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March 24, 2004 at 07:00 PM
Traditional And UL Sales Concepts
Dont Always Apply To Variable Products
BY DOUGLAS I. FRIEDMAN
When reviewing a new sales concept or recent Internal Revenue Service ruling, I often notice that the effect of the concept or ruling on variable products is very different than the effect on traditional and universal life products.
The reason is that sometimes the variable product features do not fit the particular concept. Likewise, the regulatory requirements for variable products may discourage their use in a particular market.
This has been the case recently with 2 developments: 1) the relatively new concept known as accounts receivable financing; and 2) the proposed regulations on the valuation of life insurance policies.
In general, the accounts receivable financing plans offered by various vendors work the same way. The concept is to approach a business that has substantial assets in accounts receivable, especially if the business has few other assets. An example would be a professional practice, such as a physician.
In such businesses, the accounts receivable often represent 90 days or more of billings. That is, it may take that long for the firm to collect the average outstanding account. This may be the biggest asset on the balance sheet for a professional practice, especially when compared to other assets such as computers, furniture and examination room tables.
The sales approach is to ask whether the doctor would like to convert the accounts receivable asset into immediate cash for retirement.
The way to do this, according to the sales approach, is to pledge the account receivables to a lender in return for a loan, which is then used to buy life insurance for the doctor. The sales materials may make several claims, such as the interest on the loan is deductible, the concept shields the accounts from creditors, and the policy may be used for retirement.
