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.
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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.”