Economists who keep tabs on the nation’s leading indicators may paint a bleak portrait of the U.S. economy in 2009. But advanced sales professionals peering into their own crystal balls see a more nuanced picture: market niches that are expected to follow the general downtrend, but also surprising bright spots.
Typical of muddied outlook is the experience of Jerry Flower a principal of Capital Brokerage, Norwalk, Conn., who is selling “dramatic amounts of annuities” to compensate for the precipitous drop in business for estate and small business succession and executive comp planning.
“I’m expecting a substantial drop-off [in advanced sales],” says Flower. “Clients connected with the few large-ticket sales I’ve worked on are not pulling the trigger. The plans are ready, but clients are not writing the check.
“The clients who are proceeding with planning are doing so with smaller policies,” he adds. “I might see $10,000 in premium instead of $100,000. This market is the worst I’ve seen it in the last 15 years.”
Sources interviewed by National Underwriter say the deepening recession will negatively impact key areas of advanced sales, not least the executive compensation space. Napoleon Andrews, a Columbia, Md.-based life insurance agent and investment professional for Nationwide Financial, says struggling small businesses are already scuttling or deferring implementation of non-qualified deferred compensation plans, mostly because of their complexity and high cost of administration. The decline will thus slow sales of employer- or corporate-owned life insurance, a popular vehicle for informally funding such plans.
Also expected to take a hit are life insurance-funded solutions that have already come under heightened IRS scrutiny owing to widely publicized abuses. Among them: 412(i) defined benefit plans that are used by small business owners to aggressively fund a retirement nest egg; 419(e) welfare benefit plans that provide a pre-retirement death benefit and post-retirement medical benefit; as well as premium financing, which is used to fund the cost of insurance premiums on typically large policies.
Opinion is mixed, however, as to effect of increased government regulation of executive comp plans. Proponents say the regulatory changes-the now finalized 409A rules respecting deferred comp plans; new notice and consent provisions of the Pension Protection Act of 2006 governing the issuing of EOLI/COLI policies; and the application (“grandfathering”) of 409A to split-dollar plans issued after 2004-will actually spur sales by clarifying for advisors and clients what the IRS will or won’t accept.
Others take a dimmer view. “[The recent regulatory changes] have made doing business much harder,” says Daniel Brown, a brokerage manager at Brown, Brown & Gomberg, Skokie, Ill.-based wholesaler. “When you have to explain every provision of a 10-page document, you tend more often than not to lose the client.”
Flower disagrees. “The good news about heightened regulations is that it gives you an opportunity to talk to your clients,” he says. “I may well sell more non-business insurance because I had a chance to talk about business issues. At end of day, change brings opportunity.”
Advisors see other bright spots in the small business arena. Sources say business continuation plans, including life insurance-funded buy-sell agreements to facilitate the transfer of a business in the event of the death or disability of an owner, will continue apace.
The same holds for IRC Section 162 executive bonus arrangements, particularly the restricted endorsement type. But sources note the size of bonuses will likely be scaled backed. Already being shelved by cash-strapped businesses, observes Brown, are “double bonus” arrangements that ratchet up compensation to cover income tax that executives have to pay on the bonus (i.e., employer-paid life insurance premiums).
How will the downturn impact advisors catering to high net worth individuals who have advanced planning needs? Here, too, advisors forecast areas of both heightened and flat-to-diminished activity. Those clients who in recent years might have turned to such planning to secure tax benefits may hold off, either because of continuing uncertainty as to final disposition of the estate tax or because declines in asset values-of client-owned stock, real estate and businesses-have reduced the need to purchase life insurance to cover potential estate tax liabilities.
To the extent, however, that non-estate tax considerations are motivating factors, such as buying insurance to provide for a client’s survivors, ensuring a legacy or equalizing an estate among heirs, then the need for planning is expected to remain undiminished.
“Our perspective is that the most opportunities lay where we can simplify our message for advisors and clients, focusing on the non estate-tax reasons for purchasing life insurance,” says Brett Berg, a director of advanced markets, strategy and development, at Hartford Life, Hartford, Conn. “The simpler the idea, the greater the opportunity.”
Reduced asset values, sources say, should be a boon for advisors engaged in split-interest gift planning: using planning techniques to give away the equity value of an asset while maintaining control and income. In the philanthropic space, such planning typically involves the charitable remainder and charitable lead trust. Also widely employed in split-interest gifting is the grantor retained annuity trust, the intentionally defective grantor trust and gifts of LLC interests.
“The convergence of three economic blows-low asset values, low interest rates and low tax brackets-yields a perfect storm of opportunity for split-interest gifting,” says Herb Daroff, a partner at Baystate Financial Planning, Boston, Mass. “We’re keeping a lot of appraisers very busy now reappraising clients’ businesses and real estate properties to secure additional discounts on these assets. And we’re telling clients they won’t want to pass up on this opportunity.”
They may, however, balk at using certain life insurance policies to fund their plans. Because of steep declines in stock market valuations this past year, sources say clients will likely shy from market-sensitive variable and variable universal life policies (though, observers point out, investing in such policies may actually be the wise course, assuming that stock valuations are not due for a further big drop.) Given the flight to safety, whole life, term and (especially) secondary guarantee universal life products will remain the favored vehicles near term.
“In an economic downturn, interest in secondary guarantee products is sure to rise,” says Flower. “The value of the guarantee is higher because the uncertainty is greater. In addition, it’s the best buy for low-cost permanent insurance coverage.”
Its Essential Portfolio account minimum was slashed from $5,000 to $500 for investors who set up recurring deposits at account opening.
Want to retire in a state where your savings don't go far, or move to a cheaper state where you can still live comfortably?
The entrepreneurial mindset in both genders carries over to their giving strategies, Fidelity Charitable reports.
Sponsored by Orion Portfolio Solutions
Discover how to enhance your relationships with HNW clients and grow your business.
Sponsored by SmartAsset
Cut through the noise and avoid common blunders many FAs make when trying to lure in new clients.
Don’t miss crucial news and insights you need to make informed investment advisory decisions. Join ThinkAdvisor.com now!
- Free unlimited access to ThinkAdvisor.com which provides advisors, like you, with comprehensive coverage of the products, services and trends necessary to guide your clients in making critical wealth, health and life decisions.
- Exclusive discounts on ALM and ThinkAdvisor events.
- Access to other award-winning ALM websites including TreasuryandRisk.com and Law.com.
Copyright © 2019 ALM Media Properties, LLC. All Rights Reserved.