INSURANCE ARTICLES AND COMMENTARY

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INSURANCE: (LIMRA) Term insurance accounted for 42% of all policies purchased by adults from agents in 1995. Term policies also account for more than 50% of policies bought by individuals with incomes over $50,000- a higher percentage than for those with lower incomes.

LIFE INSURANCE: (1998) The NALU (National Association of Life Underwriters) provided these statistics for the cost of insurance:

The average cost per $100 of new annual premium for policies sold direct was $97 (much higher than often reported) and $139 for policies sold through a GA (General Agency) system. However, the lowest GA company had a cost of $103- "a clear indication that companies using agents can deliver" a competitive product.

Other comments- the lapse rate for annuities sold by stock brokers is three times higher than for those sold by agents; despite consumer surveys indicating many people prefer to buy direct, only 2% to 3% actually do.

LIFE INSURANCE:  1998 Traditional life insurance policies may not be profitable for the company til the seventh year- primarily after paying the front end commission. Of course, it takes a lot of years for the policyholder to become profitable- they effectively pay the front end commissions. And many policyholders have a change of heart after buying the traditional policies. A study by Bragg and Assoc. said that 15.9% of all whole life policies are in force for just ONE year. In years three though five, another 5.7% lapse the policy. Universal life, which is cheaper loses about 8.1% of policyholders in the first year and about 9.5% of the remaining are closed out after the second year. After 6 years, about 40% of all whole and universal life policies have lapsed. End result? Neither the company nor the policyholder gets any benefit. Just the agent from the front end commission. That's not to say that an agent should not be compensated. But people end up using the wrong agents to begin with and that's why they are sold policies they simply may not need. Yes, you can (partly) blame an agent. But the consumers must accept at least 60% of the responsibility for not doing enough homework- if any!

That needs to be put into further context in that, according to a LIMRA study, 35% of households knew they did not have enough life insurance. But since they felt uncomfortable about trusting an agent (and undoubtedly equally uncomfortable about death in itself) they were doing nothing.

MORE INSURANCE: (1998) As stated, one of the reasons that some people do not buy insurance is simply because they do not trust insurance agents. Dow Jones Investment Adviser had some pertinent comments in November by summarizing an article with, "after talking with many persons in all corners of the industry, it becomes clear that too many insurance home offices are still run by industry veterans whose mindset hasn't changed much from the 1970's. They still think that every breadwinner should own life insurance and that people have to be tricked or coerced into buying it".

Even if you do find somebody attempting to do the job correctly, they simply don't have the requisite skills. The article went on, "the problem is that even many of the people selling the product don't have a good understanding of it. If they don't understand it, then there is no way the person who is buying it is going to have a clear understanding." "When the consumer talks to a life insurance agent, a lot of the time, neither has a clear idea of how the numbers work. The agent is trained to avoid clear answers anyway, he really has no choice." Insurance companies will "have to demistify the ir product lines or lose any chance of regaining the public trust"

AND MORE INSURANCE: (1998) Term insurance has grown from 33% of the market in 1985 to 50% in 1997. Whole life was 88% of new premium dollars in 1986 is now down to 18% of the face amount written in 1996. What has taken over? Well, of course universal life really beat up whole life. But variable life has come on to the scene during the last few years and acquired a lot of business. So, is variable any good? Nope. People are sold variable life- it is rarely bought.

LIFE INSURANCE & ANNUITIES: (1998) I don't like this number since it does not, in my mind,  reflect what consumers should do (so what else is new?). From about 14% of total premiums in 1973, annuity premium volume now accounts for about 50% of all monies received. Life insurance premiums have therefore done the opposite going from 55% of premiums in 1973 to less than 30% today (remainder is health insurance). Whole life accounted for 82% of all premiums collected in 1980 but is now less than 50% today.

VARIABLE ANNUITIES: (1998) "According to LIMRA, variable products were 20% of 1996 life premium and 53% of 1996 annuity considerations. The forecast is for continued growth. By 2000, 31% of life premiums will be variable and by 2002, variable will account for 70% of   annuity considerations."

Why are so many people buying variable products? Because the rep is nice and they trust them. Not because they rep was competent nor certainly is it what they should be doing. You have to understand basis to buy a variable- and insurance agents are NEVER taught that.

MILLION DOLLAR ROUND TABLE: (1998) How many cases a life agent must sell in order to be identified as "Top of the Table" or whatever? Here are some numbers that will make your day. "MDRT STATS - Total 1998 qualifying members: 18,868 with an average number of lives/cases of 132 in 1997 (3,351 sold 150 or more lives/cases). Court of the Table qualifiers: 2,193, with an average of 225 lives/cases and a median of 108. Top of the Table members: 711, with an average of 280 lives/cases and a median of 101. Industry average? According to LIMRA, agents in the business for five years of more sold an average of 41 lives/cases in 1996.

COULD BE PROBLEMS: In 1997, insurance companies increased in investments in high yield bonds representing 35% of their entire portfolios- up from 32% in 1996. Add in non performing bonds and other high risk investments and it pushed the risk level up to 38 cents on the dollar. Its not the same cautionary scenario as the early 1990's, but still requires vigilance.

HOUSEHOLD SPENDING ON INSURANCE 1995:

All insurance: 6.8%

Health: 2.7%

Auto: 2.2%

Life: 1.1%

Homeowners: 0.7%

Other: 0.1%

source: Ins. Information Institute

INSURANCE: (1998) (Juan B. Aponte and Herbert S. Denenberg, "A New Concept of the Economics of Life Value and the Human Life Value: A Rationale for Term Insurance as the Cornerstone of Insurance Marketing," Journal of Risk and Insurance, September 1968) Two insurance professors discuss the failure of traditional marketing approaches to match products with needs:

"Perhaps the entire structure of life insurance marketing needs retooling, as it relies almost exclusively on a marketing force promoting an investment, yet basically untrained in matters of   investment. In making an investment use of life insurance, the   insurance oriented salesman is generally more conversant with the advantages than the disadvantages of his recommendations. What is needed is an insurance-investment counselor who has no special financial interest in any investment alternative and is also conversant with all major alternatives. Today, the typical insurance salesman not   only does not fully appreciate investment alternatives, but he often   has little understanding of the investment element of life insurance. And his limited knowledge is strongly warped by his interest in the commission structure of his product." I am one of only 35 licensed Insurance Analysts in California .

ACCELERATED DEATH BENEFITS: Amounts received under a life insurance contract on the life of an individual who is terminally or chronically ill may be excludable from gross income (check your contract to see if the rider exists). A similar rule applies to proceeds from the sale of a death benefit under a life insurance settlement to a viatical settlement provider under those circumstances (but do a lot of research before you attempt a viatical.)

INSURANCE: (1999) According to a Roper Starch study, the share of American households having such coverage has dropped from 83 % in 1976 to 74 %. At least 25 million Americans don't have it. That is, in part, due to the poor reputation that insurance agents have. Also due to the fewer number of agents in the business- or entering the business. Lastly, it is due to improper, inadequate or totally lacking proper financial planning by families who refuse to address the risks of life and living. Unfortunately, many women and children will bear the brunt of the problems because the man- traditionally the breadwinner- will die first leaving no funds for the family.

INSURANCE: (1999) Conning & Company survey predicts "that traditional agents who had accounted for virtually all life insurance sales 20 years ago, today account for 82%, with that number expected to dwindle to 68% over the next five years as insurers move to other channels of distribution." According to the survey, insurance companies expect the other 32% of their life insurance sales to come from stockbrokers and banks (20%), direct marketing (6%), workplace marketing (2%) and quote services/Internet sales (4%).

MORE LIFE INSURANCE ETHICS: (1999) Richard Weber notes at least 5 ethical problems within the industry. My (cynical) comments follow.

1.) Sale illustrations. These are distortions of reality since they are based on situations that will supposedly exist 25- 50+ years into the future. Sure they may work, but the whole idea with insurance, in my mind, is to buy insurance. If you become emotionally involved with an illustration that may not come close to reflect reality, you may find yourself in a major bind years in the future. If you need insurance for a period of time, buy it for that time frame- hence term for many situations. But if you need/want permanent insurance, buy permanent insurance and stop messing with all the unknowns about earnings, mutual funds in variable products and what not. You'll only get into trouble. (Admittedly, maybe you won't. But you may not know for 40+ years and then it's too late to change.)

2.) Replacement of policies. These are viable under certain circumstances, but they are extremely limited. The problem within the industry is that agents were replacing one with another with another, etc. for the commissions. There will be more legislation on the problem, but best stated whenever someone makes an offer for replacement - caveat emptor. In California- as well as other states- you must sign off on replacement forms before a sale is consumated.

3). Regulation. Mr Weber notes an old axiom that you cannot regulate ethics (and a rationalization for why bother to have ethical standards in the first place!) He is absolutely correct when he states "regulations.... tend to make it harder for ethical agents to conduct their business and usually will have little or no impact on those for whom the regulations were intended. While we must adhere to regulations whether we like them or not, ethical selling calls for constantly going beyond the regulations and seeking what is genuinely in the client's best interest."

4. Consolidation. Mr. Weber asks, "Will mergers be in the best interest of the public?" The major disability companies are all merging into one and its debatable that what actually will transpire will be in he best interest of consumers.

5. Product suitability- The Insurance Market place Standards Association (IMSA) requires member to "develop, promulgate and monitor policies and procedures that speak to product suitability standards." But if they did so, half of the insurers in the U.S. (my opinion) would be put out of business. I know some of the biggest firms that are almost focusing on the dollar as the "be all and end all".

The problem is that no matter what you think of insurance, past problems, future difficulties, etc., it still is a mandatory element of financial planning. However, as much as 70% of the public are underinsured and underserved. The sale/use of life insurance can be done ethically. But not by an industry that clearly is focused on the dollar, no matter what it says. Not by the Departments of Insurance who effectively do nothing to fine unethical and illegal activities. Even to allow said licensees to remain licensed. Not by the national Planning Organizations who do not require any continuing education in the field. Not by fee only planners who I have found are almost incompetent in this mind numbing area.

INSURANCE IMCOMPREHENSIBILITY: "Companies need to become much more consumer oriented. This is going to allow consumers to understand the products more, which will make the sales easier, which allows us to pay agents less per sale. I think we need to try to improve the quality of information. If you ask your friends from outside the insurance industry what insurance products they have, ask them to explain why they have those products. See how many can give you anything more than vague answers. Then, read the material the insurance companies are giving these people. See how many paragraphs you have to read over three or four times to understand what the product is and how it works. What chance does your average consumer have of understanding these products?" (Tillinghast actuary at a May 1997 meeting of the Society of Actuaries).

MORE INSURANCE: (1999) one of the greatest difficulties clients have in financial planning is the ability to look at death- yet it is absolutely mandatory that one addresses the need for various types of insurance. Unfortunately this hesitancy is also clearly evidence with a lack of insurance planning by CFP's. In a recent commentary in the Journal of Financial Planning it indicated that many planners were not looking at, or least not emphasizing enough, the entire area of risk management-not just life insurance, but also disability, health, long-term care and liability coverage. One CFP noted that "insurance is not is exciting to offer to clients as investments". An estate planning expert noted that the majority of financial planners either don't know, or what they know about life insurance is wrong and they therefore are not using the product. In my opinion, it is malpractice if someone says he is doing a financial plan any precludes insurance.

Several reasons have been offered why a the insurance planning is not properly addressed:

1. Most planners apt to focus almost solely on investment management

2. Clients don't like to pay for insurance.

3. Few people like to think about death, dying, and disability, Alzheimers, hospitals, nursing homes, home health care or any of the associated issues. This is most notable in men who can do have a significant fear of dying. Women tend to be far more open about the subject.

4. Life insurance companies have been emphasizing the investment aspect of the policy and have not truly addressed the underlying need for insurance- the financial and emotional security should someone die or become disabled.

5. The investment emphasis by a the insurance companies has resulted in a lot of lawsuits that have made planners uneasy with a product.

6. This is been used as a rationale by many planners-the fact that it is almost solely commissioned based and therefore must contain an absolute conflict of interest.

7. Insurance is, in my mind, one of the most difficult areas of all planning areas. While it is easy to get information about mutual funds and other investments from the lights of Morningstar in Value Line, it is almost nigh on to impossible to obtain objective and intensive analysis of a life insurance product. Therefore, since the analysis is hard, and since very few planners had the capability to do such analysis, they simply have decided to effectively eliminate planning for that area in total. While this has been somewhat noticeable with financial planners having a life insurance license, it is become almost unilateral with fee only planners who possess no license whatsoever and are almost universally not taking any mandatory containing education classes that are required by the state licensing departments. One of the rationalizations that these fee only planners use, as stated above, is the element of commissions. While it is unquestionably true that commissions can taint the planning process, it is not a universal fact. Further there are certain products-such as long term care and Medigap policies-that are only available with commissions. Therefore, regardless of anybody's bias for or against commissions, they have no choice but to utilize said products and therefore have a fiduciary obligation to do the necessary research to figure out how they work, what they are supposed to do and what the client should ultimately purchase- if anything. But we still go back to knowledge. And unlicensed fee only planner will only have a rudimentary background in analyzing said products. Therefore, while somebody may have limited the conflict of interest in regards to commission, they simply have paid and hourly or flat fee for an incompetent, unknowledgeable adviser who is effectively breached its fiduciary obligation to a client.

The article also noted this quote, a fee only planner might gather info at a "seminar or by reading a magazine article, but not sure they are getting adequate information." I will reinforce that statement from my attendance at an IAFP meeting in San Francisco where (mostly) fee only planners heard a 25 minute discussion on long term care. I would not be surprised that that might be the only true discussion they hear on the matter for a full year- and that they might very well use that simplistic insight as the entire breath of the subject matter. Yet commissioned agents in California must attend a full eight hour course on long-term care before they can never really broached the subject with a client. You tell me, commission or otherwise, who would you rather use? I'd opt for the knowledge.

LIFE INSURANCE (Insure.com 1999) The total face amount of life insurance policies that were issued in 1998 rose by 4.6% to $2.37 trillion, while the face amount of total life insurance policies that are in force grew by 10.8% to $19.84 trillion, according to A.M. Best.

New ordinary life insurance policies -- including whole, universal, term, and variable life -- rose 8.5 percent to $1.48 trillion, while ordinary life insurance in-force grew by 12.8% industrywide to $12.9 trillion.

INSURANCE: (2000) According to a Roper Starch study, the share of American households having such coverage has dropped from 83 % in 1976 to 74 %. At least 25 million Americans don't have it. That is, in part, due to the poor reputation that insurance agents have. Also due to the fewer number of agents in the business- or entering the business. Lastly, it is due to improper, inadequate or totally lacking proper financial planning by families who refuse to address the risks of life and living. Unfortunately, many women and children will bear the brunt of the problems because the man- traditionally the breadwinner- will die first leaving no funds for the family.

NEW GROUP TERM RATES: (Insure.com 2000) The chart below shows how much you'll be taxed for every $1,000 of death benefit over $50,000 on your group life insurance policy.

Age	Current	New
Under 25	$0.96	$0.60
25- 29	0.96	0.72
30- 34	1.08	0.96
35- 39	1.32	1.08
40- 44	2.04	1.20
45- 49	3.48	1.80
50- 54	5.76	2.76
55- 59	9.00	5.16
60- 64	14.04	7.92
65- 69	25.20	15.24
70+	34.12	24.72

ESTIMATED RISK FOR AN AMERICAN OVER A 50-YEAR PERIOD. (2000)

Risk of death from botulism: 1 in 2,000,000

Risk of death from fireworks: 1 in 1,000,000

Risk of death from tornados: 1 in 50,000

Risk of death from airplane crash: 1 in 20,000

Risk of death from asteroid impact : 1 in 20,000

Risk of death from electrocution: 1 in 5,000

Risk of death from firearms accident: 1 in 2,000

Risk of death from homicide: 1 in 300

Risk of death from automobile accident: 1 in 100

Source: Cosmic Catastrophes (Plenum Press, 1989)

Here is an article on the conflict of interest generated by commissionable sales. (2000) I have stated such conflicts for years. But one thing that is consistency missed is that using a fee planner on insurance (which I can do legally in the California) can still be fraught with errors and costs. Why? Because most fee planners are not interested in insurance, have never been licensed in it, take no continuing education courses- simply state that they are conflict free. Fine, but paying hourly fees to a twit who doesn't like the subject and knows little about it is valueless as compared to someone who does a good job and who gets a commission. Further, many of these fee planners simply refer a client to a low load product. In some cases that is preferable to the high fees generated in a commissionable product. But you still have to tell me why you want a cash value product in the first place. The point being is that there are next to no commissionable agents nor fee planners who have a clue to that statement. And absolutely no consumers. Neither does Insure.com who sponsors the article.

Underwriting Systemic Lupus Erythematosus (SLE)

"Lupus" (SLE) is an autoimmune disease where the body loses its ability to tell the difference between foreign substances called "antigens" and its own cells and tissues. The immune system instead attacks its own cells and tissue through "immune complexes" that build up in the tissues and cause inflammation, injury and pain. SLE is notable for unpredictable exacerbations and remissions and usually involves the joints, skin, kidney, lungs, heart and GI tract.

Women and minorities have the highest incidence of SLE

Women of child bearing age are at the highest risk

SLE is three times more common in African American blacks than American caucasians.

Newer information puts the prevalence in the United States as high as 2,000,000

Most state insurance departments underfunded  (2000)

Source: Consumer Federation of America

California got a B but it also had an insurance Commissioner who had to quit, the lead counsel had to quit years ago, etc.

ANNUITY SALES

Annuity sales since 1997 (in billions) Year Fixed Annuities Variable Annuities Equity-indexed Annuities 1997 $35.2 $87.9 $3.0 1998 $28.0 $99.5 $4.0 1999 $36.7 $121.8 $5.0 Source: LIMRA International

Insurance (LIMRA & 2000 ACLI Life Insurers Fact Book)

	U.S. Full time Career Agents	Life Insurers Doing Business in U.S.	Number of Individual Policies Sold	Face Amount
1983	244,345	2,117	18,571,000	754,832
1986	246,908	2,254	17,116,000	934,010
1989	242,103	2,270	14,850,000	1,020,971
1991	238,491	2,064	13,583,000	1,041,706
1993	219,014	1,844	13,664,000	1,101,476
1996	192,750	1,679	12,022,000	1,089,268
1998	190,350	1,563	11,559,000	1324,671
1999		1,470	11,673,000	1,399,848

Number of meetings an insurance agent has to have in order to close one: (2001) The "Purdue Formula" (published in 1948) of 10 face-to-face meetings, five closing interviews and one sale per week no longer cuts it. LIMRA's new formula is get in front of 15 people and hold six closing interviews in order to make one sale.

Homeowners insurance: (NY Times 2001) Prices are rising at more than twice the 3 percent average of recent years, and by more than 10 percent in many states. The companies are earning less on their investments and on certain types of personal policies while reeling from a surge in weather-related claims in the last few years. In addition to raising rates, some companies are also forcing homeowners to pay more out of pocket after they file claims.

There is also a trend toward discouraging and rejecting homeowners' claims.

Only a few years ago, if a house insured for its full value of, say, $100,000 was destroyed, the insurance company would replace it, even if the cost ran to more than $100,000. Now the payout is usually limited to, say, 25 percent more than the insured value.

Instead of applying deductibles of $250 or $500, once standard, many companies now impose a deductible of up to 5 percent of the value of houses in the hurricane-prone Atlantic and Gulf coasts. On a home insured for $100,000, the owner would pay the first $5,000 in damages.

In Florida and some other coastal states, insurers have persuaded regulators to let them drop hurricane coverage from their home insurance policies and sell it separately.

Life Insurance: (2001) Studies have found that 90% of life insurance policies held institutionally have never been reviewed or thoroughly evaluated since inception or donation. These same studies show the financial strengths of nearly 10% of insurance carriers have degraded since policies were issued and that 60% of polices are performing poorly (i.e., below their original projections). The most common problems one finds in reviewing a portfolio of polices include:

the carrier’s strength may have diminished to an unacceptable level of risk.

potential policy under-performance may taint donor/recipient expectations.

loans could be crippling policies.

policies in the 1980s and early 1990s were sold at higher crediting rates than today.

mortality tables/expectations have changed substantially.

policies could lapse before mortality due to underfunding.

payments (i.e., gifts) of premiums may be required many years beyond the original “as sold” illustrations.

lower expenses in current policies could create higher death benefits or lower premium costs than in older policies.

Life insurance is complicated. Every policy is different – carriers, product design, guarantees, expenses built into the policies, riders of many types, policy construction, endowment considerations, mortality assumptions, and agent compensation. No similar assumptions can be made when looking at two different policies. There are relatively easy ways, both on-line and off, to check the carrier’s fô-�

There is a federal standard for all fiduciaries in OCC/OTS regulation-that all “investments,” including insurance contracts, must be reviewed before acceptance and annually thereafter. That is the recognized rule of prudence. (and rare that a financial planner, attorney, CPA, will ever hire  an independent expert to do such review)

Leukemia insurability

Pancreatitis insurability

Seniors were allegedly duped into buying annuities that did not mature until they were to mark their 95th birthday. (2001)

ANNUITY PRODUCTS, MORTALITY and INFLATION RISK LINK: (Brown, Mitchell, Perterba) (PDF) Scholarly review 2001

California Insurance Link

New York Insurance link:

Customer satisfaction with home insurers

This will give you an idea of how much rates are increasing: (11/2001) One broker reports a customer who paid $45,000 for $5 million in trucking coverage last year, is paying $157,000 at renewal.

Another broker said a general liability policy costing $5,800 last year is $12,000 today, with most carriers declining the coverage altogether.

A $10 million umbrella policy quoted at $8,900 last year is $27,000 this year. (That's an awful lot for an umbrella)

The National Association of Insurance Commissioners has launched the Consumer Information Source web site, designed to enable consumers to locate specific company information, as well as to file consumer complaints and review information on resolved complaints against a company.

SUSPECTED ALCOHOL ABUSE UNDERWRITING  (2002)

Why these clients are usually postponed or declined

How they are discovered in the underwriting process

The potential bias in the client's medical records

Blood tests that suggest alcohol abuse problems

Special blood tests used to clarify suspected alcohol abuse cases

Sale of an insurance policy: (2002) In 1998 senior life settlement transactions totaled 100 million, in 1999 is 900 million, estimated to grow to 10 billion a year. A life settlement is the sale of an in-force life insurance policy for the calculated present value of its future net death benefit. The policy seller receives a lump sum cash payment in exchange for transferring all ownership and beneficial interest in the policy to the purchaser. The policy insured(s) must be age 65 or greater. The transaction transfers expensive premium payments from the seller to the buyer and provides current cash to the seller for more suitable financial planning options. The U.S. Census Bureau estimates that there will be 50 million people age 65 and over by 2010, representing almost 15% of the U.S. population. Given the significant proportion of that population which will continue to own life insurance, industry experts estimate that life settlement sales could reach $20 to $50 billion per year within the next 10 years.

Find an old life policy- The Medical Insurance Bureau may be able to help find a policy upon someones death

Here's what to do when you need care and your insurance company says you don't. PLUS: 3 sample letters of appeal to use when disputing a claim denial.

Insurance rates: (2002) commercial buildings which now pay five or six cents per square foot for insurance need to budget for costs to go up to as much as seven or eight cents a foot. She says the increases could be across the board for all types of properties. Single family housing developers could be sharply affected.

Insurance policies (2002) The MIB Life Index(tm) Annual Report indicates that demand for life insurance remained stable in 2001, registering a slight .1 percent increase over demand in the year earlier. A surge of activity during the fourth quarter of 2001 offset a similar high level of activity in early 2000. The second through fourth quarters of 2001 showed stronger sales of life insurance than the same period in 2000, with the fourth quarter activity levels being at the highest three-month level since the fourth quarter of 1999.

Annual Percent Change vs. Previous Year

            US Canada Total

2001 -0.5% 6.3% 0.1%

RED FLAG MEDICATIONS IN UNDERWRITING--PART 1

Buying life insurance after being diagnosed with cancer

P&C:  (2002) The U.S. property and casualty (P&C) insurance industry -- suffering from sagging investment returns and unprecedented claims from the September 11 terrorist attacks -- could save $30 billion annually through aggressive transformation of the way it processes insurance claims.

P&C Insurance after 9/11 (AM BEST 2002) The affordability and availability of reinsurance have been severely impaired, and most reinsurers are unwilling to cover terrorism risks. Primary insurers are limited in their ability to change pricing and coverage terms. Equity markets have become directly correlated with insurance losses.

1. The Changing Risk Environment - Numerous lines of business have become exposed to catastrophic risks once thought confined to natural occurrences. Underwriters must now think in terms of target potential and consider the huge clash potential, in addition to traditional loss exposures. An industry-wide solution is needed to stabilize the risks facing the industry.

2. Market Hardening Accelerates - Pricing for Jan. 1 reinsurance renewals could rise by as much as 100-200%. The effects of Sept. 11 will not be fully recognized until 2002, when premium growth is expected to reach 10%. A.M. Best expects higher insurance prices will continue through 2003. Thereafter, new capital threatens to derail the pricing train.

3. Flight to Quality Takes Off - A.M. Best expects to see a renewed flight to quality that will benefit financially strong insurers and reinsurers. A.M. Best expects this trend to be greatest in the reinsurance and large commercial markets.

4. Capital Reenters the Market - Since Sept. 11, approximately $16 billion of new capital has entered the insurance market. While the entrance of new capital is a positive sign for the industry, it has important implications for the sustainability of the hard market.

5. Results - Bad News/Good News - The fourth quarter is likely to become a dumping ground as insurers write off the year and take the opportunity to clean up their balance sheets. Reported combined ratios are expected to bottom out in 2001, with personal and commercial lines projected at 112.5 and 118.0, respectively. On the other hand, results should improve as catastrophes return to historical levels, reserve additions moderate and price increases are more fully earned, albeit in a more modest recovery than typical of past hard markets.

6. Financial Services Converge - To date, convergence of financial services with the property/casualty industry has been limited to distributors rather than underwriters. The changing risk environment has introduced even greater volatility that will keep the property/casualty and financial services industries from combining. We expect selected ``bolt-on'' acquisitions by Bermuda-based and European insurers. Once the issue of coverage for terrorism risk is clarified, additional suitors will emerge. At the same time, consolidation within the domestic property/casualty industry will accelerate.

7. Technology Reshapes Business Models - The internet has become an important business-to-business tool, linking companies with both captive and independent agents. As agents are better prepared, more efficient application submission and real-time quotes are two areas that continue to quickly evolve.

Insurers and 9/11: (BEST 2002) The immediate financial impact on life insurers of Sept. 11 was manageable, with worst-case scenario payouts anticipated at under $6 billion. Best anticipates that these combined forces will have longer-term implications for insurers' investment portfolios, mental health and disability claims and life reinsurance, particularly catastrophic life reinsurance, group life reinsurance and workers' compensation carve-out coverages. Other findings:

1. A 5% growth in net premium and 15% decline in pretax statutory operating earnings in 2001, as compared to 11% and 10% respectively in 2000.

2. Extreme volatility in the equity markets and low interest rates are causing customers to shift from variable to fixed products.

3. The need to define limits on terrorism coverage going forward is critical. While a more immediate issue for property/casualty insurers, the implications of bioterrorism and other threats make it a concern for life/health insurers as well.

4. There are some indications that more people are seeking out life insurance, turning the old "life insurance is sold not bought" adage on its head.

And more: The unprecedented events of Sept. 11 have forever changed the way the insurance industry defines risk. Both property and liability lines have been exposed to catastrophic risks that cannot be priced using traditional actuarial methods." Some trends:

1. Underwriters must now think in terms of target potential and consider the huge clash potential, in addition to traditional loss exposures.

2. Market hardening will accelerate.

3. Expect to see a renewed flight to quality that will benefit financially strong insurers and reinsurers.

4. The changing risk environment has introduced even greater volatility that will keep the property/casualty and financial services industries from combining.

412 (i) Benefit Pension Plan The plan must be funded solely by individual or group life insurance and annuity contracts that are part of the same series, that include the same mortality tables and rate assumptions for all participants.

Insurance: (2002) Over the near-term, Fitch rating service maintains its Negative Rating Outlook for the North America life insurance industry. The outlook is driven by several factors including: intense competition; a shift to lower-margin products due to changes in consumer demographics, expectations and preferences; declining sustainable earnings and capital growth rates; and increased earnings volatility because many earnings drivers are increasingly outside of management's direct control.

LOMALearn (2002) Online is LOMA's new online learning site designed to offer insurance and financial services courses for organizations and individuals in the United States and Canada.

Underwriting and depression: (2002) WHY CAN'T CLIENTS WITH A DEPRESSION HISTORY QUALIFY FOR PREFERRED?

The short answer is that depressed people experience a death rate twice that observed in the general population from both natural and accidental causes. There are three primary types of depression:

Dysthymia - a low grade depression present for at least two years.

Major Depression - A more extreme version of Dysthymia that can be either unipolar or bipolar. Bipolar is classified as having one or more periods of elevated or irritable mood.

Seasonal affective disorder - Major depression which occurs at specific seasons.

The increased mortality from natural causes is due to common conditions such as heart disease, lung infections and influenza. Accidental deaths are probably related to greater risk taking behavior. Clients with a psychiatric illness are more likely to be either victims or perpetrators of violence and are more prone to abuse alcohol and drugs.

The most serious complication of major depression is suicide. A quarter of all patients diagnosed with major depression attempt suicide at least once and 15% of patients ultimately die by suicide.

Factors associated with a poor risk are three or more episodes, lack of a maintenance dose medication, multiple drug therapy, poor compliance, hospitalization and substance abuse.

Minor depression is usually Table 2 within the first year of diagnosis and standard thereafter. Major depression is usually rated Table 2 to 4 if under good control.

So you think attorneys and CPA's et al understand insurance?: (National Underwriter, Blazzard, JD, Hasenauer JD 2002) "Given that the subject of life insurance is rarely taught in law schools or accounting courses, most lawyers and accountants  know little more about insurance than does the general public. When asked by their clients to advice on insurance, then, it is often easier to discourage their purchase than to expose that that they are truly ignorant and life insurance and how it works.

Even the training that is available on these subjects may be inadequate to provide a level of comfort that lawyers or accountants need in order to recommend a purchase.

As things now stand, we know of no reference material that is currently available that would enable an insurance professional or lawyer or accountant to access the technical information that applies to these new insurance products."

An insurance license does not provide the adequate insight to the technicalities and never will. The designations of CFP, NAPFA, CPA PFS, etc. do not provide it either. Certainly if one gets a designation 10 or 15 years ago with no additional input provides nothing either since insurance products are forever evolving. Admittedly, many are not worth the paper they are printed on but there are a few that demand intensive investigation.

As stated, a license per se is no indication of competency. But no license at all and giving advice on this product is fraud upon the public. The best way- perhaps the only way- to know what is going on is to get a license. Then you will be on the list of every company out there. You will be deluged by product info. Again, 85% you throw away. But the 15% gives insight that no coursework could ever provide.

And since I am only one of 40 in California with a LIfe and Disability Insurance Analyst license, I can unequivocally tell you that, while I am considered to be an expert, my insight to what's new comes from being licensed as an agent. No two or three hour seminar to planners can come close to this info.

Annuities (National Underwriter 2002)  90% of annuity owners still own the first annuity they bought and only 3 out of 10 owners have withdrawn or received money from an annuity or their spouse still owns. The average age of withdrawal is 62.. Slightly more women than men are owners of non qualified annuities. The majority of owners are married, 21% are widowed and 10% are single

People do not hold on to policies: (ACLI Life Insurance Fact Book 2001 (ACLI tabulations of data from National Association of Insurance Commissioners)  In the year 2000, life insurers paid out $43.8 billion in death benefits under life insurance and annuity policies.

In the year 2000, insurers paid out $183 billion in life and annuity surrender values..

Insurance regulation. (2002) In a consumer survey by ACLI, only one-third (34 percent) of the public is able to correctly identify state governments as the primary regulators of life insurance companies - while 25 percent incorrectly believe life insurance is regulated at the federal level. A similar number - 24 percent - incorrectly believe the life insurance industry is not regulated, while 17 percent said they did not know whether or how life insurance is regulated.

Only one in 10 consumers (11 percent) say they would turn to the state insurance commissioner, regulatory commission or consumer protection agency to resolve a complaint against a life insurer. Almost six in 10 (57 percent) say they would turn to a lawyer or the legal system instead. The second largest group of respondents - 13 percent - would go to the life insurance company itself and work through its chain of command.

A 2000 study by the Consumer Federation of America (CFA) found that more than half of the states - representing 56 percent of the U.S. population - were more than 40 percent below the minimum funding level needed to effectively regulate the insurance industry and to fully protect consumers. The CFA study also found that the state regulatory system overall was almost 25 percent below the minimum funding needed.

Life Insurance: (2002) Only one-third (34 percent) of the public is able to correctly identify state governments as the primary regulators of life insurance companies - while 25 percent incorrectly believe life insurance is regulated at the federal level, ACLI's survey found. A similar number - 24 percent - incorrectly believe the life insurance industry is not regulated, while 17 percent said they did not know whether or how life insurance is regulated.

Only one in 10 consumers (11 percent) say they would turn to the state insurance commissioner, regulatory commission or consumer protection agency to resolve a complaint against a life insurer. Almost six in 10 (57 percent) say they would turn to a lawyer or the legal system instead. The second largest group of respondents - 13 percent - would go to the life insurance company itself and work through its chain of command.Life Insurance: Only one-third (34 percent) of the public is able to correctly identify state governments as the primary regulators of life insurance companies - while 25 percent incorrectly believe life insurance is regulated at the federal level, ACLI's survey found. A similar number - 24 percent - incorrectly believe the life insurance industry is not regulated, while 17 percent said they did not know whether or how life insurance is regulated.

Only one in 10 consumers (11 percent) say they would turn to the state insurance commissioner, regulatory commission or consumer protection agency to resolve a complaint against a life insurer. Almost six in 10 (57 percent) say they would turn to a lawyer or the legal system instead. The second largest group of respondents - 13 percent - would go to the life insurance company itself and work through its chain of command.

Structured Settlements: During the first six months of 2002, life insurance members of The National Structured Settlements Trade Association wrote $2.91 billion of issued annuities as settlements for physical injury claims. That is slightly lower than last year, but significantly higher than 1999 and 2000.

Hurricane insurance: (2002) More than 68 million people now live in hurricane-vulnerable coastal areas of the United States, up from 52 million in 1970, a 31 percent increase over 30 years. Expensive homes and commercial structures now have an insured property valued at more than $2 trillion, the I.I.I. warns. Nationally, homeowner insurance rates are going up 8-10 percent. People who live in areas vulnerable to natural disasters are paying more because the risk of significant damage is higher. Rates for homes along the coast can be about 20 percent higher than inland properties. In addition, the deductible they carry, the amount of loss they would be responsible for before insurance kicks in, is higher, too. Hurricane deductibles may range from one to 15 percent of the home's insured value, depending on many factors that differ from state to state, and sometimes from insurer to insurer.

Rebuilding Costs - Consumers need enough insurance to rebuild their homes in case of destruction by a hurricane or other disaster. If you've made alterations or improvements to your home, such as adding a deck or expanding a room, it is important to notify your insurer so you have the right coverage for the value of your home. Also, make sure that the "policy limit" for rebuilding has kept up with increases in local building costs. If you have not adjusted this amount in a number of years, you may be underinsured. To prevent this, ask your insurer about an "inflation guard clause," which will automatically increase your coverage regularly by a certain percentage.

Replacement Cost Coverage - Insure your home for its "replacement cost" rather than its "actual cash value." Replacement cost coverage pays for the repair or replacement of damaged property with materials of similar kind and quality. Actual cash value reimburses you for the depreciated value of your home. This means your company would deduct for factors such as age and wear and tear. Also consider purchasing additional coverage through a guaranteed or extended replacement cost policy. These policies provide added protection against sudden increases in construction costs due to shortages of labor and building materials after a widespread disaster. Guaranteed replacement cost pays to rebuild your home as it was before the disaster, even if it costs more than the policy limit. Guaranteed and extended replacement cost may not be available if you own an older home.

Building Code Upgrades - Building codes require structures to be built to specific standards. If your home is severely damaged, you will have to rebuild it to comply with new building code standards in your state, which could be costly. While most policies do not pay for this added cost, consumers may be able to add an endorsement to their policy. Check with your insurer.

Coverage for Personal Possessions - There are two types of insurance consumers can buy to protect their personal possessions. Replacement cost coverage replaces property without a deduction or depreciation. Actual cash value coverage typically provides replacement cost less depreciation. Replacement cost generally costs about 10 percent more, but it provides much better coverage.

Loss of Use - If a hurricane or some other insured disaster destroys your home and you can no longer live in it, you are covered for the cost of living elsewhere while your home is being repaired or rebuilt. It pays the cost of hotel and restaurant bills and other additional living expenses beyond what you would pay for ordinary living. If you rent out part of your home, it would also replace lost income for the time you would not be able to collect rent. Many policies provide coverage for 20 percent of the amount of insurance you have on your house. Coverage varies from company to company, so find out how much you have and if you need additional coverage.

Split dollar mess: (NY Times 2002) In July, Congress passed the Corporate Responsibility Act of 2002, which banned company loans to executives. Now, according to the interpretation of tax lawyers and compensation experts, the premiums on split-dollar policies could be considered interest-free loans because the corporation is eventually reimbursed.

The uncertainty over the policies has virtually halted their sale, pending clarification by the government.

Split-dollar policies, so called because on paper the company and executive split the benefits, have been a feature of executive compensation for nearly 40 years. Typically, the company pays close to 100 percent of the premiums, which grow tax-free within the insurance policy and over a decade or two become a mountain of cash. When the executive retires, the corporation is repaid — without interest — from the cash buildup for the millions it has contributed in premiums.

The policies are set up so that the remaining cash pays for premiums for the rest of the executive's life, leaving the death benefit for his estate. Alternatively, after the corporation has been repaid, the executive can make regular tax-free withdrawals from the policy and spend the money during retirement, although the executive must take care to leave enough cash in the policy to continue paying premiums. If the policy lapses, the loans become taxable.

Claims- According to Weiss Ratings, the nation's property and casualty insurers had a $5.5 billion profit for the first three months of 2002, representing a $260 million, or 4.9%, increase over the same period last year. "Years of strong earnings and frequent rate increases have allowed the industry to quickly absorb losses from catastrophic events." On the life and health side, Weiss Ratings reports a $4.5 billion profit for the first three months of 2002, a $1.1 billion, or 32.8%, increase over the same period in 2001. An increase in net written premiums of $6.1 billion drove the increase, coupled with declines in policy surrenders and claims.

Ethics and competency: (Weiss 2002) Among the 62 brokerage firms covering companies filing for bankruptcy between May 1 and August 31, 2002, 46 firms, or 74 percent, continued to recommend that investors buy or hold shares in the failing companies (1) even as they were filing for Chapter 11, according to a study by Weiss Ratings, Inc., the nation's leading independent provider of ratings and analyses of financial services companies, mutual funds, and stocks.

A total of 54 publicly traded companies filed for bankruptcy during the four-month period studied. Of this group, 19 bankrupt companies were rated by the brokerage firms covered in this analysis, receiving a total of 126 ratings. Those ratings break down as follows:

Weiss Ratings determined that 90.9 percent of the ratings issued on companies filing for bankruptcy were either "buy" or "hold" ratings, compared to the 66.6 percent issued in this most recent four-month period. Conversely, the previous Weiss study found that only 9.1 percent of the ratings issued to the bankrupt companies were "sell" ratings, whereas "sell" ratings comprised 27 percent of the total ratings reviewed in the current Weiss study.

47% of Failing Companies Continued to Receive Unanimously Positive Ratings - Of the 19 failing companies rated by brokerage firms, nine, or 47 percent, continued to receive strictly positive ratings on the date of their bankruptcy filing. For example, on the day it filed for Chapter 11, APW Ltd. received two "buys" and five "holds." Another nine companies received a mix of positive and negative ratings, including Adelphia Communications, which received five "buys," three "holds" and two "sells," and WorldCom, Inc., which received seven "buys," six "holds," and fourteen "sells." Only one company, Panaco, Inc., received a "sell" rating exclusively. The table below summarizes the ratings received by the 19 rated companies that filed Chapter 11 between May 1 and August 31, 2002 as of the date of failure and six months prior to failure.

34 Brokerage Firms Fail to Issue Any Warnings to Investors - Among the 62 brokerage firms studied, 34 failed to issue a single "sell" rating on any of the companies filing for bankruptcy during the four-month period ending August 31. For example, CIBC World Markets maintained three "buy" ratings and two "hold" ratings on failing companies, while Thomas Weisel Partners maintained three "buy" ratings and one "hold" rating up through the date the rated companies filed for bankruptcy. In addition, Goldman Sachs and Credit Suisse First Boston each maintained five "hold" ratings on failed companies at the date of bankruptcy. Also sticking with "buy" ratings until the very end were ABN Amro, Argentina Research, Banc of America, Buckingham Research, Commerzbank Securities, Dresdner Kleinwort Wasserstein, Jesup & Lamont Securities, JP Morgan, Kaufman Brothers, Pacific Crest Securities, Performaxx AG, Raymond James, RBC Dain Rauscher, Robertson Stephens, Sanford C. Bernstein, SG Cowen, SoundView Technology, and USB Piper Jaffray.

Fourteen firms avoided issuing positive ratings on failing companies, issuing only "sell" ratings at time of bankruptcy, including Argus Research, BB&T Capital Markets, Davenport & Co., Fortis Bank and HSBC. Another 14 firms issued "sell" ratings by the date of the bankruptcy filing but also maintained at least one positive rating on other bankrupt companies.

It's almost laughable

Life Insurance: Almost one-third of Americans age 18 and over have no life insurance protection. Of those households that do have protection, 30% have coverage that's less than one times their annual income. Disturbingly, 76% of those households with life insurance protection that's less than their annual income thought that the amount of coverage was adequate.

The survey also revealed alarming statistics concerning the "prime needs" segment - those full-time employees with dependents, such as a non-working spouse or minor children. Only 64% of this demographic have any type of life insurance protection. Of those that do have coverage, 58% revealed that the amount of coverage is less than three times their household income. The majority of those with this minimal coverage also reported that they believed the amount of coverage was adequate. Employees need to consider whether three years or less of household income will be enough to provide for a child's education and pay monthly expenses such as a mortgage, rent, car loan, or childcare over a long period, especially if they have not adequately saved for these expenses.

Insurance (Insurance Information Institute 2003) Insurers in the last decade paid out $1.18 in losses and expenses for every $1 they earned in premiums

states as California, Florida and Texas are having insurance availability issues, which he said are due primarily to the cost of mold-related claims. Mold repairs cost Texas insurers more than $850 million last year compared with "virtually nothing just a few years earlier.

I.I.I. estimated that homeowner's insurance policy premiums nationally increased 8 percent in 2002 and are expected to increase 9 percent in 2003.

More insurance: (2003) the insurance industry had 66 percent of its investment portfolio in bonds and only 21 percent in the stock market at year-end 2001

Insurance default (WEISS 2003) Insurance company failures declined 48.9 percent to 23 in 2002, from 45(1) in 2001.

Three life and health insurers and 20 property and casualty insurers failed in 2002, compared to six and 39 respective failures in 2001.

HMO failures declined 10 percent in 2002, with nine failed HMOs compared to 10 in 2001.

Insurance (NAIC 2003) Although most Americans feel they have about the right amount of insurance coverage (67 percent), only 34 percent say they understand the details of the coverage "very well. Bite me. Only 5% could get close to a true understanding. And that might be pushing it.

Life Insurance: (Trusts and Estates 2003) EXCEPTIONALLY LOW INTEREST RATES AND FALLING EQUITY MARKETS HAVE CREATED A TIME BOMB WITH UNIVERSAL LIFE INSURANCE POLICIES IN IRREVOCABLE LIFE INSURANCE TRUSTS ("ILITS"). The premium projections for these policies at the time of the purchase are often invalid given insurance companies' decrease in crediting rate percentage (with simple universal life policies) and poor performance of separate accounts (in the case of variable universal life policies). The simple fact is that every actor involved in the creation and funding of the ILIT, including the attorney, C.P.A., insurance agent and trustee, may be liable if the policy within the ILIT lapses or otherwise is adversely affected due to poor performance. These professionals must regularly monitor such policies.

Insurance Fraud: (2003) An Accenture fraud study found that nearly 25% of Americans surveyed think it's okay to defraud an insurance company and nearly half said people commit insurance fraud because they can get away with it. Almost a quarter think it's either "quite acceptable" or "somewhat acceptable" to overstate the value of a claim and nearly 40% were "not very likely" or "not likely at all" to report someone who committed insurance fraud "Claims fraud is a huge issue, with a tremendous impact on the U.S. economy," said the president of Omega Insurance Services, one of the country's largest investigation firms. The company investigated approximately 15,000 cases of workers' compensation and disability cases alone last year. "The study results are somewhat consistent with a weak economy," Fargo said. "But they also reflect a general deterioration of our ethical underpinnings, as well as excessively lax penalties for fraud."

Property and Casualty Insurance: (2003) U.S. property/casualty insurers are expected to pay an estimated $5.8 billion in insured property-loss claims from catastrophes last year, making 2002 the fourth-lowest year in losses in the last 10, according to preliminary estimates by Insurance Services Office, Inc.'s (ISO) Property Claim Services (PCS) unit.

Six catastrophes struck 23 states in the fourth quarter, causing an estimated $1.7 billion in losses ? the second-highest loss for any fourth quarter in the last 10 years. PCS estimates that insurers received nearly 540,000 claims from homeowners and businesses in the quarter, which accounts for the highest number of claims in any fourth quarter since 1998.

Catastrophe losses in 2002 were 50 percent below the 10-year average for insured-property losses of $11.5 billion per year, PCS's year-end analysis shows. Last year's 25 catastrophes were also well below the 32-events-per-year average of the last 10 years.

Insured-property losses from catastrophes were the lowest in 1997 at $2.6 billion, followed by $4.6 billion in 2000 and $5.6 billion in 1993.

Beat this: (2003) Guaranteed $1,000,000 insurance to age 120, payable at $6,211 for a male standard non tobacco age 37.

Male 35, preferred, $1,000,000 $5,230.

INSURERS' PROFITS PLUNGE - (Weiss Rating 2003) U.S. life and health insurers' profits fell 61% in the first nine months of 2002 to $3.4 billion, the lowest level in a decade. Driving the decline in industry earnings during the first three quarters was a staggering $9.6 billion capital loss on the sale of investments, compared to a $3.3 billion loss for the same period in 2001.

OVERLY OPTIMISTIC - (Financial Enews 2003) Remember when actuaries used to consider 4% as a reasonable long-term safe rate of return? Somehow company pension plan managers and accountants put on rose-colored glasses and began using 10% or so in the 1990s. Unfortunately, these companies have now been forced to make lower assumptions on the returns attributed to their pension plans. Results: More money needed for pension reserves and lower earnings. Unfortunately, many experts believe cuts in assumed rates are not enough...many are still in the 9% range. Moody's has expressed a similar concern about variable annuities, which many insurers assume will grow at an 8% annual rate over the life of the product. According to Moody's, "the favorable market returns that some insurers have embedded in their pricing and accounting assumptions are increasingly unlikely to be realized."

Term (Steuer 2003) term life insurance price comparisons showed that average composite premiums for the popular 30 year level term life policy have dropped by 18.7 percent over the past year while rates for 25 year level term life policies have fallen by 12.4 percent. Composite rates for the 10, 15 and 20 year level term life insurance policies have remained essentially unchanged from one year ago.

Conclusions from the comparative survey include – (1) Showing the largest drop of all term life policy categories, average premiums for the popular 30 year level term life policy have declined by 18.7 percent over the past year; (2) Average premiums for the 25 year level term life policy have declined by 12.4 percent over the past year; (3) Average premiums for the 10, 15, and 20 year level term policies remain substantially unchanged from last year and (4) Average premium rates for females remain at 29 percent below those charged for males

Life Settlements: (2003) A nationwide survey of senior citizens shows that life insurance agents should provide their policyholders with information about life settlements regardless of a policyholder's interest in purchasing one. The survey says 86 percent of senior citizens believe life insurance agents should inform clients about life settlements as an alternative to letting their policies lapse or surrendering them for their cash value. Of those who would consider selling their insurance policies, 90 percent said they would first seek advice from a financial professional such as a life insurance agent, attorney or accountant.

The survey indicates that life settlements are a niche market, with one in seven (14%) policyholders at least somewhat interested in selling their policy in a life settlement and one in five (19%) interested in learning more about life settlements. Of those interested in selling their insurance policy in a life settlement, the leading reasons include the potential cash benefits (24%) and attractiveness of the concept (21%).

Insurance risk: (Fitch 2003) The ongoing low interest rate environment and the associated risk with minimum rate guarantees does not present a near-term solvency issue, but raises longer-term concerns about earnings and capital growth.

'The Big Squeeze: Low Interest Rates and Minimum Rate Guarantees Pressure Life Insurers' Interest Margins,'

Insurance: (Limra 2003) IN 1961 there was one insurance agent for each 200 households. No its one for 600 households.

In 1983, there were 14 million insurance policies in force. Today its 9 million.

70% aged 25 to 34 do not have insurance (though not as many in this group are married as before).

Insurance: (Hartford Financial Services Group 2003) Most Americans with annual household incomes of $100,000 or more lack sufficient life insurance to permanently replace their salaries yet say they have sufficient coverage. The survey found that 64.6 percent of all respondents had less than $500,000 in life insurance and 10.6 percent had less than $100,000 in coverage.

The survey found that 78.3 percent of the "emerging affluent" purchased life insurance primarily for income protection for their families. Another 9.3 percent secured coverage for estate planning or wealth transfer, 7.5 percent for retirement planning, and 4.3 percent for business planning. Most respondents owned term life insurance (37.3 percent) as compared to permanent coverage (24.8 percent) and many people owned both types of policies (34.8 percent).

More than 38 percent of the emerging affluent did not review their life insurance coverage after a major life event, according to the survey. A major life event was defined as the birth or adoption of a child, marriage or divorce, the purchase of a house or primary residence, graduation from college, or the completion of a child's education. Sixty-seven percent said they did not review their coverage annually and 6.8 percent reported never reviewing their coverage.

66 percent of survey respondents report losing 10 percent or more of their investments' value within the past two years; 9 percent said they lost more than 50 percent of their assets.

Life Insurance: (2003) Milliman and Robertson estimate that that 89.5% of all universal policies do not mature in a claim

Universal policies designed for life are about 40% to 60% less than whole life. However, the cash value is not guaranteed. It's just insurance all the way to age 120.

Male, Best Class, $500,000

Age	Whole Life	Universal life with No Lapse Guarantee	UL cost as a % of Whole Life
20	$3,445	$1,248	36.2%
30	4,400	1,845	41.9
40	6,930	3,063	44.2
50	10,885	5,132	47.1
60	18,080	8,690	48.1
70	30,920	16,109	52.1
80	60,200	33,013	54.8

If you want insurance for your life, this is what you look for. It's a commissionable product. It beats low load, non commissionable products by a mile- assuming you want insurance. Notice that there is no reference to cash value or loans. That's because the cash value is irrelevant. The only time you take money out is if you wanted to terminate the policy. Simple and cheap.

Insurance returns: (2003) Even with their bond-heavy asset mix, life insurers' total investment income was essentially flat from 1997 to 2001, according to a new study by Conning Research & Consulting, Inc. The study, "Investment Profile of the Life Insurance Industry: 2002 Edition," found that bonds continue to dominate life insurer investments, accounting for more than 80% of assets in all years. Despite this conservative allocation, the total rate of return on investment fell from 8.3% in 1997 to 7.6% in 2001.

Buy term and invest the rest? only 14% of those only owning term insurance invest all the money they save in buying term every year, despite the advice of experts to "invest the rest."

Half of all long-term care insurance policies are sold in 10 states: (2003) California, Florida, Illinois, Iowa, Missouri, New York, Ohio, Pennsylvania, Texas and Washington

1,001 / 1,369 / 2,988: Average annual premiums, in dollars, for buyers of long-term care insurance at respective ages 40, 50 and 65. * Includes $150 daily benefit; four years of coverage, 90-day elimination period, 5% compounded inflation protection and nonforfeiture benefit.

839 millions of dollars of long-term care insurance claims paid in 2001

4,776: Number of employers in the U.S. offering long-term care insurance

Million Dollar Round Table: (2003) MDRT consists of more than 28,000 members worldwide and has established itself as the "premier association of financial professionals." What makes them the "premier association"? Here are few of the reasons why:

* Production requirements: For 2004, U.S. members must earn at least $66,000 of FYCs, Court of the Table members need $198,000 FYCs and Top of the Table requires $396,000.

* A sound and enforceable code of ethics.

* The Annual Meeting is much more than a "how-to-make-

money" seminar. It is a client, community, family and caring

for others event.

* MDRT Foundation: The philanthropic arm of MDRT that has given over $10 million to charities internationally.

* "Deep" camaraderie among members.

The issue of belonging to a club due to the amount of premium or commissions is anathema to me.

CONNING RESEARCH: LIFE SETTLEMENTS GROWING FAST, INCREASING PRESSURE ON LIFE INSURERS' PROFITS:  (2003) Life insurers' profit margins, already under intense pressure due to lower investment returns, are now being squeezed further by the growing life settlement industry, according to a study from Conning Research & Consulting, Inc. The Conning Research study, "Life Settlements: Additional Pressure on Life Profits," finds the face amount of insurance in life settlements -- transfers of existing life policies when the insured has an impaired life expectancy -- are substantially higher than current estimates, and the study estimates a very substantial growth rate as well.

Life insurance agents: The National Association of Life Underwriters went from 145,000 members in 1992 to about 65,000 and a new name...the National Association of Insurance and Financial Advisors.)

New terms DALBAR and the other members have agreed to start the process of adopting this new language to replace the current terminology. This means that we must first switch to this new language in our written and verbal communication and in our computer files. We also must educate the people with whom we have contact about the new language.

Old Language                         New Language      

Describing the Product                   

Variable Annuity                     Personal Retirement Account

Life Cycle

Accumulation Phase                Savings Period

Payout Period

Retirement Income Period       Retirement Savings Guarantees

Death Benefit                          Beneficiary Protection

Guaranteed Minimum                 Minimum Retirement Savings Guarantee

Account Value Benefit

Guaranteed Minimum                 Minimum Retirement Income Guarantee

Income Benefit

Retirement Income Guarantees

Term Certain Annuity               For a Guaranteed Time Period

Joint and Survivor Annuity        For the Lifetime of Two People

Life Annuity                             For Your Lifetime

Fixed Amount Payout Option   Of a Guaranteed Amount

Joint And Survivor Annuity       For the Lifetimes of Two People or for a Guaranteed Time Period, whichever is longer

with Period Certain

Life Annuity with Period           For Your Lifetime or for a Guaranteed Time Period, whichever is longer

or Term Certain

Retirement Income Terms

Annuitization                           Converting Savings into Income

Annuity Income Payments       Retirement Income

or Payouts

Annuity Options                     Retirement Income Choices

Annuity Purchase Rates         Conversion of Savings to Income at Guaranteed Rates

Assumed Interest Rates       Benchmark Rate

Fees & Expenses

Surrender or Withdrawal     Withdrawal Charges Transfer Fees

Charges Transfer Fees

M&E Fee, Asset-Based      Insurance Charges

Administrative Fee,

Distribution Expense

Management Fee                 Investment Portfolio Expense

12b-1 Fees

Other Fund Expenses

Miscellaneous Terms

Subaccount                         Investment Portfolio

Premiums or Purchase        

Payments

Surrender                             Full Withdrawal

Recent tax changes in life insurance and annuity contracts. (2003)

Demutualization and taxes: What is the basis of the stock and what should be taxed

Here is something really stupid. (2003) Johnathan Clements for the WSJ notes that the longer you wait till you annuitize and annuity, the more money you will get because you are older. Well, duh.

"If you really want to generate a lot of income and you think you will live to a ripe old age, here's a great strategy: Buy an immediate annuity -- but wait until age 75, so you get a big income stream based on your shorter life expectancy."

The point has little reality. If you do not need the money till later in life, of course you can wait. But without a budget telling you what you can do before you get the that point, the statement is invalid.

Split Dollar regs: (2003) * If the executive owns the policy, the employer's premium payments are considered loans to the executive, on which the executive must pay the employer market-rate interest or be taxed on the difference between the market rate and the actual rate.

* If the employer owns the policy, the executive is taxed on the economic benefit received from the executive's interest in the policy cash value and current life insurance protection. 

Insurance: less than one policy in ten survives the period for which it is written;

- and, only 1% of all term life insurance ever manifests itself in a death claim!

The average male life expectancy is age 84, yet the average group life insurance walks out the door at age 70!

Life Insurers Fact Book 2003

Chapter 2: Assets (89 KB)

Chapter 3: Liabilities (53 KB)

Chapter 4: Income (51 KB)

Chapter 5: Expenditures (50 KB)

Chapter 6: Reinsurance (30 KB)

Chapter 7: Life Insurance (47 KB)

Chapter 8: Annuities (26 KB)

Chapter 9: In the States (48)

Chapter 10: Industry Rankings (24 KB)

Chapter 11: Mortality and Life Expectancy (28 KB)

"Quest for Scale Drives Consolidation in Life Insurance Industry," 2003

Early Memory Loss and Underwriting

Researchers Study 2.7 Million Auto Records and Find Irrefutable Connection Between Credit History, Risk of Loss (2003) In the largest and most comprehensive study ever undertaken on the connection between credit history and insurance risk, a team of researchers has found that a consumer's credit-based insurance score is unquestionably correlated to that consumer's propensity for auto insurance loss. Even more significantly, the study found that insurance scores are consistently among the most important rating variables used by insurers.

Take A New Look At Underwriting Older Age Applicants

Annuity sales in CA- The state of California passed legislation 2004 that will affect all agents conducting business in the state of california. Much of the legislation, but not all, primarily applies to the sale of annuities and life insurance to seniors (persons age 65 and older). Highlights of the legislation that become effective on January 1, 2004 are as follows:

• No advertisement for an event where insurance products will be offered for sale may use the terms “seminar,” “class,” or “informational meeting,” unless it adds the words “and insurance sales presentation” immediately following those terms in the same type size and font as those terms.

• An annuity shall not be sold to a senior where its purpose is to affect Medi-Cal eligibility.

• Any person who meets with a senior in the senior’s home is required to deliver a notice in writing, in 14- point type, to the senior no less than 24 hours prior to that individual’s initial meeting in the senior’s home.

• Upon contacting a senior in the senior’s home, the agent shall, before making any statement other than a greeting, or asking the senior any other questions, state that the purpose of the contact is to talk about insurance, or to gather information for a follow up visit to sell insurance, if that is the case, and state all of the following information:

– The name and titles of all persons arriving at the senior’s home.

– The name of the insurer represented by the person, if known.

– Each person attending a meeting with a senior shall provide the senior with a business card or other written identification stating the person’s name, business address, telephone number, and any insurance license number.

– The persons attending a meeting with a senior shall end all discussions and leave the home of the senior immediately after being asked to leave by the senior.

• Any agent or broker who is not an active member of the State Bar of California may not share a commission or other compensation with an active member of the State Bar of California.

Other aspects of the regulation become effective in January 2005. More details regarding compliance will be forthcoming at a later date. Highlights include:

• Business cards, price quotes and advertisements must include the word “insurance.”

• Every life agent who sells annuities shall complete eight hours of training (approved by the commissioner) prior to soliciting individual consumers in order to sell annuities. Every other year, four hours of training shall be completed for license renewal.

It's all marketing: (2004) “Over the years, the insurance and financial services industry has had a terrible record when it comes to recruiting people and helping them succeed in this business. Over 90% of the people they recruit don’t make it past the fifth year.” "It doesn’t have to be that way”, says Lewis Nason, who has helped scores of insurance agents on their way to achieving financial success in their business and their lives. “What most companies, agencies and managers fail to understand is that they are not in the Insurance or the Investment Business! They are in the Marketing Business! They are just operating a business that happens to market insurance and investment products.”

True, but because people don't read, they cannot expect much.

Life Insurance- (2004) The bulk of the public- actually lots of planner unfamiliar with underwriting- think that only the best clients can get insurance. Certainly those that have had something like a kidney transplant would never be accepted. Take a look at these to see what is possible

Kidney Transplant: 54 year old male; kidney removed in '98 due to cyst, subsequently client had kidney transplant, no cancer and no kidney disease, blood pressure controlled by meds, also anti-rejection medication. $500,000 universal life at Preferred Nonsmoker!

Cardiac: 53 year old male; client had a 5-way bypass in July of '02, all vessels were significantly blocked, at present blood pressure and cholesterol controlled by meds, height/weight is 5'10" and 190lbs, client has been without symptoms since surgery with good follow-up with his cardiologist. $750,000 fifteen year term at Super Standard!

Occasional Smoker: 64 year old male; smokes two cigars a day, partner in law practice, never smoked cigarettes, had a cardiac work up three years ago that came out normal. Purpose of coverage is key man. $1,000,000 ten year term at Preferred Nonsmoker!

Multiple Sclerosis: 39 year old male; diagnosed with MS (slow onset progression) in 1996, works full time and leads a normal life without using a cane or wheelchair. Purpose of coverage is personal. $100,000 UL at Super Standard!

Cholesterol/Occ Smoking: 63 year old male; cholesterol at 273 (normal 140-200) and chol ratio at 6.06 (normal is 1.0 to 3.7), also smoked a cigar in the last 12 months, client's Dr. is aware of cholesterol issues and is treating with diet and maintaining a follow-up schedule, no coronary artery disease in family. $600,000 twenty year term at Preferred Nonsmoker!

Almost anyone can get insurance no matter what their condition. But it takes time. Further, it can be costly no matter what the above situations indicate

People are not becoming Insurance agents: (2004) In 1986 the average age of an insurance producer was 36. Today it is 51 for captive agents and 56 for independent producers.

Careful when you divorce: (2004) A LIFE INSURANCE BENEFICIARY DESCRIPTION THAT READS "TO MY WIFE, SUSAN" IN ALL STATES BUT ONE, REMAINS PAYABLE TO SUSAN, EVEN AFTER DIVORCE. In all states but Michigan a change in marital status alone does not disqualify a former spouse named as a beneficiary during the time of marriage from receiving the benefits of a life insurance policy. This is based on the doctrine that the interest of a named beneficiary is a personal one, not dependent on the relationship to the insured that may have been stated in the designation. Consequently, special procedures defined by the insurer must be followed by the insured in order to effect a change of beneficiary. In Michigan things are simpler. A spouse's interest is automatically terminated by divorce and the insured's estate becomes the beneficiary.

No no lapse insurance. This article references the negative aspects of this type of insurance. Yes, there is a problem if you buy the wrong policy from the wrong company. But then that is always a problem.

Life Insurance: (2004) Managing life insurance portfolios is NO different than managing an investment portfolio. There are simply more cost-factors to measure and manage. For instance, in addition to the Fund Management Fees (FMEs) found in all investment products, insurance products also charge for the Cost of Insurance (COI) needed to pay claims, Premium Loads both for State and Federal Taxes and for Sales and Service costs, Fixed Policy Administration Expenses for insurance company overhead, and Cash-Value-Based “Wrap Fees” in addition to FMEs. Each of these cost factors must be measured and then managed.

Insurance: (2004) Lots of people believe that if you have been ill, it is impossible to get life insurance. Not so! Here are recent placements by a company that works with tough cases.

Kidney Transplant: 54 year old male; kidney removed in '98 due to cyst, subsequently client had kidney transplant, no cancer and no kidney disease,blood pressure controlled by meds, also anti-rejection medication. Got $500,000 universal life at Preferred Nonsmoker!

Cardiac: 53 year old male; client had a 5-way bypass in July of '02, all vessels were significantly blocked, at present blood pressure and cholesterol controlled by meds, height/weight is 5'10" and 190lbs, client has been without symptoms since surgery with good follow-up with his cardiologist. $750,000 fifteen year term at Super Standard!

Occasional Smoker: 64 year old male; smokes two cigars a day, partner in law practice, never smoked cigarettes, had a cardiac work up three years ago that came out normal. $1,000,000 ten year term at Preferred Nonsmoker!

Multiple Sclerosis: 39 year old male; diagnosed with MS (slow onset progression) in 1996, works full time and leads a normal life without using a cane or wheelchair. $100,000 UL at Super Standard!

Cholesterol/Occ Smoking: 63 year old male; cholesterol at 273 (normal 140-200) and chol ratio at 6.06 (normal is 1.0 to 3.7), also smoked a cigar in the last 12 months, client's Dr. is aware of cholesterol issues and is treating with diet and maintaining a follow-up schedule, no coronary artery disease in family. $600,000 twenty year term at Preferred Nonsmoker!  

82 MILLION UNINSURED - (Families USA) 82 million people in the U.S., or one in three under age 65, had no health insurance for at least one month in the past two years. Hispanics, the nation's largest minority group, had the highest rate of uninsured at nearly 60%; uninsured blacks were about 43% and whites were about 24%. States with the highest percentages? Texas, 43%; New Mexico, 42% and California with 37%.

Life insurance law: (2004) THERE IS CONSIDERABLE DIVERSITY IN STATE LAW AS TO THE LENGTH OF TIME MONEY, PAYABLE UNDER A LIFE INSURANCE POLICY, IS EXEMPT FROM A CREDITOR'S CLAIMS

All the states have statutes that protect life insurance proceeds from a beneficiary’s creditors, however the laws regulating that protection vary from state to state. Generally, insurance policy proceeds are exempt from creditors’ claims as long as they can be clearly identified as those proceeds. For example, a bank account created to hold a policy’s proceeds remains exempt from creditors claims for as long as those proceeds remain in that account. Another example is that creditors cannot claim real estate that has been purchased with a policy’s proceeds.

Some states protect proceeds from creditors’ claims by stating the proceeds are exempt from claims both before and after receipt by the beneficiary. Other states do not clearly protect the proceeds after the beneficiary receives them. In these states a beneficiary’s creditors have more possibility to make claims on the proceeds, especially if the beneficiary’s debt is created after the receipt of those proceeds.

HIGH SURRENDER RATES OF VARIABLE ANNUITIES (2004) Moody's reports that "the recent resurgence and substantial sales of variable annuity (VA) products in the U.S. life insurance industry are masking the high levels of VA surrenders and policy exchanges among companies." Nevertheless, Moody's says that it does not expect this high level of surrender activity to cause rating adjustments to significant VA writers at this time. The rating agency had already factored high levels of expected policy surrenders into its rating analysis of these companies in light of the competitive and commoditized state of the VA marketplace.

Insurance (Milliman and Robertson) 88% of all universal life policies and 85% of all term policies do not mature  in a claim.

Insurance: Persistency figures show that between 35% and 50% of policies do not go beyond five years, and that 72% to 80% of policies issued do not continue beyond ten years.

Insurance:  (Joseph W. Maczuga, LIC 2004) This is due to the fact that there are two economic components involved. One is the assumed return on equity, which has been the primary focus of sales and analysis. The other is related to policy costs and the actuarial techniques used in development. This becomes the “X” factor that skewers the playing field. If one were to do a little research on the history of policy performance, illustrations and class action litigation within the insurance industry, it would not take long to validate the fact that illustration soft-ware is corrupt.

when a fee-only advisor orders a home office illustration or refers the client to a no-load insurance provider, such action may not relieve the advisor/planner of their fiduciary responsibility.

Although it is important to work with a well-trained and knowledgeable home office staff when designing a fee-based policy, it is important that the advisor understands the make-up and components of the policy for the purpose of designing premium strategy. The client should not be led to believe that there is an actual “level premium to endow,” or a targeted level annual premium that will obtain a projected cash value. The advisor must educate the client on how a UL or VUL works: the concept, the variables of costs, the need for annual reviews and adjustments (to stay on track to the planned objective) and the need for liquidity. Fee-only advisors that do not engage in this activity will still be held to their fiduciary responsibility.

As a profession, we may have unconsciously abandoned our fiduciary responsibility to comprehensive financial planning and life insurance integration, as few advisors subscribe to the conclusions discussed. Turning over the task of premium design to home office staff via illustrations, without your input and premise for the designated strategy, does not exempt you from this frontline position of litigation.

Insurance ethics: (2004) “The recent spotlight on our industry is a powerful reminder that ethical business practices are more than just the right thing to do. “Ethics is a bottom-line issue for the insurance industry. In the months to come, there will be intense scrutiny about the role of market conduct standards and how to best create strong, more efficient consumer protections while recognizing today’s dynamic marketplace realities. The need for rigorous standards of ethical business practices is key to any discussion about the future of market conduct regulation.”

A year ago, the Government Accountability Office (GAO) reported that inconsistent, uncoordinated and unfocused state regulations did not provide adequate and consistent protections for consumers, and burdened companies with duplicative and unnecessary costs,

No Lapse Insurance: (2005) Readers have no doubt seen my comment about the viability of no lapse insurance, its guarantees and its very low prices. I have also posted commentary from others that the reserves from some of these companies may not be adequate. My position is that if you choose a solid company, the odds of a default from an A or A+ rated company due to these policies is essentially nil

Kate Kincaid is the editor of California Broker- an industry magazine covering all the elements of insurance- life, dental, HMOs and so forth. Extremely qualified and knowledgeable. Her comments, in part, from the 12/2004 edition: "We are about to see the most popular permanent life insurance product on the market change for the worse and we have a few insurance companies to thank for it. In addition, if these companies have their way, new regulations may reduce performance on many life products in the future.

There has been a battle going on over no lapse guarantees. Five whole life companies, including Northwestern Mutual, and New York Life, have instigated concerns with the NAIC that the reserves for secondary guarantees on universal life products are inadequate. They have proposed a revision to the reserve guidelines, which would require the same reserves for no lapse universal products as for whole life.

If these guidelines pass, the price of no lapse universal will increase. Consumers will have to pay more to get a guaranteed premium and death benefit. Clearly, this is a disadvantage to consumers. The only parties advantaged by the change will be carriers, which do not offer no-lapse universal, but offer higher-priced whole life instead.

Whole life and no lapse universal life products offer very different guaranteed benefits. Both provide a guaranteed premium and death benefit, but only whole life guarantees the cash value. The products represent different risks, and therefore justify different reserves.

As of this date, 17 companies have submitted letters in opposition to this revision including some of the largest carriers in the market. The most significant carriers offering secondary guarantees have all stated their confidence that their reserves are adequate and conservative. This revision would create excessive and redundant reserves, which is unhealthy for the industry and consumers. These companies have proposed a revision that would make it easier for regulators to review companies calculations of reserves. This would allow any reserve problems to be identified quickly.

The bottom line is that if the reserve revision Guideline 38 passes, the price of permanent guaranteed life insurance will go up. Right now carriers are assuming that it will pass, and several are already changing their products accordingly. Consumers lose.

Everyone wants to make sure that all companies hold sufficient reserves. Only the insurance company and its regulator can know whether the company is holding sufficient reserves. Although the companies supporting this revision have suggested that other companies are holding insufficient reserves, there is no way they can know that. Carriers don' t share that information with competitors. We do support regulators investigating reserves and demanding adjustments if there is any danger to the consumer. A wholesale increase in reserves to an inappropriate level is bad for everyone except the few companies that have chosen not to compete in the secondary guarantee marketplace. "

I hope you noted, "If these guidelines pass, the price of no lapse universal will increase. Consumers will have to pay more to get a guaranteed premium and death benefit. Clearly, this is a disadvantage to consumers. The only parties advantaged by the change will be carriers, which do not offer no-lapse universal, but offer higher-priced whole life instead." These other companies are losing business- certainly expect to lose more in  the future. They are forcing the competition to increase costs to the consumer under the guise that a company might fold. Hog wash.

Just another reason why insurance is so difficult to master.  

Failed: (Weiss 2005) With the economy continuing to strengthen, the number of insurance companies that failed(1) in 2004 declined 48 percent, to 13 compared to 25 insurer insolvencies in 2003. Three life and health insurers and 10 property and casualty insurers failed in 2003, compared to four and 21 respective failures in 2003.

Death benefits: (National Underwriter 2005) The top 100 companies increased their payouts from 1999-2003 by a respective 4%, 10%, 7%, 3% and 8%,

From 1940 through 2001, the number of policies and certificates purchased annually increased from about 18.2 million to about 40.1 million. In dollar terms, the purchase amount grew from $10.7 billion to $2.77 trillion during that same period

That growth reversed in 2002 when the number of new policies dropped to 38.7 million and continued in 2003 when it declined further to 35.5 million. Even so, the dollar amount grew to $2.8 trillion in 2003.

Even as the amount of life insurance grows, the population that purchased life insurance during those six decades continues to age. The age 65 and over population was 16.6 million in 1960 and 34.7 million in 2000. It is expected to grow to 39.4 million by 2010.

And, even though the mortality rate in the U.S. is on the decline, the number of deaths has actually grown, due perhaps to an increase in the population in this country.

The U.S. mortality rate in 1950 was 9.6% and the number of actual deaths excluding Alaska and Hawaii was 1.45 million, according to the Statistical Abstracts of the United States. In 2002, the mortality rate dropped to 8.5% while the number of deaths increased to 2.44 million. The mortality rate dropped even further to 8.3% in 2004

Part of the reason the mortality rate is dropping while the number of deaths is increasing may be attributable to the growth in the U.S. population as a whole. According to the U.S. population clock sponsored by the U.S. Census Bureau, there are currently 295.2 million Americans. That compares with 150.6 million Americans counted in 1940.

Truly stupid reporting from the NY Times- (2005) same as the WSJ that I commented on several months ago. Here is the recent paragraph on annuities.

"As a rule of thumb, according to Ethan E. Kra, chief retirement actuary for Mercer Human Resource Consulting, the cost for a 65-year-old these days is about 13 times the annual benefit. A policy paying $1,000 a month - or $12,000 a year - would therefore cost someone of this age about $156,000. That works out to an annual interest rate of almost 8 percent - nearly double the current rate on 10-year Treasury bonds. "

The PAYMENT amounts to 8% of the lump sum- but once again they forget that the owner never get the original money back. If you use a 20 year lifetime, the real return amounts to a 4.70% annual compounded interest rate. But you also give up access to the funds- not so with Tbills.

I simply do not understand how this can happen- it defies any calculations on money and time.

How can two major publications both get it wrong. AMAZING!!!!!

I have been interviewed extensively by Consumer Reports regarding annuities. (2005)

Would it be correct to state that variable annuity contracts are the most complicated variety of annuity?

Answer: I don't know if I would call them more complicated per se. It is the mutual funds within them that make the risk more extensive since fixed annuities are guaranteed. That said, by the time insurance companies add in all the possible riders, they are definitely the most complicated. The key feature is that they are so fee ladened that it is hard to earn an acceptable return compared to a regular mutual fund.

And would it also be true that the commissions agents receive for these annuities are twice as high as those fixed annuities?

Answer: I'd say they CAN be more than twice as high. But not to state that they ALWAYS are. I don't know of any specific criteria on commissions. Not that there isn't- I just don't know.

Is it accurate to state that even with the tax-deferral advantages, annuities are usually poor investments? The reasons would be the lofty fees, stiff early-withdrawal penalties and the fact that actual withdrawals [or at least the gains contained therein] are taxed at an ordinary income rate rather than at a capital gains rate.

Answer: this is fine with the focus on FEES more than anything else. Certainly if the market is expected to return less than double digit returns for awhile. Pretty tough to get nailed with 2.5%+ fees and still make a decent return.

In addition, if the insurer with which you invest goes out of business, you could lose some of your investment. [Since you only lose "some," would the reason be that a state insurance fund would cover the rest? Would this be true in every state?]

Answer: This is not correct. If the insurer goes out of business with a FIXED annuity, the state guarantee can provide some relief. That's because the monies are part of the general account of the insurance company and are therefore at risk if the company goes under. Not so with a VARIABLE annuity. The Insurance company is NOT taking the risk. The monies for the mutual fund are in SEPARATE accounts that are NOT controlled by the company. The consumer is taking the risk. It is true that many insurance companies guarantee that you can only lose so much money- but that is separate issue. It is also an additional cost to the consumer. For example, assume the S&P was at 10,000. It goes up to 10,500 by the end of the year. Some companies will now guarantee that the 10,500 is a guarantee floor for the next year. For example, if the market then goes back down to `10,000, you still have a gain because your account is at 10,500. Not that difficult to do actually if the company takes some of the monies invested and does some hedging. But then these costs are an additional cost to the consumer. Furthermore, by the time you do this over a 10 year period, the guarantee might be moot. Might be valid if the last couple years were like 2000- 2002. Generally tough to do a statistical analysis. I suppose if there was a novice investor who didn't understand all the risk of inventing, it could be valid. But if they are such a novice and they don't understand risk, why go into a variable annuity where the idea is to essentially do market timing. Illogical. If they are going to be risk "adverse" with a mutual fund, just go with an index fund and hope for the best.

Those who elect lifetime payments may get them -- but the returns may not be adequate for their needs, correct? This would be because with a variable annuity, earnings are based on the returns of subaccounts and if these aren't producing, your income goes down. With a fixed annuity, at least at current rates, the returns may not be high enough either.

Answer: True. A variable might provide better returns- but if you lost 40%- 60% such as in 2000- 2002, your income would drop like a stone and you would never have enough time (as a retiree) to recoup that loss.

Any gains from an annuity will be taxed at the ordinary income rate.

This is in contrast to gains held for longer than a year in ordinary investments such as mutual funds, which are taxed at 15 percent. Is it also true that annuities receive no step-up in basis? That is, they are taxed based on what the individual paid for them rather than the value at the date of death.

Answer.: True. If I had a standard mutual fund that went from $100,000 to $200,000 and died, my beneficiaries would receive the mutual fund with a basis of $200,000. Not so with an annuity. The gain of $100,000 would be taxed as ordinary income.

The majority of annuities charge a surrender fee, correct? And is this surrender fee what companies use to pay an agent's commission?

Answer: part of the commissions may be paid from this- part of the costs of originating the annuity as well. But think of this- if the annuity went its term and the surrender charge was no longer applicable, where did the commissions come from? They come from the spread on the investments the insurance company earns and the amount it pays to the consumer. If they earn 6.5% on their investments and pay the consumer 4% (just to use round numbers to make a point) all costs INCLUDING the commissions must come from the 2.5% profit spread. The surrender charge covers the costs that could not be amortized over the entire period the consumer selected ( 5year annuity; 10 year). The surrender charges may be considered a burden and excessive- but they are a legitimate for doing business IF the product was sold correctly, in the proper amount, etc. But it is the "IF" that causes the problems.

However, are there also some annuities that have no surrender fee? [Would "a few" be more accurate?] But agents aren't likely to inform customers of this type of annuity because of the low [or no] commission, right? [Is there any incentive for an agent to sell such a product?]

Answer: A "few" is correct. They are general no load fund companies (Vanguard and Fidelity for example). No commission salespeople would use these since they get no commission. The incentive to USE this product is to take an underperforming old annuity and possibly do a 1035 tax free exchange to a no load until the client may need the money (or when they are 59.5+ in age and can take the gains out without the 10% penalty). That's what I am doing for a client right now. But I just get my standard fee for planning. Nothing extra.

Would the average surrender fee be about 5 to 10 percent? Or are they likely to be higher? Are fees usually on a sliding scale, with stiffer penalties in the early years of a contract and a declining fee the longer you hold it?

Answer: I'd say they generally top out around 10% but they can be higher if bonus interest and other incentives were added to the account up front. A 10 year surrender might be 8,8,7,7,6,5,4,3,2,1.

Although agents may tout equity-indexed annuities as delivering market returns, most contracts specify that the customer will receive only a portion of the returns. Would the rest go to management fees?

Answer: I wouldn't call them management fees. I would call them profit to the company. Note that these unique annuities are a bear to figure out and you may not ever know what will happen till the term is completely up. I look at these as potentially providing a return than in 75- 85% of the time can do better than a fixed annuity; 10- 15% the same as a fixed annuity and 5%- 10% of the time LESS than a fixed annuity. You also have to analyze economics to see if rates are expected to go up or down during the time period.

Variable annuities: (2005) According to the National Association for Variable Annuities (NAVA), total sales in the third quarter of 2004 were $30 billion: 59% in "qualified plans," as retirement programs funded with pre-tax dollars are called, and 41% in non-qualified accounts.

Nor was that quarter unique. Statistics from NAVA, compiled in cooperation with Variable Annuity Rate and Data Service (VARDS), show that qualified sales have generally outstripped non-qualified sales and that the margin has widened over the past decade. At the end of 2003, NAVA and VARDS reported that variable annuity assets in qualified accounts topped non-qualified assets, roughly $600 billion to $400 billion, and the spread probably grew in 2004.

guarantees of variable annuities (pledges not available from mutual funds) are frequently cited as the reason for holding variable annuities inside retirement plans. Traditionally, variable annuities offered a return-of-principal death benefit: beneficiaries would receive whichever was greater, the amount invested (minus any withdrawals) or the contract value. In recent years, enhanced death benefits were introduced, ratcheting up the guaranteed amount for investors willing to pay an additional annual fee.

LTC and premiums: (Life Insurance Selling) In the past several years, LTCI prices have risen substantially. The good news is that prices have not risen because the companies were wrong about claims. Claims are right where the companies expected they would be. The companies did not count, however, on the incredible persistency of this business.

At first, companies priced LTCI policies for about an 8 to 10% lapse ratio. They did not assume simply that people would give up their policies; they also expected that people would die before they needed long-term care.

In fact, almost no one lapses with LTCI, and people are living longer and longer. There has been a two-fold increase in people holding onto their policies, and the average age of claim on an LTCI policy is 84 or 85. There is a much greater chance the insurance companies will pay out than was expected several years ago.

Today, instead of pricing for an 8 to 10% lapse, companies are pricing for between a 0.5% and 1.5% lapse. This makes a large difference in pricing a policy.

Another part of the equation is how much money companies earn on LTCI premiums — what interest rates are.

We have had a long period of low interest rates. Insurance company dividends are down on whole life policies, and universal life interest rates are down. Companies are taking in LTCI premiums, investing them, and earning less in interest than they originally expected.

Unexpected persistency and the long low interest rate environment have been the major reasons for the increase in LTCI pricing. Ms. McAree hopes that as discoveries continue to be made that help prevent the onset of Alzheimer's disease and lessen the severity of strokes, premiums may come down.

Insurance companies want a return on equity (ROE) of between 10 and 13%, but on old blocks of LTCI business they are getting between 3 and 7%. That business still is profitable, but for the insurance companies to get the ROE they want, they had to increase these premiums.

Insurance companies finally are pricing LTCI policies properly, for a less than 2% lapse ratio. Also, they are using current mortality rates, which are more generous than the 1980 table.

Life Insurance: (2005) 25% of Americans who bought a house in the last 18 months have no life insurance

32% of workers who have had a baby in the lat 18 months have no life insurance

40% of working Americans are not sure whether they have enough life  insurance- or know they don't

63% of women who work are extremely concerned about the effect of premature death on family finances

70% of widows say the death of their spouses had a major or devastating financial impact.

Insurance:  (2005) This paper reports results from an experimental study that investigates insurance behaviors in low-probability high-loss risk situations. This study reveals that insurance behaviors may depend on the individual prior experience towards risk. It may also depend on the duration of the commitment period, namely the period during which individuals commit themselves to maintain the same insurance decision. Non-additive decision models such as Dual Theory and Cumulative Prospect Theory seem to have a higher descriptive power than Expected Utility Theory when explaining subjects' behaviors. This paper presents a direct experimental test of the prediction of Myopic Prospect Theory relative to insurance demand. This study is also designed to test the significance of gambler's fallacy and availability bias in the insurance decision process. These theoretical concepts help to understand many behaviors commonly observed in reality but which remain unexplained within the E.U framework. In particular, this paper provides new explanations about the puzzling fact that people usually fail to obtain insurance against disaster-type risks such as natural disasters, even when premiums are close to actuarially fair levels. According to our experimental results, the deficiency of insurance demand for natural disasters may be due to the lack of individual prior experience towards such risks ; as well as the relatively short commitment period of insurance policies (usually one fiscal year) compared with the empirical frequency of major natural hazards (centennial and even more).

"Disability Testing and Retirement" This Paper studies the design of retirement and disability policies. It illustrates the often observed exit from the labor force of healthy workers through disability insurance schemes. Two types of individuals, disabled and leisure-prone ones, have the same disability for labor and cannot be distinguished. They are not, however, counted in the same way in social welfare. benefits depend on retirement age and on the (reported) health status. We determine first- and second-best optimal benefit levels and retirement ages and focus on the distortions that may be induced in the individuals' retirement decision. Then we introduce the possibility of testing which sorts out disabled workers from healthy but retirement-prone workers. We show that such testing can increase both social welfare and the rate of participation of elderly workers; in addition disabled workers are better taken care of. It is not optimal to test all applicants, nor to apply testing to all types of benefits. Surprisingly, the (second-best) solution may imply later retirement for the disabled than for the leisure prone. In that case, the disabled are compensated by higher benefits.

Buying more insurance: (LIMRA 2005) 44 percent of U.S. households said they need more life insurance and 27 percent of households said they expect to buy life insurance in the coming year, although no one can predict how many will actually buy. If all 27 percent did, it would increase total coverage by $4.8 trillion and add an estimated $9 billion to industry revenues, almost double the amount of new premium now written each year.

The 30-year decline in household ownership of individual life insurance coverage has ended. Fifty percent of the households surveyed owned some individual life insurance, the same as in the last survey in 1998, but still far less than the 72 percent recorded in 1960. Twenty-two percent of households have no life insurance.

Ownership of group life insurance, provided chiefly through employers, has held steady at 52 percent of households, the same as in 1998. However, the number of individual workers with life insurance benefits has declined from 56 percent in 1999 to 48 percent today.

Term and whole life insurance lead in policy sales, accounting for 80 percent of the policies sold. In the 2004 survey of individual life sales, term accounted for 43 percent of policies sold and whole life 37 percent. Individually insured households owning only term insurance increased from 20 percent in 1992 to 36 percent today. Those owning only permanent insurance decreased from 58 percent to 41 percent.

Product guarantees are most important to consumers. Fixed premium, guaranteed death benefit and lifetime coverage are the most important policy features consumers cited.

Sixty-six percent of those surveyed said replacing the lost income of a deceased wage-earner was their reason for buying life insurance. Forty-two percent cited burial expense and 33 percent cited paying off a mortgage. Seventy-five percent of households agreed that life insurance is the best form of family financial protection against premature death of a primary wage-earner.

On the other hand, those surveyed cited many reasons for not buying additional life insurance, including cost (74 percent), difficulty deciding how much to buy (52 percent), procrastination (50 percent), worry about making the wrong decision (43 percent) and preferring to put money in other financial products (40 percent).

The consumers most likely to buy life insurance in the next 12 months are younger households (under age 45) and married households with children.

More than half of consumers said they would like to review their life insurance needs at least every two years.

Buyers say tax-free death benefits and cash value are important, but many are not aware of the tax benefits.

Consumers said, in choosing a company, familiarity and company reputation are more important than a friend’s recommendation or a company’s financial ratings.

No Lapse (2005)

NO LAPSE CASE STUDY (2005)

Insurance: (2005) 78% of consumers have no personal life insurance agent; 73% have no personal financial advisor or planner; 29% of consumers say they have not been approached to buy life insurance; 74% of consumers say they do not buy additional insurance because it costs too much; 52% say they do not know how much insurance to buy; 50% say they procrastinate when it comes to buying more life insurance; 43% say they worry that they won't purchase the right life insurance; 40% say they prefer to put their money into other financial products instead of insurance.

Mortality and LIfe Expectancy: Male age 55

	Mortality rate Per thousand	Life Expectancy years
Preferred Plus Nonsmoker	$0.83	33.5
Preferred Nonsmoker	1.18	30.4
Standard Non smoker	1.77	26.8
Final Expense	2.92	24.2
Simplified Issue pre need	5.88	23.9
Guaranteed issue pre need	60.68	20.6

For most insurance companies, 3% to 7% of applicants are uninsurable. That said, anyone can get insured- you just have to find the company and be willing to pay the premium.

Life Insurance (Michael Malloy) A Third Person as Beneficiary

A policyowner in a community property state sometimes names someone other than his or her spouse as the beneficiary of a life insurance policy. This is the same as making a gift to that person if that person gives no consideration in exchange for being named beneficiary. If the policyowner’s spouse does not consent to the gift, the spouse could be entitled to half of the proceeds or, in some cases, to all of them.

Some courts have held that the policyowner acted in fraud of the spouse’s rights in these cases. For example, in an Arizona case, the insured husband had purchased the insurance policy after marriage and had paid the premiums with community funds. He changed his life insurance beneficiary designation from his wife to his niece without the wife’s knowledge or consent. The husband died, and the wife and niece both claimed the policy proceeds. The court ruled that the husband’s action in changing the beneficiary without the wife’s consent “worked as a constructive fraud” on her community property right to half of the proceeds.

If a policyowner changes the beneficiary from the spouse to a third person in exchange for a valuable consideration, no gift is involved. In such a case, the third person might be entitled to the full proceeds. (5) For example, in a California case, the insured owed a sum of money to his sister. He changed the beneficiary designation from his wife to his sister in payment of the debt. The court held that the sister was entitled to the full proceeds.

Quotes for a Single Life Annuity

Female Age 79                        State CA                                                             Deposit $200,000

Income Payment Options and Definitions Estimated Income

Single Lifetime Income with No Payments to a Beneficiary ("SL")

You receive this income for your lifetime, which means, you can never outlive this income. After you die there is no income paid to a beneficiary. To receive itemized quotes click the box in the right column and complete the form at the bottom of this page. $1,869

Single Lifetime Income with Up to 5 Years Guaranteed to Your Beneficiary ("5CC")

You receive this income for your lifetime, which means, you can never outlive this income. If you should die during the first 5 years, then your beneficiary will continue to receive this income until the end of the 5th year. To receive itemized quotes click the box in the right column and complete the form at the bottom of this page. $1,789

Single Lifetime Income with Up to 10 Years Guaranteed to Your Beneficiary ("10CC")

You receive this income for your lifetime, which means, you can never outlive this income. If you should die during the first 10 years, then your beneficiary will continue to receive this income until the end of the 10th year. To receive itemized quotes click the box in the right column and complete the form at the bottom of this page. $1,597

Single Lifetime Income with Up to 15 Years Guaranteed to Your Beneficiary ("15CC")

You receive this income for your lifetime, which means, you can never outlive this income. If you should die during the first 15 years, then your beneficiary will continue to receive this income until the end of the 15th year. To receive itemized quotes click the box in the right column and complete the form at the bottom of this page. $1,395

Single Lifetime Income with Up to 20 Years Guaranteed to Your Beneficiary ("20CC")

You receive this income for your lifetime, which means, you can never outlive this income. If you should die during the first 20 years, then your beneficiary will continue to receive this income until the end of the 20th year. To receive itemized quotes click the box in the right column and complete the form at the bottom of this page. $1,244

Trustees of irrevocable life insurance trusts and other fiduciaries have a duty to act in the best interests of beneficiaries. Lawsuits are waiting to happen, because the benefits and risks of life insurance policies are often poorly understood by Glenn Daily (2006)

Life insurance accelerated benefits: (2006) What are accelerated benefits? –– Accelerated benefits allow a portion of the death benefit to be paid upon the happening of certain qualifying events. The amount to be accelerated for each of the qualifying events is stipulated in the policy. There may be accelerated benefits for one or more of the following: terminal illness, critical illness, chronic illness, disability, and nursing home care.

. How much of the death benefit is accelerated? –– The amount to be paid for the various events varies with insurance policies. The amount may also vary depending upon the event covered.

. How does acceleration of benefits affect the death benefit? –– In virtually all cases, the death benefit is reduced by the amount of the accelerated benefit. For example, if 50 percent is paid for terminal illness, then the death benefit is reduced by 50 percent.

. Are accelerated benefits taxable? –– Under the current interpretation of the Internal Revenue Code most accelerated death benefits are income tax free. This is based on the Health Insurance Portability and Accountability Act of 1996.

. What is the benefit of accelerated benefits? –– Accelerated benefits allow a number of conditions to be covered under one insurance policy, with one premium payment which is usually much less than covering the various risks separately. The new life insurance policies pay death benefits just as traditional life insurance policies, but when the need for a death benefit diminishes the policies are available to cover a number of other conditions throughout the various life stages.

Life Insurance and Divorce (2006)

Return of Premium term: (2006) Assume Dr. Smith is age 38, has two kids and a wife. Dr. Smith's total assets are less then $1,000,000, and he wants to make sure that if he were to die in the next 20-30 years, his children would be taken care of (they would be able to go to college, have nice clothes and drive nice cars), as his wife would be, too (so she does not have to go to work in order to provide for the children and herself). Dr. Smith would normally buy 20-30 year level term until he found out about the ROPT.

                                                        Term Life                                     Return of Premium

30 Year Level Term Life

Life Cost                                            $2400                                        $3940

Total cost for 30 years                        $72,000                                     $118,200

Premium Difference               ($46,200) over 30 years

                                                     ($1,540) per year

Interpreting the numbers: The amount of premium paid per year was $1,540 more with the ROPT. Most clients would automatically resort to their default position when it comes to spending money, that position being, always opt for the less expensive product when it comes to insurance and invest the difference in the stock market.

If Dr. Smith invested the difference in premium, $1,540 per year, in the stock each year for the 30 year period, Dr. Smith would have approximately $86,503 after tax (capital gains and dividend taxes), assuming an 8% annual investment return. Dr. Smith, via his ROPT, will receive a guaranteed return of premium of $118,200, income tax free. The difference between the amount in Dr. Smith's brokerage account ($86,503) and ROPT ($118,200) = $31,697. (Remember that while Dr. Smith is investing the difference in premium ($1,540) each year, he still had to pay his traditional level term life premiums of $2,400 each year for 30 years to equal the premium paid each year with the ROPT policy $3,940.)

Final numbers: Dr. Smith would have to earn well in excess of 8% pre-tax in the stock market with the difference in premium in order to have more money than he would receive with his ROPT. And Dr. Smith has no guarantee that his money in the stock market will not earn less then 8% or even negative returns (as we have seen in 2000-2003).

Life Insurance review: (Tony Steuer 2006) The Uniform Prudent Investor Act is Holding Life Insurance Trustees To A Higher Standard

A trustee assumes a significant level of fiduciary responsibility when hired as a trustee managing a life insurance policy. The Code of Federal Regulations Title 12 Sec. 9.6 mandates requirements for national banks responsible for trust assets, including life insurance. This includes on-going annual reviews as well as pre-acceptance review and post-acceptance review. These reviews are designed to make sure that the asset “is appropriate, individually and collectively, for the account.”

A May 2003 Trusts and Estates Magazine article noted that over 80% of trustees had no ‘stated guidelines and procedures for handling life insurance’. If these duties are not performed and/or not performed correctly, the trustee may be open to significant life liability exposure and be made personally liable for any resulting damages. A beneficiary may recover in a lawsuit those values that he or she would have enjoyed had there been no breach of fiduciary duty or failure to act properly.

Bad stuff: (2006) Investor-initiated life policies, in which investors lend wealthy individuals money to pay life insurance premiums for a designated period, are scheduled to be discussed by the NAIC during its national meeting this month. If the individuals die within a designated period, their beneficiaries get the death benefits less the premiums and interest. After the period expires, the individual has three options: repay the loan with interest and keep the policy, sell the policy and repay the loan with interest or transfer the policy to the investor, usually a hedge fund. If the policy is transferred, the investor receives the death benefits when the insured individual dies. The interest rates often are double digit and can be as high as 28%. New York has banned these arrangements as a "speculative investment for the ultimate benefit of a disinterested third party" lacking an insurable interest and several other states may do the same.

Bonds or annuities:  (WSJ 2006) "Many baby boomers could salvage their retirement dreams by buying immediate-fixed annuities, which would convert their modest savings into a healthy stream of lifetime income." An example given is a 65-year-old woman with $100,000 to invest, trying to decide between high-quality bonds and an annuity that provides lifetime income, both offered by Vanguard. The immediate-fixed annuity would pay her $7,336, but if she dies soon after purchase, the $100,000 gone. The bond is yielding 5.7%, but she will need to liquidate some of it each year to equal the immediate annuity. The problem with the bond is she would be pulling out $7,336 each year, but the amount of interest she earns keeps shrinking as her fund balance gets smaller. By age 88, she would be out of money, but her life expectancy is 85. In other words, picking the bond fund over the annuity would be a problem if the woman lives more than three years beyond her life expectancy...and the definition of life expectancy is that half are dead but half are alive.

Fraternal Life Insurance:  (WSJ 2006) This is something I knew nothing about since I have never used these types of policies. Unlike other insurance companies, fraternal organizations can unilaterally -- and retroactively -- change many terms of their policies. 

Founded as self-governing support networks a century or more ago, some fraternal groups have strong church ties, such as Thrivent or, for Catholics, the Knights of Columbus. Others, such as Woodmen of the World and the separate Modern Woodmen of America, are essentially secular, with broader community-service missions. Altogether they claim about 10 million members.

Some buyers aren't aware that fraternal organizations can change the terms of their policies. Thrivent, Knights of Columbus and Woodmen of the World in recent years have altered their bylaws to prevent their policyholders from taking disputes to the courts, instead requiring them to settle unresolved disagreements before an arbitration panel -- even if they had purchased their policies years before the change was made.

state laws generally require them to publicize such changes and forbid them from directly reducing insurance benefits after a policy is sold, they can change terms and conditions that could affect the payout.

Insurance:  (2006) studies show that 59 percent of today’s homes are underinsured by an average of 22 percent. The cost of building or repairing a home has increased dramatically in recent years. According to the U.S. Census Bureau, homeowners spent over $218 billion on additions, alterations, maintenance and repairs in 2005, up from $201 billion in 2004. Materials like lumber, cement, gypsum and structural steel products have become scarcer, not only because of the devastation from last year’s storms, but also because of increased global demand. In fact, the cost of lumber climbed 6.1 percent in 2005 

Lapsed policies: (Highline Data LLC 2006) 19.4 million ordinary life insurance policies (i.e., individual contracts marketed with a face amount of $1,000 or more) lapsed in 2005, representing more than $1 billion in life insurance coverage. The number of lapsed credit life insurance policies (those sold through lending institutions to short-term borrowers contemplating consumer purchases; and through retail merchants selling on a charge account basis to installment buyers) totaled nearly 3 million, equating to approximately $16.6 million in insurance coverage. Lapsed group policies totaled 163,000-plus and $745 million in coverage.

Is VUL worth it?  Good article (2006)

My comments on the use of VUL- A VUL can work. But what is missing in all the illustrations is a Monte Carlo showing that the policy can simply fall flat.

Next is the use of a flat rate of return. Then there is the overriding element of what allocation to use. If the advisor is nothing more than a series 7 with a life license, what is the point. They have no clue to allocation.

And If one decides on a CFP- effectively the same issue. They send out for their allocations via software. And such software ALWAYS will show risk declining (where they actually meant standard deviation). So the whole thing is a mess.

They can work if someone knew what they were doing. But since 99 44/100% are clueless, end of discussion.

Life Insurance Worksheet (Tony Steuer 2006)

INCOME NEEDS:

1.) Annual income your family would need if you die today (typically between 60%–80% of total income)- Consider any lifestyle changes, and include any current expenses such as mortgage/rent, groceries, clothing, utility bills, entertainment, travel, transportation, child care, etc: $______________

2.) Annual income available to your family from other sources - Include all salaries, dividends, interest, current (or estimated) social security benefits, along with all other sources of income: $______________

3.) Annual income to be replaced (Subtract line 2 from line 1.) : $______________

4.) Funds (Capital) needed to provide income for your required number of years? $______________

Multiply line 3 by the appropriate factor below:

10 YEARS X 8.1

15 YEARS X 11.1

20 YEARS X 13.6

25 YEARS X 15.6

30 YEARS X 17.3

35 YEARS X 18.7

40 YEARS X 20.0

EXPENSES:

5.) Funeral expenses - average cost of an adult funeral is about $10,000: $______________

6.) Administrative Expenses (also referred to as an Emergency Fund and/or Final Expenses (approximately six months - 50% of the higher wage earner’s salary); - can vary for cleaning up the affairs of the deceased, e.g., advisor fees, filing taxes: $______________

7.) Mortgage and other outstanding debts (credit card debt, car loans, home equity loans, etc). It may make sense to pay off these debts, considered if the survivor will have a substantial income: $______________

8.) College costs: 2002-2003 cost of a four-year education: public college-$51,346; private college $109,412. Multiply by number of children and keep in mind that costs are increasing more rapidly than inflation $______________

9.) Capital needed for college - Multiply line 8 by the appropriate Years before college Factor: 5 years X .82; 10 years X .68; 15 years X .56 and 20 years X .46: $_____________

10.) Total capital required Add lines 4, 5, 6 and 9: $_______________

ASSETS:

Keep in mind that current asset value may be considerately different at time of liquidation as well as the value may be significantly discounted due to forced sale such as real estate, family business or other investments:

11.) Bank accounts, money market accounts, CDs, stocks, bonds, mutual funds, real estate: $_______________

12.) Retirement savings IRAs, 401(k)s, Keoghs, pension and profit sharing plans: $_______________

13.) Present amount of life insurance (including group life insurance assumes that it will continue): $_______________

14.) Total income producing assets - Add lines 11, 12 and 13: $_______________

15.) Life insurance needed - Subtract line 14 from line 10: $_______________

9/13: Is life insurance a good use of retirement funds? (Tony Steuer)

Ah, a hot topic. The answer here is not the popular answer in the industry. Before you can get dazzled by the tax-deferred inside build up of cash values on most life insurance policies, remember that you must need life insurance in the first place. It’s very easy for someone to say, look, put money into a life insurance policy, it will accumulate on a tax-deferred basis and then you can recover it on a tax-free basis at retirement.

For those of a certain age group – Danger, Will Robinson, Danger. The tax issues and issues go far beyond the scope of this interview and in no way does this interview give any type of tax or legal advice. Remember that you should have a need for life insurance before purchasing life insurance, just as you would have a need for a can opener before buying one. Then take a look at all the hypothetical costs affiliated with a life insurance policy and calculate out the actual build-up and you’ll see that life insurance is in most case not a smart way to accumulate money for retirement. Also keep in mind that by doing something based on tax laws, you’re counting on them remaining the same—which is almost surely a sucker's bet. I can almost guarantee you that there will a change in tax laws before you know it. Don't base decisions on current tax laws alone.

You can get up to $50,000 worth of life insurance with no Medical Exam (2006) - No Blood - No Urine- no  APS. There are only Six health questions. Any yes answer disqualifies acceptance for coverage

1. Do you currently receive kidney dialysis or require oxygen use or have you been diagnosed as having a terminal illness? (Terminal illness is defined as any illness or diagnosis that would reasonably be expected to cause death within 24 months)

2. Do you require assistance to eat, bathe, dress or take your own medication or are you currently confined to a hospital, nursing home, mental facility or Hospice or have you been hospitalized 2 or more times in the past months?

3. Has proposed insured ever been diagnosed as having or been treated for AIDS or ARC by a member of the medical profession or tested positive for HIV antibodies as part of a test conducted for the purpose of obtaining insurance?

4. In the past 5 years have you been diagnosed or treated for, or are you currently under treatment for Alzheimer’s disease. any form of cancer (other than basal cell skin cancer) Heart or Circulatory Disorder (except controlled hypertension), Sickle Cell Anemia, Stroke, Kidney ?Disease (including dialysis), Liver Disease, any Lung disease (except mild asthma not requiring daily medication) ALS (Lou Gherig’s disease) or other neurological disorders (except for controlled seizure disorder with no seizures in the past 2 years) ,or surgery for any Heart, or Circulatory Disorder ( except varicose veins) or transplant of any organ?

5. Are you currently disabled or been disabled in the last 6 months or at any time during the last 6 months have you been unable to mentally or physically complete 30 hours per week of active employment or have you been declined or postponed for life insurance or health insurance in the past two years.

6. In the past 10 years have you been convicted of a felony; or in the past 5 years have you been treated or advised to have treatment for or excessively used alcohol or any drugs of abuse.

Insurance (Tony Steuer 2007) More than 1 in 4 men have no life insurance coverage, and almost two-thirds of men aged 18 to 24 have no life insurance.

* Nearly 1 in 3 women have no life insurance coverage.

* The average amount of life insurance coverage on insured individuals reached $146,300 in 2004.

* Twenty-five percent of U.S. household heads feel they do not have a plan in place to provide a decent standard of living for their family if they died tomorrow.

* Three-fourths of Americans needing more insurance think they can't afford the premium, despite the fact that many are under age 45 and could buy term insurance for a modest sum.

* Consumers feel buying life insurance is an important and complex financial decision. Eight in 10 find it difficult to decide how much and what type to buy and worry about making the wrong decision. Two-thirds don't know where to buy or who to turn to for help.

* Life insurance surpassed all other sources of financial assets or income that Americans expect to use to help pay bills and to maintain their lifestyle if a primary wage earner dies.

Cross Endorsement  agreements- (Linda Storm 2007) Under a cross-endorsement buy-sell arrangement, the business owner purchases and owns a life insurance policy on his or her life while the other business partners purchase and own policies on each of their respective lives. The value of each policy is based on the projected value of the business and each business owner’s proportional interest in the business. The arrangement is structured as an endorsement split-dollar plan so that a portion or all of the death benefit can be leased for a “rental charge” to the other business owners to satisfy the obligation under the buy-sell agreement.

Consequently, each business owner will recognize rental income on what they charge on their own policy, offsetting the net cost of the plan. The business owner as owner of his or her own policy continues to have access to the policy’s potential cash values. To minimize the cash outlay needed to pay premiums, the company may make annual bonus payments to each business owner in the amount of the premium.

The value of the rental charge is based on the economic benefit cost of the death benefit, which initially represents only a fraction of the premium. The economic benefit cost is measured annually using either a government or insurance company rate table that takes into account the insured’s attained age and the amount of the death benefit being endorsed.

Arrangements Between Irrevocable Life Insurance Trusts

Alternatively, the cross-endorsement buy-sell arrangement can be structured so that an irrevocable life insurance trust (ILIT) established by each business owner is the owner of the policy; and each ILIT endorses the death benefit to each of the other ILITs established by the other business owners. In this case, the business-owner-insured makes annual gifts equal to the premium amount to the trust that ideally qualify as tax-free gifts.

While the buy-sell plan is in place, the life insurance proceeds are to be paid to each surviving owner to fund the buy-sell obligation. However, if the plan is terminated for reasons other than death, the business owner can continue to own the policy and use the policy cash values to supplement retirement income or to fund a buy-out of the business. The policy can also be retained by the business owner to cover estate tax liability

Insurance litigation: (2007) The average U.S. insurance company faces nearly 1,700 separate lawsuits pending in U.S. courts..." - which is more than FIVE TIMES the litigation pending in the next highest sectors.

The report goes on to reveal that "the average insurer spent $36 million on litigation in 2005". While it is noted that "only a modest fraction" arose from "contract and other causes of action", 31% of legal counsel surveyed listed contracts as primary concern, and 38% listed class actions and regulatory proceedings as their primary concern.

The survey included property & casualty - not just life insurance - but the survey still begs the question: how many millions of dollars are spent on PREVENTION? On agent training and education? Or on supervision, due-diligence, suitability screening, and DISCLOSURE?

Annuity Market News reported (October 10, 2006) the results of an independent online survey made in August, where 44% of the over 4,000 U.S. adults surveyed said they view the insurance industry UNFAVORABLY.

Insurance: (2007) more than three in four (76%) parents with no life insurance coverage say that the death of the primary wage earner in their household would make it harder to afford college and one-third say college would be completely unaffordable.

And a study by LIMRA showed that about two-thirds of the 48 million people who either hadn't bought life insurance or thought they should own more didn't know where to buy it or who to see for help. The top reason given for avoiding the purchase of life insurance was "dreading high-pressure sales tactics."

Cross purchase (2007)

Consider Taylor James and Mark Lawson, who are each 50% owners of Tech Solutions Inc., which has been appraised at $4 million. Taylor (age 45) and Mark (age 46) are preferred underwriting risks and want their growing families to have the funds available to sell the business to each other should either one of them die prematurely. They also want flexibility to account for a buy-out before or at retirement or to cover the estate taxes that may be due as a result of the personal wealth the business creates.

Taylor and Mark enter into a buy-sell agreement in which each promises to buy out the other in the event of premature death. Each purchases a universal life insurance policy for $2 million and endorses or “rents-out” the death benefit on the policy to each other. The premium due on Taylor’s policy, based on 20 premium payments, is $23,694. Mark’s premium is $24,822 for 19 years

The net cost of the plan is the same as paying the cost of a personal policy with no endorsement. When the buy-sell plan terminates, the endorsement will terminate and each owner will continue to own the policy and use it for their current needs. The cash value accumulation can partially fund a buy-out at retirement or supplement income. Of course, the policy death benefit can remain intact to provide the family with estate liquidity.

Equity INdex Annuity (2007)

Quiz 1.) What annual reset credit method can show a Zero return in 5 of the last 10 years? (S&P 500 Index assumed)

A. Monthly Average

B. Monthly Cap

C. Daily Average

D. Annual Point to Point

2.) What credit method below earns the greatest amount of interest over the troubled 1970s? (S&P 500 index assumed)

A. Monthly average with a 1% spread

B. Monthly average with a 12% cap

C. Monthly average with a 90% participation rate

D. a Fixed rate of 5%

3.) A comprehensive study published in November 2006 showed that using rolling ten-year periods of the S&P 500 index starting in 1967, EIA credit method performance between best and worst would have varied by how much?

A. less than 1/2%

B. 1%

C. 2%

D. over 3%

4.) If your client expects to see results that closely mirror the stock index performance, which credit method should you use?

A. Annual point to point

B. Daily average

C. Monthly cap

D. Monthly average

5.) True or False: Choosing an EIA that offers an immediate bonus on the premium deposit assures a higher ending value.

A. True

B. False

Answers 1.) B. Monthly Cap, when a typical 2% cap is used. Increasing the cap to 3% reduces the number of zero years to 3.

2.) A. Monthly average with a 1% spread. $10,000 deposited in an EIA using this method in January 1970 would have grown to $17,082 by January of 1980. The same amount earning a fixed 5% rate would have grown to $16,289. Worst performer? The 12% cap. It yielded just $15,692.

3.) D. Over 3%. In this study of 16 popular credit methods, the best credit method yielded an average annualized return of 7.17% and the worst credit method's annualized return was 3.72%.

4.) A. Annual point to point. This method behaves most like the index as quoted in news sources when no caps or fees are applied; instead the participation rate is less than 100%.

5.) B. False. Although an upfront bonus may be a tempting way to recoup losses realized in other investments, the trade off is usually reduced credit method rates.

Updated Heavy Build Chart (2007)

Height    Preferred         Table C           Table H

5ft 6 in. 185                   267                  316

6ft --     217                   325                  368

6 ft 3 In. 238                  345                   388

6 ft 6 in 259                   365                     406

Weight (2007) Gender: Male; Age: 40; Height: 5'11"; Weight: 190; Smoking: No; Existing Health Conditions: None

Looking to secure protection for his wife and daughter, our sample profile is shopping for a $500,000 term life policy with a 20 year term length.

Weight     Monthly* Monthly Cost of  Extra 10 pounds

190          $31.06

200          $37.63        17% ($6.57)

210          $40.25        7% ($2.62)

220          $46.38        13% ($6.13)

230           $63.44       27% ($17.06)

Changing Definition of 'Dependent'- Young and uninsured (USA 2007) Adults younger than 35 are nearly twice as likely to be uninsured as adults 45 and older, according to a report by the Blue Cross and Blue Shield Association. Twenty-seven percent of young adults in their 20s have no health insurance.

Who is insured and for how long?

In 2004, the United States counted 46 million people without health insurance. This number does not include people over the age of 65, who receive Medicare benefits, nor does it take into account the millions more who are inadequately--or "under"--insured. The uninsured population is growing at a staggering rate. In 2000, just under 40 million people did not have health care coverage; in just five years, the population has jumped 6.5 million. Nearly half of this increase is due to young people between the ages of 19 and 34. Employment statistics suggest that fewer employers are offering health care coverage, and more people are self-employed than they were a decade ago.

Something very wrong here- From an Email I got this morning: FREE INSURANCE, NO PREMIUMS (???)

WHO: Seniors aged 65 - 85.

WHAT: $15,000 death benefit, issued by an A+ rated carrier, with No Premium, and only five (5) basic health questions.

HOW: An investor group buys a $50,000 policy, and pays the premiums on it, keeping $35,000 death benefit for themselves and providing $15,000 death benefit to the insured with No Premium paid or due from the insured.

WHERE: Already approved in multiple states, with additional states being added as fast as possible.

WHEN: Now. Click here for information, or call Nathan or Jerry at 866-872-3165. Brand-new product, be among the first to offer it.

WHY: Commissions. A flat $250 commission is paid to the agent.

Life Insurance- (2007) 17% of institutionally managed policies will lapse prior to life expectancy*

• 26% of institutionally managed polices will lapse prior to maturity*

• 55% of institutionally managed policies have a management concern or a potential performance issue*

• 11% of institutionally managed policies are not competitive relative to peer products

LTC- As of 2006, about 200,670 LTC Partnership policies were still in force in the 4 states that have established Partnership Programs (California, Connecticut, Indiana and New York). Of these, how many policyholders have exhausted their benefits and received Medicaid? 175

Of course, the statistics did not indicate how many policies have actually been started.

And LTC coverage is affordable by 20% and owned by just 7%-8%.

Life SEttlements- (2007) In 2005 about $10 billion worth were transacted, according to Sanford C. Bernstein & Co. (AB ), up from virtually nothing in 2001. Industry analysts say this number rose to $15 billion in 2006, and could double this year, to $30 billion. Over the next few decades, as the ranks of retirees swell, Bernstein predicts that the face value of life settlement deals will top $160 billion a year in today's dollars. Death bonds will never approach the size of the mortgage market, which saw $1.9 trillion of securities issued last year. But if Wall Street achieves its goal of turning most of the life settlements created each year into death bonds, the market could rival the size of today's junk-bond market, where issuance totaled $128 billion in 2006, up from $56 billion in 1996, Many life settlement providers, for example, are trying to lure people who don't even hold insurance. In this tail-wagging-the-dog scenario, speculators take out policies on the individuals' behalf, pay them something up front, cover the premiums, and then wait for the people to die so they can collect. At the most outlandish extreme, one outfit devised a plan involving the population of the Federation of St. Kitts and Nevis in the Caribbean.

Investors, meanwhile, have been burned by operators who have misrepresented the profit potential on deals. Two men now awaiting trial in California hatched an allegedly fraudulent scheme aimed at the entire congregation of a black church in South Central Los Angeles. They promised investors 25% annual returns because African Americans die earlier than other racial groups—an ugly pitch that prosecutors say overstated the upside potential.

Even some of the biggest life settlement firms operate under a cloud. Philadelphia's Coventry First, for example, faces civil charges from the New York Attorney General's office and is in danger of being barred from doing business in Florida. It denies any wrongdoing.

The eight-year-old industry certainly has an ignominious history. It grew from the shards of the so-called viaticals business, which imploded in the late 1990s amid allegations of fraudulent dealings with AIDS patients and other terminally ill people. The word viatical comes from viaticum, a religious term for the communion given to a person near death. As AIDS spread during the 1980s, patients turned to the viatical settlements market to unlock insurance money to pay for care. But advances in medicine in the 1990s extended patients' lives, making viaticals less profitable for the buyers. At the same time, the industry was rife with abusive sales practices that drew the attention of prosecutors. By 1999, business had all but dried up.

Surprisingly little has changed in the latest iteration. Only 26 states require professional licensing for life settlement brokers; elsewhere, anyone can hang a shingle. The market is especially popular among former stockbrokers, mortgage brokers, insurance agents, and lawyers. But all sorts of people from small-time movie producers to dentists are setting up shop.

Equity Index Annuities: (2007) Approximately $25 billion in equity-indexed annuities were sold last year.

Equity-indexed annuities are quite similar to equity-participation securities, which are traded on the American Stock Exchange under various brand names. Equity-participation securities guarantee that investors will receive the initial face value of the security plus the increase in the value of a stock or stock index reduced by an annual spread. The correspondence between equity-indexed annuities and equity-participation securities is closely analogous to the correspondence between variable annuities and mutual funds.

Insurance companies have added trivial insurance benefits, disadvantageous tax treatment and exorbitant costs to equity-participation securities and sell them as equity-indexed annuities.

investors in equity-indexed annuities cannot determine the costs they are incurring. Moreover, equity-indexed annuities’ complexity makes it virtually impossible even for brokers and agents to properly evaluate the annuities. Salesmen can readily determine though that commissions paid for selling equity-indexed annuities – as high as 10% or 12% – are much larger than commissions paid on mutual funds and variable annuities.

Insurance- (2007) " 17% of institutionally managed policies will lapse prior to life expectancy*

" 26% of institutionally managed polices will lapse prior to maturity*

" 55% of institutionally managed policies have a management concern or a potential performance issue*

" 11% of institutionally managed policies are not competitive relative to peer products*

** Based on RIC's completed LifeTrack Baseline Reviews provided to Trust Fiduciaries. Retrieved from RIC database on March 6, 2007.

Insurance today: (2007) Universal Life, 34%

Whole Life, 25%

Term Life, 24%

Variable Life, 17%

U.S. Individual Life Persistency Update (2007 http://www.soa.org/files/pdf/US%20Indiv%20Life%20Persistency%20Report-FINAL.pdf)

This report presents the results of a study of individual life insurance lapse experience in the United States conducted jointly by LIMRA International and the Society of Actuaries. The study is based on data provided by 22 individual life insurance companies and it presents lapse experience for whole life, term life, universal life, and variable universal life plans traced through 2002. The report examines lapse experience on individual life products for a variety of policy and product factors.

For all individual life insurance products combined, lapse rates have increased from levels observed in a previous LIMRA persistency study covering the mid-1990s experience period.With the exception of the early years, policy lapse rates for the current study observation period were higher across all durations. The overall lapse rate for the 2001-2002 observation period was 4.9% on a policy basis and 7.8% on a face amount basis.

.. Individual life insurance products experienced higher rates of lapse than either individual disability income or individual long-term care insurance plans. And the difference is greatest for policies in durations 5 through 10. In response to the poor performance of financial markets during the observation period of the current study, many individual life carriers began to focus new product development work on products with strong guarantees, including term, guaranteed universal life, and even whole life. This resulted in replacement of both variable policies and older, less competitive guaranteed products with more competitive newer products.

.. The overall lapse rate for whole life insurance plans was 3.9 on a policy basis and 5.8% on a face amount basis. Policy lapse rates have increased slightly from the mid-1990 levels for all policy years.

.. Total lapse rates for term insurance for all policy years combined were 10.2% on a policy basis and 10.3% on a face amount basis. Experience has worsened slightly since the mid-1990s for policies in years 11 and later; however, rates of lapsation have declined for policies in years 1 through 10. Some of the increase in lapses in the later years is attributable to shock lapses on level premium term policies nearing the end of the level premium period.

.. Shock lapse rates (rates of lapse for policies near the end of the guaranteed level premium period) for level-premium term plans included in the current study ranged from 30% to 50% and tended to vary with the length of the guaranteed premium period.

.. The overall lapse rate for universal life (UL) products for all policy years combined was 5.3% on both a policy basis and on a face amount basis. With the exception of policies in year 1, UL lapse rates have increased from the levels seen in previous individual life persistency studies. .. The overall lapse rate for variable universal life (VUL) plans covered by the current study was 8.5% on a policy basis and 8.8% on a face amount basis. Lapse rates have increased significantly from levels observed during the mid-1990s. This is likely the result of the poor equity market performance and continual volatility of returns over the observation period of the current study

Many policyholders became disillusioned with variable products after seeing their cash values shrink significantly. And, in the case of variable universal life plans, in many instances additional unplanned premium payments were required to keep policies in force.

Premium persistency was also examined as part of this study. Premium payment ratios are calculated as the ratio of actual premium paid (up to the planned or billed amount) to the planned premium amount on policies that survive the observation period. Premium payment ratios have increased slightly for policies in the first three years, but have decreased for policies that are in duration 4 or later.

Life Swap with Defective Grantor Trust (2007) : Don't know if I would use it since there appears to be some issues still unresolved, but it is interesting nonetheless.

LIFE SWAP CONCEPT

The life swap concept accomplishes both goals: It allows for policy access and for the ability to remove the policy death benefit from the taxable estate. With life swap, the individual creates an irrevocable defective grantor trust and funds it with an asset to which the individual does not currently need access. Concurrently, the individual purchases a life insurance policy sufficient to meet the potential future estate tax need.

During the insured's life, he or she can access policy values because the policy is owned directly by the insured. This provides a ready cash reserve that is accessible on a tax-advantaged basis. Cash withdrawals from a life insurance policy are considered a return of premium and, therefore, are not subject to income tax (limited by the insured's investment or "basis" in the policy).

Loans may be taken against policy values after the insured has withdrawn the basis amount. This cash reserve may be used by the insured as a financial stopgap during his or her life. Meanwhile, the asset(s) in the irrevocable trust is appreciating outside the insured's taxable estate.

If, prior to the insured's death, it is determined that the policy death benefit should be removed from the insured's estate, the policy owned by the insured may be "swapped" for the asset(s) held in the irrevocable trust. Although the value of the asset received by the insured in the swap is included in the insured's taxable estate, the larger death benefit of the life insurance policy escapes estate inclusion once it is swapped into the irrevocable trust. This flexibility, however, is attained at the price of timing volatility. If the insured dies before the swap is conducted, the full death benefit remains in the insured's taxable estate.

Properly structured and timed, life swap may be accomplished with no adverse tax consequences. And the insured's goals of access to the policy values during life while removing the death benefit from the insured's estate, if desired in the future, are accomplished.

DEFECTIVE GRANTOR TRUSTS

The first step in structuring the life swap is to make the irrevocable trust defective for income tax purposes. The defective grantor trust rule to be used for life swap is found in Code Section 675(4)(C). By adding the language found in this code section to the irrevocable trust, the grantor gains the ability to "swap" property held by the trust with property of similar value held outside the trust.

Because the properties being swapped are of similar value, the transfers should not be subject to income or gift taxation. Note that the valuation used for both the life insurance policy and for the asset received from the trust must be fair market value to avoid gift tax issues.

THREE-YEAR RULE

Generally, the transfer of a life insurance policy into an irrevocable trust within 3 years of the insured's death causes the death proceeds to come back into and be taxed as part of the insured's estate. The 3-year rule of IRC 2035 only applies to transfers by gift. An exception to the rule is a transfer by sale. The life swap avoids the rule because the policy being transferred to the trust is "sold" for the value of the assets being received from the trust in exchange for the policy.

TRANSFER FOR VALUE RULE

The transfer for value rule of code section 101 provides that when a policy is sold or otherwise transferred (swapped) for a valuable consideration, the life insurance death proceeds, above the consideration paid for the transfer of the policy plus the net premiums paid by the purchaser, are taxable as ordinary income.

The only way to avoid a transfer for value when selling a life insurance policy is to sell it to a buyer who is an exempt recipient under the rule. For life swap, the most important exempt recipient is the insured. The sale of the policy to the insured is exempted from the rule so the negative tax consequences of the rule are avoided.

Remember that the transfer for value rule is an income tax rule. The irrevocable trust created in the life swap plan is a defective grantor trust for income tax purposes, so the transfer of the policy into the trust is considered a transfer of the policy to the insured, and therefore the transfer for value rule does not apply.

ESTATE TAX

By allowing the asset(s) to grow in the trust and then swapping it out for the life insurance policy prior to death, one removes the larger death proceeds from the insured's estate for the lower value of the policy at the time of the transfer (the swap is based upon the policy's cash value, not the full value of the death proceeds). The asset received from the trust also enjoys a step-up in basis because it will be included in the insured's taxable estate at death.

Moreover, if the asset(s) growing in the trust appreciates beyond the value needed for the swap, that additional growth will remain in the trust after the swap and out of the insured's taxable estate. Of course, after the swap, the life insurance death proceeds will be received by the irrevocable trust income tax-free and will be available to meet the insured's estate tax liability.

With life swap, timing is everything. What happens if the individual dies before the swap is conducted? If the individual's spouse is alive, the assets, including the life insurance death proceeds, may be passed to the spouse without estate tax inclusion under the unlimited estate tax marital deduction. The policy proceeds may then be used for the spouse's planning. Alternatively, although the life insurance death proceeds will be taxed in the insured's estate, the estate can use the life insurance to meet the estate tax liability.

RESULT

Life swap builds the desired flexibility into the high net worth individual's planning. It achieves the goal of retention of access to the life insurance policy values during the insured's life for emergencies or opportunities while allowing the larger death benefit to be removed from the insured's taxable estate.

Life swap also brings the ability to position the life insurance appropriately based upon the state of the estate tax in the future, at a time closer to the individual's death. This allows the insured to purchase the life insurance for planning purposes while still healthy, yet it provides the ability to remove the policy death proceeds from the estate if estate taxes are still a concern.

Forgays, J. A., Esq. (2007, June 11). Building Flexibility Into Estate Plans Using The Life Swap. National Underwriter, Vol. 111, No. 23, pp. 21, 48.

Insurance terms (Bruce Gordon 2008) Of course, technically we don't call them flexible premiums because frequently they are not flexible-or, at least, not if the policyholder wants to keep the policy in force. Instead, we use names like "target premiums," "minimum premiums," "guideline annual premiums," "guideline single premiums," and "seven-pay premiums." Some of these also can be "guaranteed premiums" and "non-guaranteed premiums." We can even select or solve for "specified premiums."]

Usually, none of these terms is synonymous, although sometimes, under some circumstances, they can be. I guess "flexible" is meant to be an admonition regarding the prospective buyer's overall attitude and attempt at understanding.

"Target premium" is usually the premium most frequently quoted. However, it usually is only the level of premium upon which the agent receives full commissions. That's probably why it is most frequently quoted. But, that's a relationship better left "bundled" to avoid any confusion.

There is also an initial "minimum" premium, which is the premium actuarially determined to meet all the initially required expenses and fund the initial surrender charge.

This, of course, differs from the real minimum premium, which is the amount required to keep the policy in force, longer term, under a given set of performance assumptions. But, the National Association of Insurance Commissioners conceived its new, consumer friendly, multi-page required proposal format to help mitigate this confusion.

And, then there are the government's defined premiums, which are really "maximum" premiums.

However, since it is still a "flexible premium" policy, you can always pay more than these maximums-if you are willing to give up some of the benefits of a "flexible premium, adjustable benefit, whole life policy." That must be the "adjustable benefit" aspect, right?

Then, there are the "cost of insurance" charges, which usually cover more than just the cost of the term insurance. These should not be confused with term insurance premiums that might be paid for a separate term insurance policy (which probably is really a "term-like" "graded premium whole life" insurance policy, but that's the subject of another article).

In fact, they are probably not even closely similar rates. Does that mean the probability of dying is dependent upon policy type?

And with universal life, the amount of insurance that the COI pays for is called the "net amount at risk," which is different from the "specified amount," which is the amount of insurance originally purchased. This is the kind of stuff that makes advertising copywriters cringe.

Similarly, "cash value" is usually only that portion of the "policy value" that can be borrowed or withdrawn, although the latter is usually referred to as a "partial surrender" (probably so as not to be confused with a "full surrender").

Meanwhile, "Partial surrender" returns part of the cash value to the policyholder, while a "full surrender" returns the policy to the insurance company, right?

Funding Large Life Insurance Policies (2008) 

Split Dollar Plans, Part I

Michael Malloy

Introduction

A Split Dollar arrangement in its various designs can be helpful in estate liquidity planning to minimize income, estate, and gift taxes.  Split Dollar plans have also been used by corporations as an executive benefit to encourage employees to remain with the company, or to help the corporation to replace the loss of a valuable executive.  The 2003 Final Split Dollar Regulations (Final Regulations) change the way Split Dollar plans are treated from a tax perspective in many important ways, a properly structured plan remains a viable and important planning approach to consider.

Part I presents a simple overview of Split Dollar Plans. Over the next several issues, thanks to Richard Hindlian, Joshua Husbands, and J. Alan Jensen of Holland & Knight, we will give you the information you need to craft a Split Dollar arrangement under the Final Regulations.  The material we will present is substantially the same as their article for the May/June issue of Probate & Property magazine, which is published by the ABA’s Section on Real Property, Probate and Trust Law.  The material we will present in coming newsletters covers some of the following topics:  Taxation of Pre-September 17, 2003 Split Dollar Arrangements; Split Dollar Loans Under The Final Regulations; IRC 409A And Material Modifications; IRS Notice 2008-42.  We are most grateful to the authors and Probate & Property magazine for allowing us to use this valuable material in upcoming issues.

New Split Dollar Arrangements Subject to the Final Regulations

The new regulations categorize Split Dollar plans into two mutually exclusive regimes: the economic benefit regime and the loan regime. How you structure your particular Split Dollar plan will be based on certain factors.

Economic Benefit Regime. Under the economic benefit regime, the premium can be split between the economic benefit portion of the premium and the balance of the premium. The economic benefit for income and gift tax purposes can be significantly low at younger ages because it is based on the annual “term” cost of the death benefit and not the policy’s full premium.

In a corporate context in which you or your Irrevocable Life Insurance Trust (ILIT) is the owner of the policy and your company lends you or your ILIT the premium, you must annually report the economic benefit cost as income. Alternatively, you or your ILIT can actually pay the economic benefit portion of the premium out of pocket. In a family or corporate context in which a trust is owner of the policy, the economic benefit amount also constitutes a gift for federal gift tax and generation-skipping transfer tax purposes, whether paid in cash or not.¹

Under the new regulations,²   the calculation of the annual economic benefit rates for single life policies involves the use of the government Table 2001 rates,³ or the insurer’s alternative term rates,⁴ whichever are lower. Moreover, the economic benefit rates associated with a survivorship policy can be significantly lower than the rates for a single life policy, making a Split Dollar plan with a survivorship policy⁵  an extremely tax-efficient planning strategy. Although economic benefit costs increase with age, it can be advantageous from a tax standpoint to structure a Split Dollar plan using economic benefit rates since the economic benefit initially represents only a fraction of the premium.

Loan Regime. Generally, under the loan regime, you or your company lend the annual premium to your trust. The trustee of the ILIT repays the loan either during lifetime using a portion of the policy’s net cash value and other available funds, or at death using the life insurance proceeds. The loan balance is equal to cumulative premiums paid in addition to capitalized loan interest, if any. The ILIT has two choices in how the loan is structured: pay loan interest (or capitalize it) at a fair market rate, or be deemed to have paid such interest under IRC §7872, the below-market loan rules.⁶

Unlike a Split Dollar plan under the economic benefit regime, a loan arrangement includes a loan interest component that is applied to the cumulative premiums paid instead of an economic benefit cost related to the death benefit as discussed above.

Structuring a Split Dollar Arrangement

How the plan is designed, including the named parties to the arrangement in a private (family) or corporate context, whether a collateral assignment or endorsement approach is used in the plan, and whether the policy is structured to transfer equity to the owner, will determine the regime it must follow as well as the benefits and consequences to the parties involved in the arrangement. Generally, Split Dollar plans can be structured with either an endorsement or collateral assignment filed with the insurance company. ⁷

Types of Split Dollar Arrangements: The Endorsement and Collateral Assignment Methods

Endorsement Split Dollar. In most cases, endorsement Split Dollar plans can continue to use the economic benefit regime. An endorsement plan is used when your company owns a policy on your life and endorses some or all of the death benefit to you or your ILIT.⁸  An endorsement Split Dollar arrangement is typically used in business planning. It is a cost-effective way for your employer to provide for key person protection, and/or to provide you with supplemental retirement income.⁹   It is also used when your employer wishes to maintain control of the policy as a form of golden handcuffs. In many instances, endorsement Split Dollar is incorporated into a non-qualified deferred compensation arrangement, in which your company has purchased the life insurance policy as a tax-efficient vehicle to fund the deferred compensation payments upon your retirement.¹⁰  In such arrangements, you contribute the term cost of the death benefit that will be provided to your beneficiaries as a pre-retirement survivor benefit. Alternatively, the company may pay the term cost of the benefit for you in the form of additional taxable compensation.¹¹

Collateral Assignment Split Dollar. A collateral assignment arrangement is one in which you or your trust own a policy on your life (the policy can be a survivorship policy on you and your spouse, if applicable). The owner of the policy assigns, or pledges, the policy’s cash value as well as the death benefit as security for the repayment of premiums advanced by the non-owner.

Generally, collateral assignment Split Dollar arrangements can be established as private or corporate¹² Split Dollar plans in which the life insurance is typically owned by an ILIT you create.¹³  In the usual private Split Dollar plan, the arrangement is between you and the ILIT. You may also have your company participate in funding a Split Dollar policy to make use of corporate dollars. In a typical corporate Split Dollar arrangement, your ILIT is the owner and beneficiary of the policy and the policy will be collaterally assigned to your employer as security for the repayment of premiums.

As mentioned above, when the growth (equity) in the policy’s cash value benefits the policy owner, the IRS has historically been concerned about taxing the plan’s equity. Therefore, when a Split Dollar plan is created using the economic benefit regime and the owner of the policy is you or your company, the new regulations require that the collateral assignment must be a non-equity collateral assignment in which you or your company are entitled to recover the GREATER of the policy’s net cash surrender value or premiums paid when the Split Dollar arrangement is terminated.

It is no longer possible under the Final Regulations to establish an equity collateral assignment Split Dollar plan using the economic benefit regime. A fair market or below-market loan arrangement must be used if the collateral assignment is for the LESSER of the policy’s net cash surrender value or premiums paid. In the loan arrangement, the value of the benefit is based on loan interest and not economic benefit rates.

Current Treatment of the Split Dollar Plan

Traditional endorsement Split Dollar arrangements, non-equity collateral assignment Split Dollar arrangements between an employer and an employee, and private non-equity collateral assignment Split Dollar arrangements between a family member and his or her ILIT will continue to be subject to the economic benefit regime.¹⁴  The key to using the economic benefit regime is to make sure that the plan is set up so that there is no equity that benefits the policy owner in a collateral assignment plan, or that the plan is an endorsement plan in which the company owns the policy. Arrangements in which you or your company make premium payments for your ILIT and in which the gain benefits the ILIT must now be structured as a loan arrangement.

Terminating the Split Dollar Plan — the Roll-Out

A Split Dollar plan must be terminated either at a specified date, such as retirement, or at death¹⁵ It is important to consider the different ways to terminate the plan during lifetime since the increasing economic benefit costs in the economic benefit regime or the loan interest charges in a loan scenario may have significant gift tax implications in later years. Often, the terminology used to describe the termination of a Split Dollar arrangement is a “roll-out.”  The funds to roll-out of a Split Dollar plan may be available from the following sources:

Death Proceeds. Upon death, the policy proceeds, which are ordinarily income tax-free, can be used to repay you or your company in a private Split Dollar context, or to recover your company’s costs, replace you, or to fund a buy-sell plan in an endorsement arrangement.

Other Trust Assets. If you make gifts above the economic benefit amount to the ILIT, it may be possible for the trustee to use the trust balance to fund the roll-out.¹⁶

Transfer of the Policy. In an endorsement plan, your company can choose to make an income taxable bonus of the policy to you. The bonus will also be treated as a gift from you to your ILIT, if a trust is used.

Existing Source of Funds. An existing source of funds, such as a Grantor Retained Annuity Trust (GRAT), a Charitable Lead Trust (CLT), a Defective Grantor Trust, or a Credit Shelter Trust (CST) may be used to repay the collateral assignment in a Split Dollar plan. When anticipating the use of a trust, the term of the Split Dollar plan is typically coordinated with the term of the trust.

Types of Split Dollar Plans

Although there are many existing, new, and creative ways to structure Split Dollar plans under the new regulations to achieve specific planning objectives, currently there are four primary Split Dollar designs that can utilize the economic benefit regime:

• Private non-equity collateral assignment Split Dollar between a family member(s) and a trust;

• Private Switch Dollar;

• Corporate non-equity collateral assignment Split Dollar between a company and an employee or an ILIT; or

• Endorsement Split Dollar in which the company owns the policy and provides benefits to the employee

Private Non-Equity Collateral Assignment Split Dollar

A private Split Dollar arrangement with a non-equity collateral assignment makes sense when you have the cash flow to fund a large life insurance need but you need to minimize the gift taxes connected with premium gifts you make to your ILIT. Here is how it works:

Private Switch Dollar

The Switch Dollar plan simply combines the advantages of the economic benefit and loan regime into one arrangement. When the economic benefit regime becomes less economical, the collateral assignment is terminated and a promissory note is established with an initial loan balance that includes all prior premiums paid (or an amount equal to the life insurance policy’s cash value, if greater). A Switch Dollar plan can be used for equity collateral assignment Split Dollar plans that were in existence prior to the Final Regulations,¹⁷ or for new non-equity collateral assignment arrangements in which the economic benefit costs may result in high gift taxes at older ages. It can also be used immediately before the policy moves into a gain position (i.e., the cash value exceeds the total premiums paid). Here is how it works:

Corporate Non-Equity Collateral Assignment Split Dollar

A corporate Split Dollar arrangement with a non-equity collateral assignment makes sense when you need to minimize the gift taxes connected with premium gifts you make to an ILIT, and when you either do not have the cash flow to fund the premiums or your company is looking for a way to provide you a fringe benefit. Here is how it works:

Endorsement Split Dollar

An endorsement Split Dollar is used when your company prefers to own a policy on you to provide you stipulated benefits, and /or to fund your replacement. Here is how it works:

Endorsement Split Dollar as a Buy-Sell Funding Tool

In a key man buy-sell context, it may be economical for your company to own individual policies on your life and the lives of other key employees who are also shareholders (SH). Your company cross endorses the death benefits of each policy to help fund a cross purchase agreement among the shareholders. In this scenario, your company retains a portion of the death benefit of each policy equal to its key man need or cost recovery, and cross endorses the excess death benefit on each policy to the other shareholders. In many cases, the economic benefit cost is paid by you and the other shareholders in the form of a bonus and is income taxable to each shareholder.¹⁸  Here is how it works:

Alternatively, the parties could choose to use a non-equity collateral assignment Split Dollar arrangement to fund the cross purchase arrangement. In this plan, each key employee owns the policy and the company is the funding source. Here is how it works:

Loan Arrangement. You can establish a loan arrangement if it is more economical to do so. Whether a loan arrangement makes sense or not will be based on your age and the interest rate environment. Here is how it works:

Clearly, there are many benefits to using a Split Dollar arrangement. Your need for the life insurance, as well as your age, the existing interest rate environment, as well as the funding sources available, during lifetime to terminate the plan if necessary, will dictate the design that may work for you.

 Benefits of a Collateral Assignment Split Dollar Plan

• Estate liquidity. You can secure the amount of life insurance you need for estate liquidity purposes while minimizing gift taxes that may result from premium payments.

• Leveraged gifts at minimal gift tax value. Since the economic benefit rates that are used to measure the gift tax value of the arrangement can be very low, gift taxes can be minimized while your gifts of the premium are leveraged with life insurance.

• Planning flexibility. You can lock into insurability now at a low gift tax cost. If the estate tax is repealed after 2010, you have the flexibility to terminate the arrangement and cancel or maintain the policy depending on your needs.

• Buy-Sell funding. Your company can help you to fund a buy-sell agreement using a collateral assignment Split Dollar plan.

Benefits of an Endorsement Split Dollar Plan

• Executive benefit. Since the cost of an endorsement Split Dollar plan to you is only the economic benefit portion of the premium, the plan offers you low-cost death benefit protection and/or supplemental retirement income.

• No cost at termination. There is no cost to you when an endorsement plan is terminated.

• Key-person protection. When a corporation owns a life insurance policy on your life in an endorsement Split Dollar plan, the company can use the death benefit to provide you with low-cost death benefit protection and replace or minimize the effects of your loss on the company.

• Buy-Sell funding. Your company can help you to fund a buy-sell agreement using an endorsement Split Dollar plan.

• Cost recovery. Your company can recover the costs of an endorsement plan using the death proceeds.

What to Consider When Using a Split Dollar Plan

• Cash flow. Cash flow is required to fund premiums.

• Increasing economic benefit. The economic benefit costs will increase over time, thereby increasing the annual gift tax value or cost of the arrangement.

• Estate taxation of repayment. The repayment of the premiums in a private Split Dollar plan may be included in your taxable estate.

• Lifetime termination of arrangement. It is important to consider the funding options available for a lifetime termination of the plan, to minimize potential gift and income taxes that may result over time.

• Final Split Dollar Regulations. The 2003 Final Split Dollar Regulations dictate how a Split Dollar plan can be structured and describe the tax consequences of such plans.

Footnotes

1. The structure of arrangements subject to the economic benefit regime is essentially unaffected by the Final Regulations and will continue
to receive conventional Split Dollar treatment (i.e., the economic benefit will continue to be based on the “term” cost of the death benefit).
2. The Final Split Dollar Regulations reference IRS Notice 2002-8 regarding the new Table 2001 rate table.
3. The economic benefit rules were first articulated in Revenue Ruling 64-328 and Revenue Ruling 66-110. Split Dollar arrangements created prior to September 18, 2003 can continue to use the methodology for calculating economic benefits of the original rulings, unless the arrangement is materially modified as described under the 2003 Final Regulations.
4. An insurer’s alternative term rates can be used providing that the insurance company issuing the policy makes such rates known to prospective purchasers of their term insurance and that the insurer “regularly” sells its alternative term product. See IRS Notice 2002-8.
5. The Table 2001 rates for single life policies have been adjusted by insurers to reflect the costs associated with survivorship policies.
6. Arrangements subject to the loan regime are structured as fair market loans or below-market loans governed by IRC §7872. The premium loan will be considered either a demand loan or a term loan, depending on the repayment terms of the arrangement. The nature of the loan will also determine what Applicable Federal Rate (AFR) of interest must be charged in the transaction as well as the tax consequences to the parties.
7. The insurance company is not a party to the arrangement.
8. If the endorsement is owned by an ILIT to keep the proceeds from being subject to estate tax, you will be making a deemed gift to the ILIT of the economic benefit amount. This amount will be subject to gift taxes annually. Providing that the amount of the gift is covered by your annual gift tax exclusions, you will not incur gift taxes. An annual exclusion gift is the amount of annual gifts that each individual can make to an unlimited number of people without federal gift tax. In 2006, this amount is $12,000 per individual per year (indexed annually for inflation and subject to specific rules). Also, if the endorsement is owned by an ILIT and you are the majority shareholder of your corporation, you must use a “restricted” endorsement to keep the death benefit proceeds from being included in your taxable estate.
9. Section 101(j) of the Internal Revenue Code may impose income tax on the death benefit of life insurance contracts owned by the employer of the life insured unless certain exceptions apply. All such exceptions include satisfaction of notice and consent requirements set forth in the section.
10. An endorsement split dollar plan may fall under the provisions of Section 409A of the Internal Revenue Code. Section 409A imposes extensive substantive requirements on arrangements that purport to accomplish a deferral of income or the taxation of income. By its own provisions, failure to satisfy these requirements will result in the loss of deferral of recognition and taxation of the income.
11. If the endorsement arrangement includes a survivorship life insurance policy, a salary continuation plan must be in place in order for the economic benefit to continue after the first spouse’s death. The surviving spouse would then be deemed to be making gifts to the ILIT. Therefore, it is important that the trust does not include provisions that benefit the spouse or the proceeds may be included in the surviving spouse’s estate. Also, ownership of a life insurance policy may subject a C-Corporation to the alternative minimum tax.
12. When a corporate Split Dollar plan under either the loan or economic benefit regime is used, a Split Dollar plan is considered to be an “employee welfare benefit plan,” and is therefore exempt from the participation, funding, and vesting requirements of ERISA. Split Dollar plans established for highly compensated executives or select groups of management only require a notification to the Department of Labor (DOL). A letter should satisfy all reporting and disclosure requirements.
13. Trusts should be drafted by an attorney familiar with such matters to take into account income and estate tax laws (including generation-skipping transfer tax). Failure to do so could result in adverse tax treatment of trust proceeds.
14. It is not clear at this time whether or not non-equity collateral assignment Split Dollar plans in which the shareholder insured is not an employee of the company, and other types of private Split Dollar (between two trusts or between a partnership and a trust), are subject to the economic benefit regime or loan regime. The conservative position should be that such arrangements are subject to the loan regime.
15. The economic benefit must continue to be paid or it will be taxed annually for as long as the Split Dollar arrangement is in place. If the Split Dollar repayment is forgiven, its value will be subject to income and or gift taxes, depending on the structure of the arrangement.
16. You can make gifts of cash or other assets to the ILIT. Alternatively, you can sell an asset to the ILIT. Moreover, certain assets you transfer or sell may be valued at a discount allowing you to maximize your annual gifts or the amount you transfer out of your estate, such as a properly structured Family Limited Partnership (FLP) or Limited Liability Company (LLC).
17. Taxation may result when the existing Split Dollar plan is switched to a loan arrangement if the policy cash values exceed premiums paid (i.e., the policy has equity that benefits the policy owner).
18. Under the Final Regulations, the company will be deemed to receive “rental” income to the extent of the economic benefit cost.

Acknowledgments

 

2007 CDS Complaints, by type
Delays	16%
Claim denials	15%
Unsatisfactory settlement/offer	9.8%
Cancellations	4.6%
Premiums/rating	4.4%
Source: NAIC

 

2007 CDS Complaints, by line of business involved
Accident and health	36%
Auto	34%
Homeowners	12%
Life and annuity	9%
Commercial multi-peril	1.8%
Source: NAIC

14 companies that have sustained an A.M. Best Financial Strength Rating of “A” or higher from as early as 1907.  (2008)These companies are:

* Federal Insurance Co. (a member of the Chubb Group of Insurance Cos.)

* The Life Insurance Company of Virginia (now known as Genworth Life and Annuity Insurance Co.)

* Great American Insurance Co.

* Hartford Fire Insurance Co.

* John Hancock Life Insurance Co.

* MetLife

* National Fire Insurance Company of Hartford (part of CNA Insurance Cos.)

* New York Life Insurance Co.

* Northwestern Mutual Life Insurance Co.

* Penn Mutual Life Insurance Co.

* Providence Mutual Fire Insurance Co.

* Prudential Insurance Company of America

* Standard Insurance Co.

* Western & Southern Life Insurance Co.

The Ten Worst Insurance Companies In America (2008)

1.  Allstate

2.  Unum

3.  AIG

4.  State Farm

5.  Conseco

6.  Wellpoint

7.  Farmers

8.  United Health

9.  Torchmark

10.  Liberty Mutual

Annuitization. (2008) Of all variable contracts in force from 2002 to 2004, about 0.1% were annuitized each year. 

LIFE INSURANCE (Barry Flagg 2008) there have been 247 failures of life and health insurers since 1988, averaging more than 12 failures each year over this time, and with a high of 38 failures in 1994 and a low of only 1 failure in both 1988 and again in 1995[1].  So while the number of life and health insurance companies who have failed has been low in recent years, averaging less than 1% per year since 2000, recent events serve as a reminder that diversification should at least be considered in life insurance portfolios.