A few days ago I received a telephone call from a person identifying himself as a representative of a “living benefits” company, which I assumed was one of the new nomenclatures for a viatical organization. Before he could get into his presentation, I interrupted by saying that I am fully retired and no long actively selling. But before I could hang up, he said, “Hey, youre just the kind of person we are looking for,” so I listened further.
The gist of his presentation was that because I had many years of selling, I no doubt had a large book of seasoned policies with significant cash values locked up within them. He went on to say that his organization could free up those values for present policyowners on a basis favorable to the policyowner and to me if I would cooperate. I thanked the gentleman for his call but told him I was opposed to the concept he was espousing and hung up.
Based upon ads that I see in a number of publications (some of which should not be running such ads), it is obvious that this is a growing marketing practice. I did not go into detail with the caller as to why I oppose viatical settlements–especially to healthy people–but I will try to do so in this column.
We often assail our lobbying organizations for their lack of proactive positions regarding government interference in our business. The cry usually takes the form of “why are we always reacting to government intrusion instead of being on the offensive?”
The fact is, however, that such criticism is exactly the opposite of reality. We are the creative, innovative force in the marketplace and government is the reactive force. We create split dollar–government reacts; we create a top-heavy pension plan–government reacts; we create single premium tax shelters–government reacts, and on and on.
Now, back to viaticals. A long time ago Congress determined that the trafficking in life insurance policies was not in the public interest and enacted the “transfer for value” rule to discourage the practice. For a long time, the adverse tax consequences of selling a policy under this rule effectively curbed the sale of policies except in certain exempted circumstances. But now, the issue is back and I have no doubt will eventually precipitate a reaction by government.
It is well to remember that in the 1980 tax act to eliminate tax shelters, the sole targeted shelter that survived was the tax-free build-up within life insurance policies and annuities. The reason it survived was because with life insurance:
Payment is made upon the death of a human being.
Economically, the life was more valuable while living.
The beneficiary is a family or other dependent entity.
Cost recovery schemes of any type do not fit this definition and their use always increases our likelihood of being attacked. It has been estimated that the tax revenue loss attributable to the inside build-up for the years 2002-2006 will be $132 billion. When Congress is hungry for revenue, that amount is not small potatoes.
There may be some merit in a viatical settlement with a terminally ill insured desperate for money today. But even in that situation, there are often better options insofar as the beneficiary is concerned. But the sale of policies, sometimes bought with this ploy in mind, is an open invitation for government reaction. It seems to me that individuals and organizations dedicated to preserving the tax advantages of life insurance should give this practice a very cold shoulder.
In addition to the foregoing, I have always been troubled by those in our business who seem to be preoccupied with moving money around rather than creating new savings. Invariably as new products make their way into the marketplace, an early target is existing cash values, making for a painless sale. The round of replacements that has plagued our business offers ample testimony to this problem.
The U.S. still has the lowest savings rate in the industrialized world and presents a constant worry for our long-term economic welfare. Some blame this on high taxes, but Denmark, with a much higher tax load than ours ranks number one in personal savings. So I believe the answer lies elsewhere.
Perhaps the answer resides in the lack of honest-to-goodness competition. With the advent of full financial services, when anyone can sell most any financial product, there is a great temptation to go with the flow and move money into the “product du jour.” Real competition requires true selling and that often means changing minds and dealing with customer bias in a constructive way.
Deregulation, which was supposed to stimulate competition, may, as a practical matter, be killing competition. I continue to believe that the public is better served when each discipline can present its own case with conviction, and with the expectation that some of that conviction will stay with the customer in a way that will increase that persons savings rate.
When you just move money around, the only thing new that is created is commissions.
Reproduced from National Underwriter Life & Health/Financial Services Edition, March 11, 2002. Copyright 2002 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.