What Producers Need To Do If The Estate Tax Is Repealed

Second of Two Parts

In my view, estate-tax-dependent producers need to visit with and emulate their colleagues who already have a more eclectic approach to the marketplace, a more comprehensive approach to serving their clients and a more diverse set of skills.

While its probably na?ve to think that even these more compleat producers wont be hurt by repeal, we should remind ourselves that the government would only be repealing the death tax, not death itself. So, the more compleat producers can be (somewhat) comforted in knowing that they can continue to do what they have always done, except now, the estate tax liquidity need will no longer suck all the oxygen (and premium dollars) from the discussion.

Business owners will continue to have the usual business succession challenges, including ownership succession and equalization issues historically best addressed by insurance.

They still will have their own financial planning issues, particularly as these affect their ability to phase out of the business on their own terms and not on a gurney. That means insurance-funded plans–qualified and nonqualified–as well as insurance for accumulation outside of the business.

There are also issues with regard to spousal financial security, particularly where the spouse wants to be secure independent of the business once the owner passes away.

There are management succession issues, meaning there are key person retention plans such as deferred compensation, executive bonus plans and a host of other things that can make sense.

Again, the compleat producers have long had a sales approach and a planning process that addressed all of these concerns. The estate-tax-dependent master of the split-dollar universe did not.

What about the impact of repeal outside of the business-owner market, meaning generally outside of a market in which a familys major holding is threatened by estate tax? Even in that context, a lot of sales tracks to upwardly mobile executives, for example, have been based on a need for estate tax liquidity. What if that need disappears?

In my view, the producers who will win, meaning those who will sell a lot of product, are going to be those who offer a dynamic planning process, one that creates a thread that the planner weaves through the patchwork quilt of the clients financial life.

The planning process must enable the client to maximize current and future income through coordinated tax, investment, risk management, retirement and estate-planning strategies. Said another way, the future belongs to the planner who knows how to make the clients dollar do double or triple duty.

In training seminars for producers who are prospecting among upwardly mobile executives, I have seen how heavily they dwell on estate tax liquidity as a key disturbing track. My message, however, has been for producers to downplay estate taxes as part of their sales process. Why? This type of client just doesnt care about estate taxes. They are far more worried about long lives at lower yields than they are about estate taxes. As long as their spouses will be protected, the kids will get what they get.

I try to teach producers that the better approach, for sake of discussion, is to get this type of client to appreciate that the insurance purchased for family security today can be the insurance that will enhance his or her own financial security in the future.

In a more crass way, I suggest that producers bypass the need sale and go for the greed sale, in enlightened fashion, of course. In other words, appeal to the prospective clients self-interest and ask the younger–but well-paid–client to pretend that he or she is doing financial planning 20 years from now. What are the objectives and concerns he or she will be likely to address at that time? Explore how the clients ability to achieve those objectives and address those concerns will be so much easier if he or she has a fully funded cash value policy at that time.

When clients agree to look down the field, as it were, they will see that they really do need the coverage for a while. So, since they are paying the cost of term insurance anyway, they will buy term and invest the rest within the cash value policy. They wont believe how much that policy will do for them later in life.

As intuitive as that sounds, I have to say that I dont see many producers who are adept at describing and illustrating the concepts I just mentioned. In certain cases, its a product issue, with some producers being uncomfortable with selling universal or variable universal life. Yet, these flexible premium products are particularly well suited as the cash value policy of choice for many of these clients because the clients can start out with a minimum premium for the desired coverage and then increase the premium (and probably reduce the death benefit) as their compensation hopefully increases. There are no issues as to convertibility or insurability.

Many other producers are simply not knowledgeable enough about planning and products to illustrate and explain how insurance products can serve the clients goals for security today and capital accumulation for tomorrow.

I always put planning hand in hand with product because they are inextricably intertwined. Indeed, the clients think so. The valuable role that insurance can play in long-range financial planning is tough to portray to a savvy client unless he or she sees that the producer has selected and designed a product that not only grows cash value quickly and efficiently but also “distributes” cash value efficiently.

When these savvy prospects see high early cash value, for example, they know they are getting a real bang for their buck. If they dont see that, then its harder for them to see what the cash value insurance is going to do for them and not just for their families. Otherwise, they can and will buy term and invest the rest or theyll buy group UL at work.

Of course, all that efficiency I am talking about is typically associated with lower producer compensation. But I once heard the prominent head of a broker/dealer exhorting his producers to understand that VUL could compete very well with mutual funds as an accumulation vehicle and financial planning tool, but only at lower compensation. Otherwise, the policy would be dragged down by excessive frictional cost. When a few brokers started to argue with him, he responded by reminding them that they were old enough to remember what happened when the sales charges on mutual funds were reduced. Sales skyrocketed!

While some of what I have said may not sound new, my point (and my concern for the insurance community) is that I dont feel sure enough that producers have the skill sets–meaning the fact-finding skills, the disturbing skills, the planning skills, the product knowledge and resources, and the professional relationships–to make the kind of transitions and do the kind of business I have described.

There just isnt the training there used to be because most of the emphasis over the past 10 years or so has been on packaged sales and not on comprehensive planning and the associated product selection and design.

I think insurance companies and industry organizations are going to have to retool, revamp and, in many cases, ramp up their training to better support producers in those markets that will be most affected by the loss of the estate tax.

Training regimes will have to entail three separate but obviously related areas: (1) estate and business succession planning and the associated product selection and design; (2) executive benefit planning and associated product selection and design; and (3) personal financial planning and, you guessed it, associated product selection and design.

Charles Ratner is national director of personal insurance counseling at
Ernst & Young LLP. He can be reached via e-mail at charlie.ratner@ey.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 27, 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.