Life Insurance Advisors, Inc.

Permanent insurance in danger of lapse before insureds’ second death; policies replaced

         Clients had purchased $6 million of second-to-die coverage 5 years previously from a relatively obscure company that had recently demutualized and that had experienced a downgrade in its financial strength ratings. Policies consisted of an equal combination of whole life and term insurance.

         “In-force” ledgers of existing policies showed death benefit lasting indefinitely. However, Life Insurance Advisors’ (LIA’s) independent analysis using proprietary software showed a strong likelihood that at least half of the insurance, and perhaps all of it, would lapse if the survivor of the client couple lived a long time. This is one of the everyday examples in LIA’s experience where a company’s own projections have proven unreliable and overly optimistic. This experience forms the basis for LIA’s opinion that policy reviews require an objective analysis that does not depend solely on illustrations and projections from the carrier in question.

         The clients were able to switch coverage to a top-rated company with a consistent history of producing highly competitive returns on whole life policies. Because the replacement policy was structured with the lowest possible commission, the cash value of the new policy exceeded the new premium outlay by the second year.
Permanent insurance in danger; death benefit reduced to save policy

Clients, referred by attorney, had purchased three $2 million dollar second-to-die policies for which they were paying almost $250,000 annually. These policies were a combination of whole life and term insurance and were designed to purchase the most “permanent” death benefit for the least premium. Once again, an independent review indicated a substantial risk that the policies would not last as long as the survivor of the two insureds might live, even though they were in relatively poor health. In spite of these health issues, an agent had proposed new policies with $225,000 of commissions. An analysis of this proposal suggested no realistic chance that the replacement policies, even if approved, would surpass the performance of existing policies. The large commissions would clearly preclude any possibility of such an outcome.

Life Insurance Advisors worked with the existing insurer, obtaining and analyzing numerous alternative illustrations, to repair and preserve the existing policies. LIA determined the amount by which the term insurance portion of the existing policies should be reduced to increase, to an acceptably high level, the odds that the policies would last for as long as one of the insureds would likely live.
Recommendation to save over $2 million in commissions on new insurance

Client, referred by fee-only financial advisor, was interested in purchasing a very large insurance policy ($4 million of premiums in two years) on his wife through his profit-sharing plan. He then planned to sell this policy to an irrevocable trust for a very low cash surrender value, a fraction of the premiums paid by the plan trustee.

Life Insurance Advisors raised some of the possible legal problems with such a plan from a policy valuation and ERISA compliance standpoint. Client was satisfied with the legal advice he had already received on these points. LIA pointed out that the very low cash surrender value of the policy after $4 million in premium payments resulted from unusually high commission payments for such a policy. LIA contacted the insurer in question and determined that it would be possible with this insurer to buy such a policy with a rebated commission in California (the client’s home state). LIA suggested that the client, if he was prepared to incur the legal risks of such a plan, pursue it on a commission rebate basis, resulting in more than $2 million in additional funds within his profit-sharing plan after the purchase of the policy than if he had proceeded according to his original plan that he discussed with LIA.
Alternative company, policy design, and premium structure reduces commissions by 88%; increases cash value and death benefit rate of  return by 77% and 59 %; adds over $6 million to death benefit.

          Client, referred by fee-only financial advisor, had been shown an illustration for a $6.9 million policy from a company with a well-recognized name. LIA was asked whether the proposed policy offered the best possible company, policy type, cost, and risk-adjusted return.

         LIA recommended a different company with higher financial strength ratings and a better historic rate of return on its policies than the company in the original illustration. LIA also suggested a policy type and premium structure that substantially reduced commissions and increased cash value and death benefits by millions of dollars. For a policy with the same premium, death benefit, and underlying investments as the client had been shown, LIA’s recommendation produced the following superior results:
- Reduced the first-year agent commissions by over 88%, from $155,000 to $18,000 in comparison with those in the illustration the client had been shown.
- Increased the first-year cash value from 0 to $150,000.
- Increased the cash value at the insured’s age 85 from $7,657,000 to $13,556,000, or by 77%.
- Increased the death benefit at the insured’s age 85 from $10,404,000 to $16,499,000, or by 59%, or $6,095,000
Insurer restores original $1 million policy that was about to terminate

Client, referred by attorney, had purchased a variable life policy that had been sold with a “vanishing premium” illustration. Subsequent to the purchase, the agent had indicated that client did not need to make certain premium payments and that the sales illustration was conservative in comparison with what the policy would likely return.

LIA provided analysis showing abnormally low rate of return for premiums that had been paid on this policy and reviewed file and history of case to uncover facts and arguments that helped the lawyer negotiate a highly favorable settlement with insurer. As a result, the policy that had been on the verge of lapsing and that the client had been inclined to surrender was restored to its previously illustrated value. The insurer guaranteed the permanent original death benefit of $1 million with a continuation of the original premium payments.
Client negotiates additional benefit for value of split dollar policy cost

Client, referred by attorney, sought help in calculating the current and future value of his interest in a split dollar policy. Client was considering an early retirement but wanted to maximize his benefit under the split dollar plan.

LIA reviewed plan details and calculated the possible benefits to client and future costs to the employer under various possible alternatives and in light of new IRS regulations governing split dollar plans. LIA’s independent spreadsheet analyses helped to persuade employer to offer client an additional severance benefit equal to the future cost of the split dollar plan for client that the employer would avoid as the result of client’s early retirement.

Sample Cases