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.
While various life insurance policies may be utilized for this concept, the securities laws may restrict the use of a variable product. The reason is that there are restrictions that prohibit a broker-dealer from arranging a loan so a customer may purchase securities. In view of this statutory provision, a broker-dealer may decide not to offer variable products in this market.
The recent valuation regulations are another example of where the results for variable life and annuity products are different than for other policies.
The recently proposed regulations were aimed in part at perceived abuses in the so-called Section 412(i) pension market. Under a Section 412(i) plan (named after the Internal Revenue Code that sets out its requirements), the employer makes all its contributions into life insurance and annuities. The benefits for employees at retirement are based upon the values in the contracts.
Actuarial valuationsan expensive cost in other plansare not required in Section 412(i) plans. The reason is that the contributions are calculated according to the guaranteed accumulations in the insurance contracts.
The recent regulations cover buying an insurance product with the idea of transferring the contract to the plan participant when the contract value is low due to surrender charges. The contract usually would be purchased by the plan participant for this low value. But, in later years, the contract would recover and provide values similar to other policies.
The interim guidance issued with the proposed regulations state that an acceptable value would not be less than the premiums paid on the policy, regardless of the surrender value. But, variable products were never a very good fit for the 412(i) market anyway. The reason is that they do not have minimum cash accumulation guaranteesat least, not unless the fixed account is used. And, in that case, the loads and charges in the variable contract usually are significantly higher than in other contracts. So, to use the fixed account may not make sense.
In sum, the difference between variable contracts and other policies may sometimes restrict or discourage their use in markets in which other policies are sold. Therefore, while many agents are interested in markets, such as accounts receivable financing and Section 412(i) plans, insurers may restrict the sale of variable products in those markets.
Douglas I. Friedman, a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is [email protected]
Reproduced from National Underwriter Life & Health/Financial Services Edition, March 25, 2004. Copyright 2004 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.