Category: Insurance - PFwise.com

Understand IUL Bonus Multiplier

4/5/2020

Some IUL products include Bonus Multipliers that enhance the illustrated interest rates for a more favorable, though unlikely, illustrated result.

At face value they look great! These illustrations look mathematically correct, but they tend to portray the most positive possible outcomes - something most people might not experience. Stress testing these illustrations is a vital component of understanding the potential risks.

Take a look at the presentation from AIG which would help improve understanding of illustrations, IULs, bonus multipliers, and how it all really works.

4 Actions That Help Life Insurers Hedging Their Market Risks

4/4/2020

Q. Given the market turmoils, how life insurers hedge their investment risks and protect their customers' policies?

A. Life insurers use a variety of financial arrangements, such as exchange-traded futures contracts, and over-the-counter swaps and options, to “hedge themselves” against swings in interest rate and investment price risk.

One question for life insurers risk managers is wondering whether they picked the right hedging strategies. Another question is how well the other players involved in the hedging arrangements, or “counterparties,” will meet their obligations.

Here are four more things to know about life insurers’ hedging arrangements.

1. The financial hedging arrangements are just part of life insurers’ defenses against market swings.
Life insurers may try to offset the performance of products that will do poorly when the stock market falls, for example, by selling other products that may do well when the market falls.

They also include many provisions in product contracts that limit the consumers’ ability to withdraw assets quickly. Those restrictions may protect consumers from cashing out valuable insurance protection or income planning products too quickly, and they may protect the issuers’ from “runs on the insurance company,” or situations in which consumers might rush to the insurance company to pull cash out.

2. The National Association of Insurance Commissioners (NAIC) helps state insurance regulators keep close tabs on life insurers’ hedging.

The NAIC’s Capital Markets Bureau compiles voluminous data on hedging, and it publishes annual summary reports every year.

The latest report, for example, shows that, at the end of 2018, 219 of the 722 U.S. life insurers that the NAIC was tracking had financial derivatives exposure with about $2.5 trillion in notional value.

About $1.2 trillion of the exposure involved swaps, or agreements to trade the liability for one financal instrument with the liability for another financial instrument.

About $1.1 trillion of the exposure was associated with options, or arrangements that lock in the insurer’s ability to make a transaction at a particular price. An S&P 500 index option, for example, may help a life insurer support a life insurance policy or annuity contract with an investment option tied to the performance of the S&P 500 index.

3. The federal Financial Stability Oversight Council and economists in the Federal Reserve system also track life insurers’ hedging risk.

4. The typical counterparty for a life insurance company derivatives arrangement is a financial services giant.

According to the NAIC Capital Markets Bureau report on insurers’ 2018 derivatives use, the 10 largest sources of U.S. life insurers’ counterparty exposure accounted for about 49% of the exposure, and they are well-known companies.

In-depth Look at IUL's Bonus Multipliers

4/2/2020

Q. Is IUL's bonus multipliers always a good thing?

A. Not true. Bonus multipliers could make some IUL policies' illustrations look very attractive, however, there are caveats a consumer needs to know.

The attached document from AIG explains the bonus multipliers for IUL in depth and how to evaluate it properly.

It's a must read if you are evaluating IUL products.

Would life insurer go under if coronavirus deaths mount in the U.S.?

3/28/2020

Q. Do I have to worry that my life insurer will go under if coronavirus deaths mount in the U.S.?

A. Insolvencies are unlikely.

First, the question assumes that those dying own life insurance. That isn't a given.

In the U.S., sales of individual life-insurance policies fell 40% from the 1980s until flattening in recent years, according to research firm Limra.

Many Americans rely on life insurance provided by their employers. Many of those dying from the coronavirus are 70 or older, so they wouldn't likely be covered by these policies.

What is more, U.S. life insurers' bottom lines are protected at least somewhat in that they have lines of business that benefit when people die prematurely. Many are big sellers of annuities and have blocks of long-term-care policies on their books. If deaths rise, insurers would get out from under obligations on these contracts.

Having said the above, there is no question that life insurers face hard times if Treasury bond yields stay at this ultralow level. Insurers invest customers' premiums heavily in corporate bonds, which are priced in relationship to Treasury bonds.

7 Questions to Boost Your Life Insurance IQ

3/26/2020

7 in 10 Americans recognize that life insurance will protect their ability to live a long, financially secure life. Yet more than half either do not have life insurance or don’t know if they do--leaving themselves and their families vulnerable to financial risks.

If you like, you can use the following 7 questions from AIG to test your life insurance IQ. You will be surprised how many Americans have the answers to these basic questions wrong!

Go to here to start.

The Swiss Army Knife Approach to Retirement

3/25/2020

If you’re like most people, you want financial security. This means having protection from future uncertainty and the flexibility to make changes to your financial plan. And because you’re likely to spend 20 or more years in retirement, you probably want a smart way to potentially increase your savings to help pay for health-related expenses not paid for by Medicare.

Sagicor's WealthCare can help you feel confident about your future
By adding a WealthCare policy to your retirement portfolio, you’ll have the advantages and financial flexibility you’re looking for in one efficient solution. So, you can focus on enjoying your retirement because you have the following flexibility and benefits -

Why Life Insurance Trusts Are Better For Multi-generational Planning

3/24/2020

Q. Why life insurance trusts are better for multi-generational planning?

A. This is because the new Secure Act!

Consider this scenario
Someone is leaving a $1 million IRA to a conduit IRA trust for his grandchildren.

Under the old stretch IRA rules, if the trust qualified as a see-through trust, RMDs could be based on the age of the oldest grandchildren, say, 19-year old. RMDs would be paid to the trust and from the trust right through to the grandchildren over 64 years (the life expectancy of a 19-year old), leaving the bulk of the inherited IRA funds protected in trust for decades.

Meanwhile, the grandchildren receive only about 1.6% to 2% of the account for the first 14 years, with the percentage increasing very slightly each year. That percentage of IRA funds being released to the grandchildren would stay under 10% for 50 years. Those smaller RMDs would keep tax bills lower for many years and keep balance of the nondistributed trust funds protected.

Why it won't work anymore
But not anymore! Under the new Secure Act, if the plan stays as is, all the funds will be released to the grandchildren and taxed by the end of the 10th year after death. Even if a discretionary trust was used to keep more funds protected, the entire inherited IRA balance would still have to be paid out to the trust by the end of 10 years - and taxed at trust rates for any funds retained in the trust for continued protection.

That's why the person with $1 million IRA could instead withdraw the IRA funds over time using today's low tax rates and use them to buy a life insurance policy. Due to the life insurance leverage, the payout after death can far exceed the $1 million balance in the IRA, depending on the person's health and age.

The caveat?
In order for the new life insurance strategy works, the person has to qualify for life insurance.

3 Myths About Annuities

3/23/2020

MYTH 1: Consumers hate annuities
Truth: Although some people may not fully know the benefits of annuities, or hold outdated, incorrect opinions, a growing number are becoming educated and are choosing to add fixed indexed annuities (FIAs) to their retirement plans. In fact, recent annuity sales are shattering previous records. According to the LIMRA Secure Retirement Institute, FIA sales were $20 billion in the second quarter of 2019, 14 percent higher than prior year results. Indexed annuity sales are expected to grow by double digits to about $96 billion by the end of 2023, a 38 percent gain over 2018. Those who understand the benefits FIAs can provide — income protection and stability with little or no maintenance — are not surprised.

MYTH 2: Annuities are not an accumulation vehicle
Truth: With the innovation of uncapped crediting strategies, this is no longer true. Consumers can take advantage of a positive index performance without worrying about another 2008. An indexed annuity with a decent participation rate will help significantly reduce clients’ risk, but also give holders the growth they need. In fact, according to a study on traditional asset allocation conducted by Roger Ibbotson and Zebra Capital Management, FIAs help control financial market risk, mitigate longevity risk, and will likely outperform bonds over time.

MYTH 3: Annuities are unnecessary with proper asset allocation
Truth: The Ibbotson and Zebra Capital Management study also showed that “a major advantage of an FIA is the ability of the insurance provider to ‘transform’ equity returns into a more ‘tailored’ return/risk profile (eliminating downside risk and providing an opportunity for interest earnings based upon a portion of equity returns). This downside protection is very powerful and attractive to many individuals planning for retirement. Additionally, with today’s low interest rate environment coupled with experts’ modest expectations for bond returns in the near-term, FIAs should be considered.

How to Write a Perfect Cover Letter for Life Insurance Application

3/15/2020

A cover letter is a critical part of the underwriting process, it presents a more comprehensive and accurate portrait of the applicant than the application allows. A well-written letter that includes background on a client’s risk factors can help move the application through underwriting. A poorly written cover letter – or none at all – could result in unwanted delays or even a quick decline.

To help ensure your cover letter does its intended job, start by reiterating the type of policy you would like and the face amount and explaining the purpose of the coverage – personal or business – and providing any additional pertinent details, such as:

Whether the personal policy will be tied into loans or used for income replacement or estate coverage.
For business policies, the applicant’s position and role within the company. Explain the applicant’s importance to the company and any unique talent that would be difficult to replace. If a buy-sell agreement exists, detail how it will be tied into the company’s value. For loan coverage, provide details on the loan.
Noting, with full details, any additional companies where the applicant has submitted applications for insurance.

Three Key Elements of Cover Letter

Financial Details

Explain how you and your client arrived at the desired face amount.
Provide details around any bankruptcies, poor credit or other financial issues.
Explain any unusual situations that may merit special consideration.

Medical History

Provide a summary of the applicant's relevant medical history.
For any significant conditions your client has or had, include details on current and past treatments, medications and any outcomes.
Note which rating class was quoted.

Lifestyle

Share any relevant information regarding lifestyle risks, such as hobbies, exercise routines or travel preferences.
If relevant, note any history of driving violations.

IUL Bonus Multiplier - Be Aware of the Risks

3/13/2020

Increased upside seems attractive, but buyers should be aware of the additional potential risks and complexity inherent to IUL Bonus Multipliers.

Here is a video from AIG that explains such risks.

7 Reasons to Consider Index Annuities

3/12/2020

If you are concerned about low interest rate and long life expectancy, index annuity could be a solution, see 7 reasons cited by AIG for its Power Index 7 product below -

Please contact us if you are interested in annuity products.

Can I Use Life Insurance Cash Value At Anytime?

3/9/2020

Q. Can I use the cash value in my life insurance policy at anytime?

A. Yes, cash value can be used at any age

Before age 59½: No penalties for accessing the cash value.

Age 62: No effect on Social Security benefits by accessing the cash value for supplemental retirement income (as long as the policy maintains its tax-advantaged status).

Age 65: No effect on Medicare Part B premiums by accessing the cash value for supplemental retirement income (as long as the policy maintains its tax-advantaged status).

Age 70½: No required minimum distributions (unlike qualified plans or IRA assets).

Opportunity reserve during your working years

Cash value in a life insurance policy can be an income tax-free private reserve for certain life events, including:

Provide money to start or continue a business
Pay tuition
Help fund a child’s wedding
Funding for “once in a lifetime” purchases

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part B

3/8/2020

In our last blogpost, we showed the first couple how they use term life and stuck in their current tax bracket.

Couple 2: Has tax-sensitive distribution strategy

The second married couple has the ability to design a tax-sensitive distribution strategy because they are using permanent life insurance to protect their family and their wealth.

Just like the previous couple, their desired income is $100,000 and their required income is $78,950. However, they have the flexibility to take out $21,050 from any of the three financial toolboxes.

This year, they decide they want to be as tax-efficient as possible and will take dollars from a tax-advantaged toolbox to fill their income gap.

Net worth: Includes assets from all three financial tools: capital assets, retirement income and tax-advantaged

Achieving desired income

The taxpayers with a tax-sensitive distribution strategy desire to be as tax-efficient as possible.

Desired income of $100,000 Sources of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with income from a tax-advantaged asset (cash value life insurance)

Taxes for tax-sensitive couple

This couple will pay taxes in the first two tax brackets only. Their total taxes due will be $9,086, and their effective tax rate is 9.1 percent.

Results

In this case, the second couple has a tax savings of $4,631 and a decrease in the effective tax rate of 4.6 percent compared to the other couple:

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part A

3/7/2020

This is a case study, we have two couples, each couple puts away the same amount for retirement, but they allocate assets differently among the tools. Some contributions were made to qualified plans.

Couple 1: Stuck in their tax bracket

The first couple chooses to protect their family’s dreams, aspirations and accumulated wealth with term life insurance until it runs out. They focus solely on capital assets and retirement income assets to fund their retirement.

Desired income: $100,000

Required income: $78,950; required income includes income clients are obligated to receive due to automatic payments, like pensions, or tax law (e.g., Required Minimum Distributions – RMDs, starting at age 70½)

Retirement income gap: $21,050; which will be filled using their capital asset or retirement income toolbox

Net worth: Includes only capital assets (e.g., investments and real estate) and retirement income assets, or qualified assets

Achieving desired income: The taxpayers stuck in their tax bracket decide to take dollars out of their retirement income toolbox to cover their income gap.

Desired income of $100,000 Source of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with only retirement income assets (taxed at ordinary income rates)

Taxes for “stuck” married couple: This couple will pay taxes on the first two tax brackets and some ($21,050) in the 22 percent brackets. Their total taxes due will be $13,717 and effective tax rate is 13.7 percent.

In our next blogpost, we will look at the second couple that uses permanent life insurance smartly.

How Are Life Insurance Withdrawals Taxed?

3/6/2020

Q. How are life insurance withdrawals taxed?

A. In general, withdrawals from a policy’s cash value are not taxed until the owner’s entire investment in the contract has been withdrawn.

There are four exceptions to this rule:

1. The policy doesn’t fit within the definition of life insurance.

2. The policy is a modified endowment contract.

3. A withdrawal occurs in the first 15 years with a reduction in benefits.

4. If all contributions to the contract have been withdrawn, any future withdrawals will be subject to income tax.

How are policy loans taxed?

Policy loans taken from a life insurance policy are not taxable unless the policy is a modified endowment contract. If the insured dies while the loan is outstanding, the loan will be repaid out of the death benefit and no taxation should occur. Remember, there may be tax ramifications if the policy is surrendered, lapses or is exchanged while a loan is outstanding.

What are the tax ramifications if the policy is surrendered?

If the policy is surrendered, then the cash value will be taxable as ordinary income to the extent it exceeds the owner’s contributions to the contract. Any loss incurred is non-deductible and a personal expense. In addition, loan balances in excess of the owner’s contribution to the policy may also be taxed upon a full surrender.

How is the internal cash value buildup taxed?

Generally, any increase in the cash value of a life insurance policy is not subject to current income taxation as long as the policy meets the statutory definition of life insurance. However, if a policy does not meet the definition, any increase in the cash value will be taxed as ordinary income annually as received or accrued by the policyholder.

Which Insurer Has the Best GUL?

3/5/2020

Q. Which insurance carrier has the best GUL product?

A. First, what is GUL?

Guaranteed universal life insurance is an affordable way to buy permanent insurance protection. As long as you pay your planned premiums to keep your policy active, your beneficiaries will receive the guaranteed death benefit when you die.

Most of GUL products have little to no cash value, that is why it is so cheap when compared with other permanent life products, but that is okay, because your goal is to leave a guaranteed amount to your beneficiaries in a cost efficient way.

The chart from American National below shows that its GUL product is leading the competition -

The Power of Zero - Fixed Indexed Annuity From Lincoln National

3/4/2020

As you approach retirement, you want to protect your savings from market losses.

A Lincoln fixed indexed annuity offers the potential for growth beyond that of a traditional fixed annuity, since the indexed accounts have earnings tied to the performance of an outside index. When the index increases over the indexed term, the account will be credited with earnings determined by that account’s crediting method.

But what happens if the index performs poorly and has a negative return?

The “power of zero” gives the client protection – the indexed account will never decrease due to negative performance…the lowest return is 0%.

One Powerful Policy that Can Meet Many Goals - A Case Study

3/2/2020

People in or near retirement need solutions that can evolve with their changing needs — for 20 or more years.

While your may have CDs, annuities, and bonds in your retirement portfolios, below is a case study from Sagicor to use its WealthCare Indexed Single Premium Universal Life Insurance to illustration how it can help address the many needs of today's retirees.

Case Study - How An International Client Uses U.S. Life Insurance to Realize Her Financial Goals

2/25/2020

Case study:
This is a strategy for creating a legacy and access to cash value in U.S. dollars

Meet Mrs. Chin Age 52

Chinese citizen and U.S. investor
Her daughter studies in the U.S.
Have assets in their home country, but want to globally diversify
Already own U.S. investments
May plan to move to the U.S. or have children living here

Goals:

Set her daughter up for success in this country by creating a legacy for her
Gain access to future U.S. tax-advantaged cash value

The solution:
A life insurance policy that gives you flexibility for growth, access to potential cash value and financial protection

Why a Stock / Bond Portfolio Not As Good As a Stock / Index Annuity Portfolio?

2/19/2020

Q. Why a stock/bond portfolio may not perform as well as a stock/index annuity portfolio?

A. In today’s interest rate environment, you may want to consider allocating a portion of your fixed income investments to the Index Annuity, because this powerful accumulation solution has the potential to offer you more growth than traditional fixed income vehicles like CDs and bonds, while guaranteeing your principal against loss in down markets.

Below is a Power 5 Protector Index Annuity brochure from AIG, it shows that a diversified portfolio of 60% stocks and 40% index annuities could have stabilized returns and increased performance by 0.22% for the overall period and by 1.03% in weak bond environments from 1927-2016.

In addition to the above benefits, it also helps for people who need income earlier, as it provides access to your money without a withdrawal charge after 5 years.

Term Life Converting 101 - Part B

2/18/2020

In our last blogpost, we discussed the general benefits of term life policy conversions. Now a case study from American National.

Case Study:

One of American National’s agents, Charles, was kind enough to share his experience with the conversion process at American National. Charles recently had a thirty-year-old client that was recently widowed and raising two small children on her own. She knew the importance of life insurance and wanted to make sure that her parents would have the means to take care of her children if anything were to happen to her. After spending several years as a stay-at-home mom, she was just reentering the workforce. She was working hard to make ends meet, and she scrutinized every dime she spent. However, she knew the peace of mind that obtaining life insurance would give her was worth every penny.

After completing a needs analysis and discussing the difference in premiums between American National’s 20-year level Signature Term and multiple permanent products, the client decided that the term policy was all she could afford right now. She was a little concerned because she wanted to make sure she would not be a burden to her family if she were to pass away in 21-years; however, she was relieved to know she temporarily (for 20-years) had a solution in place to protect her family.

Charles eased her concerns even more when he told her about the conversion opportunities that were available at American National. He let her know that she was making a smart decision to get coverage while she was young and in great health and told her she would have the option to convert to any permanent plan over the next twenty years! Charles also informed her that the conversion options would allow her to change her term policy to a permanent policy without having to go through any more underwriting. He advised her the process was quick and easy and would allow her to get the new policy at the same rate class as her original term policy. He also let her know that if she was able to convert in the next five years, she would even get a premium credit towards her permanent policy! She was so grateful that the term policy with American National would provide the coverage she needed NOW along with the flexibility to get what she really wanted later.

Charles checked in with his client every 6 months to make sure she did not have any additional needs and to review her statements. While meeting with her to review her third annual statement, she mentioned that within the last year she got a huge promotion at work, bought her dream starter home, and was doing better than ever! Happy to hear that she had made huge financial strides in her life, Charles reminded her of the conversion options that she had available on her term policy. Next thing you know, she converted her term policy to the Signature Guaranteed Universal Life, and she now has guaranteed coverage (at a guaranteed premium) until she is 121 years old!

Term Life Converting 101 - Part A

2/17/2020

Do you currently have a term life policy? Are you interested in a permanent product but cannot fit the premium into your budget right now? If you answered “Yes” to either of these questions, then it is time to talk about conversions!

Below is a term life converting 101 from American National, it would work for most of other life insurance carriers too.

American National offers very generous conversion options on our term policies. Clients have the option to convert their term policy to ANY permanent policy available at American National at any time before the end of their level term period or before they turn 65 (whichever comes first). The conversion period will never be less than 5 years! Not only does American National allow the client to convert to ANY permanent policy that best suits their needs, if the policy is converted within the first 5 years, the client will also receive a conversion premium credit!

Converting from a term to a permanent policy is quite simple. The only paperwork that is required is a policy change application, USA PATRIOT Act Form, a signed illustration (or illustration acknowledgement), and a supplemental application. The beauty of a conversion is that if there is no increase in the face amount, the applicant does not go through additional underwriting and will not need to prove additional insurability!

Read out next blogpost for a case study from American National about term life conversion.

How Cash Life Insurance Could Help You Keep More of Your Savings

2/16/2020

Do you want to create a diversified retirement portfolio that balances the limitations and benefits of different financial assets?

Your tax-deferred investment withdrawals, for example, will become taxable income. Add that income to any withdrawals on your stocks, bonds or mutual funds, and you could have a higher-than-anticipated tax bill.

Including tax-advantaged products like cash value life insurance can be key to a smaller tax bill later in life, as the chart below shows.

How to Create a Tax Efficient Retirement

2/13/2020

What should you do today to help protect your retirement income?

This document from Lincoln Financial below gives you some good ideas if you haven't thought about this topic before -

QLAC 101 - Which Carriers Have the Best QLACs?

2/7/2020

In our last blogpost, we discussed factors to consider when purchasing QLAC. Now the question - which carriers have the best QLAC products?

We recommend products from AIG, Lincoln, and Principal.

Below is up-to-date information about AIG's QLAC product, including producer and consumer guides, sales ideas, fact sheets, and more. If you are interested in the other carriers' QLAC products, please contact us.

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