Keeping A Wary Eye On The Storm Clouds

The first, typically marketed as charitable-owned or foundation-owned life insurance (CHOLI or FOLI), allows third-party investors in states with liberalized insurable interest lawscurrently Texas, Virginia, Tennessee and North Carolinato buy an interest in a trust that provides a small payment to a charity or education organization when the insured dies. Most of the death benefit goes to the investors.

If extended nationwide, investor-owned life insurance could prompt Congress and the states to revoke the tax-free benefit, says Leimberg. The rationale? Politicians would view life insurance no longer as a product chiefly for the benefit of widows and orphans, but as a commodity to be traded among investors in secondary markets, much like stocks and bonds.

“CHOLIs and FOLIs are a danger not only to the insurance agents, whose sales will drop precipitously, but also to the public,” says Leimberg. “With the tax benefit gone, individuals may have to buy twice as much life insurance to net as much [in death benefits] for their families.”

C. Robert Brown, president of UCL Financial Group, Memphis, Tenn., and president-elect of the National Association of Insurance and Financial Advisors, agrees, noting that CHOLI promoters are “acting not out of concern for the public, but only so investors can benefit.” He adds that NAIFAs state associations are working hard to thwart the liberalization of insurable interest laws in other jurisdictions.

NAIFA is also partnering with the Million Dollar Round Table and GAMA International in a project dubbed Task Force for our Future. The organizations are exploring ways to reverse trendsnotably the consolidation of insurance distribution channels and the increasing tendency of advisors to cater primarily to the affluentthat have left the middle market underserved.

“If the only people benefiting from life insurance are at the top of the demographic pyramid, then how in the world can we justify keeping the tax-free treatment for the masses when all were doing is insuring the [upper] classes,” says Brown.

And not always doing the best job of it. Charles Ratner, national director of insurance counseling for Ernst & Young, New York, N.Y., pointed out during one general session that advanced sales professionals sometimes get a bit too creative in devising strategies for high net worth clients, the result being less than optimal performance of their plans.

Ratner specifically focused on the merits of “the simple plan,” a tried-and-true technique for minimizing gift taxes paid on premium contributions to an irrevocable life insurance trust (ILIT).

Alternative strategies, including equity split-dollar and premium financing arrangements, may yield lower gift taxes. But because these plans are more complicated, he observes, more things have to go right (such as the fluctuating interest rate charged by a third-party lender who is funding the premium payments) to achieve the desired result (maximizing liquidity).

“Theres a constant search in this business for ideas that will help agents clinch the sale and make them appear more creative than the next person, without going over a cliff,” says Ratner. “The producer who explains the pros and cons of each approach will deliver more value than by saying, this [one technique] is the way to do it.

“Thats a high-risk, all-or-nothing strategy,” he adds. “The advisor needs to let the client choose the level at which he wants to eat well versus sleep well.”

Reproduced from National Underwriter Edition, September 9, 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.