The recently released House version of the Build Back Better Act dated October 28,2021 eliminates
several of the previously proposed tax increases impacting high net income individuals. The tax proposals dropped in the rewrite will inevitably undergo further revisions before they’re passed by the House and taken up by the Senate.
The end of the year is the perfect time to review financial plans with your clients. This year, many wealth planning strategies are on the chopping block and high-income earning individuals could see their tax rates increase in 2022. Therefore, potential changes should be considered when making decisions. As the end of the year approaches use the following checklist as a helpful guide with your clients.
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Situation: A financial professional contacted DBS’s in-house advanced case design resource to brainstorm when to approach business prospects that had expressed an interest in discussing supplemental executive benefit arrangements for key employees. Prior to COVID-19, the financial professional ran a successful telemarketing campaign focusing on mid-sized corporations. The campaign specifically promoted executive benefit arrangements that can be established on a discriminatory basis to help supplement retirement income for key executives. The financial professional was in the process of meeting with the business owners when COVID-19 caused most states to institute stay-at-home orders.
Problem: The financial professional wanted to know if it was too early to reconnect with the businesses now that states were beginning to permit businesses to open.
Solution: The DBS advanced case design resource described how it is likely that most business owners were adversely impacted and experienced revenue loss as a result of COVID-19. She suggested that business owners are likely still concerned that COVID could continue to negatively impact revenue since the Delta variant is showing that the pandemic is not over. Therefore, at the present time, businesses may be reluctant to proceed with an arrangement requiring a long-term commitment. However, they likely recognize the current precarious business situation and how the death of a key person at this time could result in permanent business closure.
The DBS associate suggested a two-phase approach. In phase one she suggested that a term policy on a key person with the business as an owner and beneficiary to help protect the business against loss caused by an untimely death. She noted that acquiring the coverage is relatively easy and inexpensive. The executive insured as a key person may be the same individual the business owner initially desired to help with supplemental retirement income. By underwriting the executive for key person coverage first, the financial professional will be in a better position to proceed with the executive benefit arrangement when there is less economic uncertainty.
Result: The financial professional liked the two-step approach and proceeded to begin reconnecting with the business owners.
Nearly all buy-sell agreements that use life insurance have one thing in common: The business owners do not own the life insurance policies that insure their own lives. In an entity purchase arrangement, the business owns the policy. In a cross-purchase arrangement, the other owners or another entity own the policies.
Common Concerns Expressed by Business Owners
Many buy-sell agreements are triggered when an owner retires, becomes disabled or voluntarily leaves the business. In these cases, the death benefit cannot be used to purchase the departing owner’s interest. Yet, the departing owner’s policy may be a valuable asset that could be used for the departing owner’s financial plans. The fact that the business owner does not own his/her policy has the potential to raise the following concerns:
1. If the owner’s health deteriorates, he may become uninsurable and unable to purchase other coverage to meet
his/her family needs.
2. Even if the insured is insurable, the cost of purchasing new life insurance coverage could be prohibitive.
3. Of course, during the term of the buy-sell arrangement, the business owner is precluded from making decisions about the policy insuring his/her life.
Because of these concerns, it’s not unusual to find many buy-sell agreements funded with a term insurance policy. In contrast, when the business owner owns his/her policy, the owner has more reason to consider a permanent policy.
How the Own-Your-Own Policy Buy-Sell Structure Work
With this approach, the owners enter into a cross-purchase agreement where each owner agrees to purchase their pro rata share of the other business owner’s interest. However, instead of each business owner purchasing a policy on the other owner’s life, each business owner purchases and owns a life insurance policy on his/her life. The policy’s value will be based on at least his or her proportionate projected value in the business. The arrangement is structured as a non-equity endorsement split-dollar agreement (normally using a return of premium death benefit option) with the death benefit endorsed to the other business owners to satisfy the obligation under the buy-sell agreement. The necessary endorsement forms are filed with the insurance carrier.
At an insured business owner’s death, the death benefit is paid to the surviving owners according to the terms endorsed, and each surviving owner uses his share of the death benefit to purchase the deceased’s business interest from the estate as required under the terms of the buy-sell agreement. If alternatively, the business owner retires or otherwise leaves the business, the remaining owners release the endorsement on the departing owner and the departing owner releases his/her interest in the remaining owners’ policies.
How Can DBS Help?
The greatest benefit of this structure is that it gives the business owner control over his/her policy, including the ability to increase the premium level to use the policy for supplemental retirement income. However, the structure does not work in all business structures and raises some tax issues which, with planning, can be avoided. To help you with the design of the own-your-own policy structure, call Terri Getman, JD*, CLU, ChFC, RICP, AEP (Distinguished), DBS’s in-house advanced case design resource.
There are six key ways in which life insurance may benefit your business
Situation: According to LIMRA’s 2021 Insurance Barometer study1, 40% of Americans live with a life insurance need-gap. This equates to 102 million adult consumers. This shows the consumer demand or “need” for coverage has increased and remains strong. The gap between “I need” and “I have” life insurance has doubled since 2019, further emphasizing the need for advisors to respond to the existing demand.
The pandemic has driven an increase in purchase intent. 31% indicated they are more likely to buy life insurance due to COVID. Furthermore, the percent of respondents indicating an increased likelihood to buy increases with income: 42% of respondents with incomes of $150K+ indicated they were more likely to buy due to COVID. This is strongest among Millennials, Gen Xers, Black, and Hispanic respondents.
Bottom line: LIMRA estimates the total market coverage gap at $12 trillion.
If there is a silver lining to these dismal statistics, it is that according to LIMRA, approximately 60 million households recognize that they need more life insurance. So why don’t they buy?
One obstacle is that advisors are not talking about life insurance. According to LIMRA, many households who believe they need life insurance say the reason they haven’t purchased is because they haven’t been approached by a financial advisor. Almost 8 in 10 U.S. households admit they do not have a personal life insurance agent to turn to and most say they never did. In fact, many financial advisors don’t talk about life insurance, even if the client brings it up! No wonder we find ourselves in such a sorry state!
Solution: A financial advisor can build a plan whose sole design is to accumulate dollars toward every goal a client has. It can be creative, tax-efficient, and even leave the client with a comfortable lifestyle as they save toward their life goals. But what happens if the client dies prior to achieving his/her investment goals? The best investment plan in the world isn’t worth much if it doesn’t take this risk into account. That is why life insurance is generally considered the backbone of a financial plan. Neglecting to include this can actually make an advisor vulnerable to a lawsuit, especially if they are holding themselves out as a fiduciary.
Unfortunately, the rise of easy money in the mutual fund business displaced life insurance sales as the way to make money. Today it is about money under management.
Life insurance is the “ugly duckling” of the financial service industry. Consequently, no one wants to talk about it.
Talking about life insurance is hard because it involves a very personal discussion. It is different from investment products that benefit the purchaser. Life insurance benefits others when the purchaser is no longer there. This discussion touches emotional nerves for the buyer and seller, so it can be tough to even initiate the discussion. So, how do you transition from an investment conversation to a life insurance discussion? Here’s a suggestion:
TRY THIS
“Up until this point, most of our conversations have focused on minimizing portfolio risks to help you reach specific financial goals, so we’ve talked about things like diversification and asset allocation. It is also important to spend a little time addressing risks that can prevent you from reaching those goals. As you age, one of three things will likely happen: you’ll die too soon, get sick along the way, or live too long. Insurance is key to protecting yourself and your important family goals at each of these stages. To help me generally determine the types of life insurance you may need, I just need to ask you: do you want your life insurance to provide protection if you die or when you die, or both? If you can give me a few minutes, this suitability fact finder can help us determine the amount and type of life insurance you should have. ”
Here are some questions to get you started:
In Summary: It is ironic – and unfortunate – that life insurance is usually not on the ‘front burner’ when people review their financial affairs. Investment products and retirement plans get far more interest and attention than life insurance, yet these financial products can take decades to reach the point where they begin to fulfill their purpose. The sad truth is, many people run out of time and die too soon before plans are complete.
No accumulation plan can solve the problem of premature death. Only life insurance can provide funds when ‘people at work’ is no longer an option. Life insurance proceeds can help replace lost income to make mortgage payments, cover living expenses, and pay bills. Only life insurance can provide the funds when ‘money at work’ is an unrealized dream cut short by premature death. Life insurance proceeds can help provide funds to pay tuition bills, fund buy-sell arrangements, equalize inheritances and provide the liquidity to pay estate taxes. Only life insurance can help rescue a business, the jobs of its employees, and the lives of the owner’s family if the business owner, in the words of Ben Feldman, “walks out the door in the morning and never comes back.” No one needs to buy life insurance, but as financial advisors at the end of the day, we need to ask ourselves: can we honestly say that we have taken care of our clients if we have not asked about this important financial product?
The annual Insurance Barometer Study tracks the perceptions, attitudes, and behaviors of adult consumers related to financial behaviors, with a focus on life insurance. This year, just 52 percent of Americans report having life insurance coverage, which means the opportunity for YOU is growing. Take a look at the rest of the results and arm yourself with the facts as we head into September’s Life Insurance Awareness Month – the perfect time to talk with your clients about their life insurance needs!
Situation
Interest rates factor into the performance of many legacy and charitable planning techniques. So, over the past several years, the historically low interest rates, and the availability of higher gift and estate exemptions have provided a unique environment for certain legacy and charitable planning techniques. Specifically, in a low interest rate environment grantor retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs), intra-family loans and installment sales to grantor trusts work best. However, relatively small shifts in interest rates can have a disproportionate effect on the performance of these rate-sensitive legacy planning techniques. Increases in interest rates could change the economics and shift the focus to other techniques.
If interest rates start to increase, there may be renewed interest in certain legacy and charitable planning strategies that benefit from a higher rate environment. Techniques that benefit from a higher interest rate environment include qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs). After several years of keeping interest rates low, the Federal Reserve may consider raising interest rates. This Counselor’s Corner describes some of the legacy planning techniques impacted by interest rates and the role of life insurance.
We’re focusing this month on Life Insurance and Family, with a special focus on generational planning. A recent case shows how the DBS team works for YOU to create solutions!
Situation: An adult child desired to purchase a life insurance policy with a longterm care or chronic illness feature on his elderly mother to help address long-term care concerns. The child recognized that he could be held responsible for expenses incurred by his mother under the Filial laws, and he wanted to protect against this risk. The adult child wanted to be the policy owner and beneficiary since he was paying the premiums.
Problem: The carrier approved the face amount requested but did not want the child as the owner. The carrier would only approve the coverage with the insured or the insured’s trust as the owner.
The Generation Skipping Transfer Tax (GST tax) is an extra tax on gifts or bequests from grandparents to grandchildren (or lower generations) that would otherwise skip successive gift or estate taxation. The GST tax rate is a flat 40% regardless of the amount of the transfer or the donor/testator’s gift or estate tax bracket. The combination of gift/estate tax and GST tax can be confiscatory.
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