When engaged in a tennis match we normally regard the person in the opposite court as our primary obstacle, but in reality, it is the net in the center–the net being an obstacle to both competitors. In a somewhat like manner, when two agents are competing for a sale, they usually have a common obstacle that often becomes the focus of the sale. That obstacle is, of course, the premium. People ordinarily do not object to owning life insurance, rather they balk at paying premiums.
Because of the foregoing, over the years, many creative ways to easing the premium burden have been devised or contrived. Fortunately, most of these efforts have been legitimate and have served well the needs of our policyholders. Split dollar, in its original context, brought together the insurance needs of one party with the premium paying ability of another party. Term insurance can be effective in solving short-term needs at low cost. However, long-term needs and ancillary objectives may not be met if term insurance alone is overutilized. Sometimes the corporate pocketbook is legally available to solve premium payments in complex estate situations or company buy-and-sell arrangements. Use of such devices tests the creativity and sales ability of agents in dealing with this omnipresent obstacle to a sale.
But along the way there have been other attempts to minimize the premium obstacle that have not withstood the test of time or the scrutiny of government regulators. In my most recent column in National Underwriter (“The Masada Complex,” April 10), I tried to point out the danger such schemes bring to our business and the long-term harm that may result from the overzealous activities of a few.
The revenue loss to the U.S. Treasury because of the favorable treatment of the “inside buildup” of cash value life insurance in the years 2002 to 2006 is estimated to be $132 billion. That’s a lot of bread, and a revenue-hungry Congress is not likely to countenance its continuation if abuses become pervasive.
I had no sooner submitted that column when a friend clued me in on the latest gimmick that goes beyond anything previously tried in dealing with the premium obstacle. In this case “Free Insurance” is offered through a technique called “non-recourse financing.” At the root of this scheme is a flagrant abuse of a life settlement on a policy or policies in what is often referred to as a “wet-ink transaction.”
It is my understanding there are a number of variations on this theme, but as a rule it involves a large life insurance policy on a well-heeled client or prospect using borrowed funds on a non-recourse basis to pay all premiums and accrued interest. The client may or may not receive a “participation fee” for being a part of the plan. When the loan matures after a few years, the insured has three choices: keep the policy by paying off the loan, transfer the policy to the lender in satisfaction of the debt, or sell the policy in the life settlement market. It is an obvious scheme to obtain life settlement money with no out-of-pocket cost. Free money through free insurance.
I am not aware of any carrier that supports this concept although I understand that a few did embrace it at first. One does not have to be too savvy to see how damaging this could be to a company’s operations. Another point probably not mentioned to the client in this type of transaction is the limitation this may put on the person’s ability to obtain life insurance that may be wanted for real needs in the future. The presence of a large investor-owned policy still in force may put the client over the limit that companies are willing to underwrite.
Since retiring from active sales I have been called on a number of occasions as an expert witness in insurance cases. Invariably the issue boils down to dealing with the premium obstacle in one way or another. Multiple trusts are set up to, in some mysterious way, make premiums deductible, or some charitable entity is used to provide free coverage to a donor and on and on. They never work, and the case is always settled against the perpetrators. I also have observed that in most cases the people doing this are just plain dumb.
There is another dimension to this that is also significant. Life insurance is a tried and tested product that has served society and individuals exceedingly well for over 200 years. It does not need gimmicks and hocus-pocus to make it attractive. In my view those who resort to such tactics are in effect admitting to an inability to function as a useful salesperson. They need training in ethics and salesmanship and a large infusion of pride in their product and service.
In closing, I would like to digress to another subject. It has been interesting to watch the banking community scream and squirm as Wal-Mart petitions for permission to form a bank. The banking lobby moved heaven and earth to break down the barriers that existed between banking and commerce. They besieged Congress with the notion that this was necessary for them to compete globally and to better serve the public. Well they succeeded and so long as banks were invading commerce everything was rosy. But now that commerce (Wal-Mart) is trying to invade the world of banks, you would think from listening to their testimony that the world was coming to an end. Too bad, guys!