL policy used is a no-load, they will not receive a sales commission from the sale. That means they will have to collect a fee in order to be compensated for their services.
That fee may be a fixed amount or a progressive amount at an hourly rate. Producers may also charge continuing fees to service the plan from year to year, creating an ongoing stream of income. This can work in the sponsors favor, by the way, since those fees may be a deductible expense for the sponsor.
This executive benefit solution wont appeal to all. But, you might want to keep it in your toolbox for when the situation warrants.
Peter J. Leniart is founder and principal of Leniart & Associates, a fee-based financial insurance advisory service in Clearwater, Fla. You can reach him at Pleniart@aol.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 11, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.