For high-net-worth individuals and business owners, the difference between an innovative financial plan and one that’s too creative by half can mean tens of millions of dollars gained, retained or lost to the tax collector. Hence the need for advanced underwriting departments that can deliver to producers the training, skills and techniques needed to ensure that clients are well served.
Question is, are advanced sales professionals delivering on this value proposition? That depends on whom you ask.
Advanced sales executives contacted by National Underwriter say the quality of such training and support is much improved compared with past years. They point to new tools–extended in-class seminars, online content, and teams dedicated to assisting agents with both technical and nontechnical issues–that are empowering life insurance professionals to meet the needs of an increasingly affluent and sophisticated clientele. And, they say, their approach to advisor-client discussions is far more consultative, and therefore less product-oriented, than in years gone by.
Critics beg to differ. Many agents, they counter, lack the expertise necessary to describe and tailor advanced sales solutions effectively. Or, when clients raise objections, producers are unable to rebut them in convincing fashion. Too often, industry watchers assert, the power of the tax technique, the illustration or the allure of a fat commission takes precedence over fact-finding and the client’s best interests.
On one thing, sources agree: The opportunities to use life insurance to satisfy complex retirement, estate, charitable and business planning objectives have never been greater.
“Looking ahead, we see tremendous growth of solutions that meet the needs of affluent individuals approaching retirement,” says Nancy Briguglio, head of advanced sales, support and specialty markets, at Lincoln Financial Distributors, Hartford, Conn. “Retirement income security will be among the most important issues for boomers who can expect to live for two or three decades beyond their working years.”
Producers will have to pursue those opportunities in a marketplace much changed from years past–and one laden with hurdles. There remains, for example, continuing uncertainty about prospects for permanent repeal or reform of the estate tax. That question mark, combined with ever longer life spans, could prompt many boomers to de-emphasize legacy planning in favor of solutions needed to secure a comfortable retirement, observers say.
Insurers and producers also are operating under heightened government scrutiny. Scandals involving 412(i) plans, variable annuities and family-limited partnerships, among other techniques, have prompted the Internal Revenue Service to clamp down on abusive practices. One result: a marked increase in compliance-related paperwork.
Insurers also are facing a fragmented marketplace, one increasingly dominated by independent agents, brokers, financial planners and self-styled wealth managers. Insurers’ ability to train properly and supervise these players is limited, thus opening the way for future abuses.
“The problem in my judgment is that a great many [independent] practitioners do not know what they don’t know,” says John Olsen, a chartered financial consultant and principal of Olsen Financial Group, Kirkwood, Mo. “As a general statement, the life insurance industry has done a wretchedly bad job of training its field forces since the essential demise of the agency system. It’s a terrible problem.”
Advanced sales executives acknowledge the challenge of working with independents. But they say those producers who seek guidance can expect enhanced support. Jill Perlin, vice president of the retirement and advanced planning group at Prudential Financial, Newark, N.J., says the company delivers technical assistance on advanced planning topics through one-on-one meetings, in-classroom instruction, conference calls and distance learning technologies like CD-ROM and the Web.
Karen Susac, director of advanced markets at Symetra Financial, Bellevue, Wash., adds that her company also delivers instruction through e-learning. But she notes that producer interest in the one-hour webinars that Symetra sponsored in past years would typically fall after two or three sessions. So, the company now favors just-in-time training: short online presentations that augment the company’s field literature.
Lengthy in-person seminars covering both technical topics and presentation skills remain a core component of Lincoln Financial’s advanced markets instruction. Says Patrick Lang, vice president of advanced case design at the Hartford, Conn.-based firm: “Our training is very focused and intense. We have to be sure agents understand what’s going on in the marketplace.”
What are producers learning about? Much of the training and coaching focuses on techniques that are enjoying heightened interest in upscale markets. Briguglio points, for example, to the net income makeup charitable remainder unitrust or NIMCRUT. Also called a “spigot trust,” the vehicle generally is funded with a variable annuity.
When the client retires, the trust distributes additional amounts to make up for prior years during which the client was otherwise eligible to receive distributions. Briguglio says the NIMCRUT is ideal for clients wanting to monetize appreciated assets in a closely held business on a tax-efficient basis.
Also hitting a “responsive chord” among the high net worth, says Lang, is traditional premium financing. Under this technique, a financing company lends the client or family trust money to buy a large insurance policy on the client’s life or to boost the face value of an existing policy to match the client’s current net worth.
A third strategy to which business owners are gravitating is nonqualified deferred compensation. Generally established as salary reduction or salary continuation plans for highly paid executives and managers, the vehicles defer an employee’s salary and the attendant income tax until after retirement. Sources say that IRS 409A rules governing the plans, which went into effect in 2005, have fueled interest in executive compensation packages by clarifying how they may be structured.
“Now that 409A regulations are out, we’re getting a lot more calls about deferred comp from all sources and companies,” says Susac. “Businesses’ comfort level with the plans far outweighs the added plan complexity that 409A entails.”
If current IRS rules have fueled–or at least permitted–growth of certain advanced underwriting techniques, they have dampened demand for others. Among the latter, sources cite, for example, equity split-dollar plans, off-shore Rabbi trusts and cutting-edge techniques that call for an IRS opinion letter. Briguglio says such letters no longer insulate clients from audits, so advisors are shying away from them.
“Clients don’t want some new concept tested in court before or after their demise,” she says. “They want to be reasonably sure that the planning is well founded and will be brought to fruition.”
Cutting edge or otherwise, more plans would transition from the concept phase to reality if producers knew how to present solutions effectively and educate prospects about the alternatives, critics say. Charles Ratner, a national insurance director at Ernst & Young, Cleveland, Ohio, says that while most producers are technically proficient at discussing tax techniques and the packaged sale, many are unable to speak about life insurance within a broader context (e.g., how the product can underpin the client’s values, financial objectives and life goals; or how a plan funded with life insurance can be flexibly structured to adjust to a client’s changing circumstances).
“[Advanced markets] training tends to focus on the pristine glory of the technique,” says Ratner. “But what happens if the client can no longer afford to pay the premiums because his business takes a turn for the worse or because of a rise in interest rates? Most agents are unequipped to deal with these kinds of questions.”
One result of the limited training, adds Ratner, has been a de-emphasis of traditional retirement and estate planning solutions in favor of the esoteric tax technique and “hot topic du jour” (e.g., packaged sales, like non-recourse financing, that promise attractive tax benefits for the client and a big commission for the agent).
Roccy DeFrancesco, founder and president of the Wealth Preservation Institute, St. Joseph, Mich., concurs with Ratner’s assessment, noting also that producers frequently recommend life insurance-funded solutions that involve more short-term than long-term benefits. He cites the overuse of 412(i) plans and private annuity trusts that offer, respectively, large upfront income tax deductions and deferral of capital gains tax but ultimately saddle clients with high estate taxes or transaction costs.
He adds that other life insurance-funded estate planning strategies get too little exposure in the marketplace, in large measure because advanced underwriting departments aren’t focusing on them. Among these are the freeze partnership, intentionally defective trust, plus LLC- and FLP-based vehicles that not only offer estate tax benefits but also protection of assets from creditors.
Susac says such advanced planning strategies have merit but cautions that they’re not for everyone.
“These techniques have their place so long as clients and advisors understand them and believe they’ll fulfill the stated objectives more easily or at lower cost than alternative solutions. But I’m not sure that a client who’s worth $1 million should spend $80,000 on some kind of LLC planning.
“Sometimes,” she adds, “a plan’s complexity is more for the benefit of the advisor than it is for the client.”