Some Thoughts About The Business If The Estate Tax Is Repealed

Third, we have the IRSs rather frenetic and somewhat successful efforts to close off other strategies and schemes that would purport to reduce the tax cost of paying premiums. In other words, not only will the insurance need itself be diminished, but so also will many of the (superficially) advantageous ways to fund the liquidity for that need.

How will these producers react? I mean, how will they react after they finally give up trying to disturb clients about the fickleness of any tax reform, or the need to fund for state death taxes or the need to have an asset with an assured step-up in basis?

I think they will chase replacements. In fact, I am seeing it already big time. Why? Replacements are and will continue to be low-hanging fruit. Once clients no longer need to fund for estate taxes, those who will not drop their coverage entirely will be interested in converting their high cash value, high premium policies to policies that offer equal or greater death benefit for far less outlay or, in many cases, none at all.

My experience is that as long as the client is healthy and willing to tolerate some risk with regard to the long-term pricing of the policy, producers should be able to replace coverage fairly easily and meritoriously, especially if they are willing to sacrifice some commission to make the policy leaner and more efficient.

Of course, this is a clarion call for any insurance companies that do not have attractive exchange programs. They could see some business go by the boards and those leaving will be the healthy ones.

Beyond replacements, these producers are likely to gravitate to the kind of packaged sales that I am now seeing with increasing frequency. These packaged sales depend for their leverage and marketing appeal on some combination of the income tax deductibility of the premium, very low early cash values relative to the premiums paid, or the ability to reconfigure the product in some way to minimize or eliminate future outlay.

Of course, there are potential pitfalls aplenty in these strategies, and the IRS and Department of Labor, as the case may be, may look askance at some of these strategies.

What about other strategies? Some commentators suggest that if estate taxes are repealed, producers should turn their attention to the use of insurance in charitable giving. Of course, life insurance can already be very a useful tool in charitable giving unrelated to estate taxes. But presumably, the absence of estate taxes will create more wealth to be distributed between the family and the community.

On the other hand, I have heard many argue that one reason not to repeal the estate tax is that, without it, charitable contributions would decline significantly. I dont know who is right, but given the current and foreseeable landscape for the economy and the markets, I am inclined to side with those who are pressing the latter argument.

One area that will get even more attention than it does now is the use of life insurance as an investment in funded trusts, particularly funded dynastic trusts. I am working with a number of producers on cases where trustees of funded trusts see that on a risk-adjusted basis, a well-structured life insurance policy can be a terrific trust investment. The IRR on the death benefit is just fine as far as these knowledgeable people are concerned. In a sense, the general account life policy becomes the bond component of the trusts portfolio.

In multi-generational trusts, we are putting the “bond equivalent” policies on the parents and variable universal life on the kids. They havent repealed inside build-up yet, so the well-designed and well-managed VUL policy is quite attractive as a part of the trusts equity component.

Of course, who knows how long we will have inside build-up if the insurance companies and industry organizations dont rein in those who just wont stop stretching that envelope.

Finally, I can see producers being urged to take a fresh look at the executive benefits business. No panacea here, either. Over the past few years, I have seen a lot of producers exit the benefits business in favor of the wealth transfer business because they believed the sales cycle was shorter, the margins better and the business less service intensive. Whats more, the Corporate Owned Life Insurance-oriented benefits business harbors significant legislative risk.

Next week: Where producers should be going.

Charles Ratner is national director of Personal Insurance Counseling at
Ernst & Young LLP. He can be reached via e-mail at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 20, 2003. Copyright 2003 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.