For years, my best sources have referred me to Lee Slavutin whenever I ask about a complex estate planning strategy. In addition to integrity and honesty, Slavutin has great technical expertise. An Australian who moved to New York in 1978, Slavutin was dissatisfied with his career as a pathologist and decided he wanted to be in sales. Almost by accident, he moved into insurance. His firm, Stern Slavutin-2, now works with many of the nation’s top estate planning attorneys and generates a majority of its revenues by advising the ultra-wealthy on insurance and estate planning. I spoke with him recently.
Let’s talk about basics. How do you advise a client on the amount of life insurance he or she needs? Don’t look only at the dollar value of a life insurance policy. Think about cash flow. If someone has $1 million of insurance, the annual cash flow could be $40,000 a year for a conservative investor. And do not automatically assume the general economic rate of inflation. My son goes to college and his fees are not going up at the 2% average rate of inflation. They are going up 6% or 8%. You should insure your life as you would your home, based on replacement value. You should be insuring for the replacement of income.
How do you keep up with the creditworthiness of insurers? One of the best ways to keep up is through Joseph Belth’s The Insurance Forum newsletter. Every September, Belth puts out a ratings issue, and it is a phenomenal reference. If you are actively involved in advising people on insurance, you need to have this publication. Joe divides companies into three groups. The top group has about 75 companies and these are the companies you should buy from.
A good insurance professional will also look at the history of the ratings of a company with each of the ratings agencies: Moody’s, Standard & Poor’s, Fitch, and A.M. Best, and see the trends. Moody’s has had a good track record of detecting problems early. A truly diligent advisor would go one step further and look at the insurer’s annual report. Finally, BestWeek, a weekly news publication from A.M. Best, is a great source of information on all the things going on in the life insurance and property/casualty insurance industry.
What are the other basics that you think advisors need to be aware of? Another is term insurance and the conversion option. Some term policies are advertising very low prices because of their conversion options. If you buy a policy that only allows you to convert to a permanent policy during the first 10 years and then in the eleventh year you develop a medical problem, you may be hampered in your ability to get a well-priced permanent insurance policy. Just be aware that the lower price you pay may reflect your reduced options.
Any thoughts on long-term care insurance? The message with long-term care insurance is that we are dealing with a fairly immature market. This product took off maybe five, six, seven years ago. My suspicion is that many of these policies have been sold under their proper price to grab market share. That’s why some companies are taking products off the market. Some practical advice: There is a very nice option available with some of these policies now that can minimize the risk of higher future premiums. You can buy a 10-payment option policy. Instead of buying a policy where you pay the premiums forever, the rest of your life, you buy the policy and you pay for it within 10 years. At the end of 10 years, you have no more premiums and that’s guaranteed. So then your only risk is that during that 10-year period the premium may be increased. But once you pay for 10 years, you’re done. This is a real guarantee. If a client is in a C corporation, the LTC insurance premium is fully deductible, for income tax purposes.
How much faith can you have in these companies and these policies? A few names that have a good reputation, that are well rated, and that I would look at, are John Hancock, Metropolitan Life, and GE.
What’s the hot product these days? Guaranteed-premium universal life. This is very popular these days because of what has happened to market returns in the last 10 years. The industry responded to that uncertainty and developed a universal life policy with a fully guaranteed premium–no ifs, ands, or buts. You pay the premium, your death benefit is guaranteed. The product has been a huge seller in the last year or two. In many cases, existing policies–universal, whole life, variable life–are being replaced by this product.
I think [there's a] problem with LTC insurance similar to what we had with disability insurance some years back. Some companies are pricing too aggressively and they may get into a problem. There is another very tricky thing here, which is not obvious. If you don’t pay your premium on time, you can lose your guarantee, or you may have to make up and pay extra money to restore the guarantee. If your policy premium is due on December 1, you have to have the money in to the company by December 1. You can’t send your check on December 1. Otherwise, you lose your guarantee or you will have to pay some extra money to restore it. The makeup amount could be huge.
What other tips like that can you give advisors? It is important not to pay the premium on disability insurance with pre-tax dollars. I’ll give you an example from a recent court case. A doctor was advised by his accountant to buy disability insurance and pay for it with corporate pre-tax dollars to get a tax deduction. Down the road, the doctor became disabled. Because of the way he financed his disability insurance, his benefits were taxable. So instead of getting $10,000 monthly tax-free, he has to pay tax on the $10,000 a month.