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Experts Applaud Gains, But Warn Of Continuing Challenges

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As 2006 ends, industry experts applaud the year’s positive developments, including legislative gains on Capitol Hill, continuing high interest among business owners in non-qualified deferred compensation plans and increases in agent recruitment. But they warn that battles lay ahead. “The Pension Protection Act was a home run for us,” says David Woods, president of the National Association of Insurance and Financial Advisors, Falls Church, Va. “Also, the fact that we didn’t get estate tax repeal was a big victory.”

NAIFA President John Davidson agrees, crediting the legislative wins in part to “seamless” coordination among industry organizations, including the American Council of Life Insurers, the Association for Advanced Life Underwriting, the National Association of Independent Life Brokerage Agencies, NAIFA and others. Aiding NAIFA’s lobbying efforts, he adds, was the organization’s ability to mount a 1,000-member bus ride to Capitol Hill to lobby senators and representatives on issues of importance to the life insurance community.

“We touched every member of Congress for the first time ever,” says Davidson. “That was a monumental achievement.”

The NAIFA executives caution, however, that the industry needs to remain vigilant about proposals that could negatively impact insurers, including pay-go rules that would require spending increases or tax cuts be offset and paid for. The danger, they note, is that Congress could eliminate the tax-favored treatment of life insurance to close budgetary gaps.

And, while backing the continuing survival of the estate tax, sources say reform of existing law is needed to permit a more favorable environment in which to do long-term planning. In place of the gradual phase-out of the estate tax through 2009 and its temporary repeal in 2010 before reverting back to 2002 law, as now mandated under the Economic Growth and Tax Relief and Reconciliation Act of 2001, many advisors advocate raising the estate tax exemption to an amount ranging between $3 million and $5 million, thereby removing the estate tax burden for most Americans.

“Frankly, I think we’ll see mortalities spike in 2010 among folks who will give up the will to live,” says Eric Brotman, a financial planner and principal of Brotman Financial Group, Timonium, Md. “It’s preposterous to think that [current estate tax law] is a healthy piece of legislation.”

Absent reform, advisors say they’re generally avoiding the use of irrevocable trusts in estate tax planning for all but their wealthiest clients. In place of these vehicles, many are recommending disclaimer trusts, which allow trust beneficiaries to redirect their interest in the trust to another party, such as the spouse of the decedent. Similar to a credit shelter trust, the vehicle permits beneficiaries to take advantage of estate tax exemption levels at a time of their choosing.

But even if federal estate tax reform happens, Brotman doesn’t foresee an increase in demand for irrevocable trusts unless the estate tax exemption amount at the federal level is coupled with those at the state level. Given continuing low exemption amounts in many jurisdictions, he says, most moderately affluent clients would be better off purchasing additional life insurance to pay off estate taxes rather than spending tens or hundreds of thousands of dollars on legal fees setting up a trust.

Past legislation affecting another area of advanced planning–non-qualified deferred compensation–has minimally impacted continuing high interest in this executive benefit among small business owners and key employees. According to a LIMRA International study published in September, “In a Vacuum: How Senior Corporate Executives Use Their Executive Benefits,” only 4% of 271 executives say IRC Section 409A rules–an outgrowth of the American Jobs Creation Act of 2004–have affected their decision to defer compensation. One-third reported having a deferred comp plan; this compares with 30% and 16%, respectively, who held stock options and supplemental executive retirement plans.

“409A is turning out to be a non-event,” says Jim Mitchell, the report’s author and a vice president of market research at LIMRA. “The rules have had no impact, though I should add that only 49% of the executives we surveyed were aware of 409A.”

The LIMRA study also found little correlation between the percentage of compensation deferred and the financial concerns of the executives. This disconnect, says Mitchell, wouldn’t be so acute if more of the executives had access to an advisor to assist with retirement planning.

More advisors may be on the way. According to a separate LIMRA study, 35 career companies recruited 14,550 agents in the first half of 2006, a 12% increase over the first half of 2005. Of the total recruits, 30% were female (for those companies providing the split for female recruits), and 75% had no insurance sales experience.

“The increase is definitely a positive,” says Margaret Honan, analyst of distribution research at LIMRA. “Much of the rise is due to the career companies refocusing efforts on their distribution channels.”

Faye Williamson, a director of U.S. Client Services at LIMRA, agrees, adding that the firms are also increasingly recruiting agents into a model that stresses teamwork among professionals who bring different skills to the client’s financial plan.