Life Insurance: The Devil Is In The Details

The onset of COVID 19, like most stressful economic events, has forced a lot of people to go back to the drawing board. Businesses and individuals are trying to figure out how to cut costs and how to restructure expenses to make it to the other side of this pandemic intact.

One of the areas you might not have thought about is your life insurance.

Lower Expenses = More Flexibility

Many wealthy families already have done some level of estate planning that incorporates irrevocable trusts and life insurance policies, which is great.

We’ve found that most of the families we come across have not reviewed the internal cost structure of their life insurance policies since the time it was sold to them – or the REAL performance of the policy. This asset class goes largely un-managed.

In conducting our own due diligence across multiple carriers (see Exhibit A below), we have found that the actual cost of insurance, known as ME&A, differs VASTLY between carriers for the exact same death benefit.

In the world of permanent insurance, this is extremely important. If you are able to pivot to a carrier that has a lower ME&A costs, theoretically, you could have more flexibility around your premium payments in times of economic stress, which would allow you to reallocate capital in a more meaningful way while still maintaining the level of insurance needed to solve your potential estate tax or liquidity dilemma.


Exhibit A


If You’re Going to Pay, Pay for Quality

At the same time that you’re trying to cut expenses, insurance carriers with over exposure to certain areas of bond and equity markets are equally experiencing their own financial crisis. Some of the biggest names in the industry, behind the scenes, are in trouble.

Here’s the way that we look at it: if you are (or your irrevocable life insurance trust) is going to pay 5, 6, or 7 figures a year in premium for a life insurance contract, you better be damn sure that the company you are involved with is financially sound.

Our research indicates that many of the “top carriers” have great marketing departments in lieu of a great financial position. And, they’re guaranteeing the policies using single-purpose LLC’s (the same way you might use an LLC for asset protection purposes) – with the parent company having little to no responsibility for the subsidiary.

Many of the leading companies (the subsidiaries, not the parents), are starting to struggle financially – for several reasons. For example, we have significant solvency concerns around the following carriers:

  • Accordia
  • American General
  • Fidelity and Guaranty
  • Genworth
  • Lincoln National Life
  • MetLife
  • Ohio National
  • Protective
  • Prudential
  • Reliastar
  • United of Omaha

Note: This list is not comprehensive, but just a sample of some of the companies that we have concerns around This list is compiled based on  3rd party research/ financial reports.

Further, much like you’d diversify your stock/bond or real estate portfolio, you probably should consider diversification of your life contracts – dividing that $40 or 50 Million death benefit between 2, 3 or 4 carriers to attempt to maximize long-term performance and minimize risk of issues with a carrier, while maintaining flexibility.

We Can Help

For most of our wealthy families, it is important to retain a strong balance sheet for a variety reasons – particularly for our real estate families that need to obtain financing for their new developments and investment transactions on a recurring basis. Advanced estate planning that limits your control is frequently not an attractive option, and neither is paying 2x, 5x, or 20x the available cost of the actual insurance coverage (M&E+A).

Unfortunately, we often find that wealthy families were “sold” a policy without proper due diligence. Certainly, you shouldn’t buy a shopping center and not look at the leases until after you’ve closed – to realize that the anchor tenant’s lease expires the following year and you didn’t buy it at a deep enough discount to absorb the carry.

Balancing liquidity needs with solvency concerns, and designing an estate and insurance plan (two distinctly different things) in a way that maximizes your flexibility and minimizes the cost structure is sometimes easier said than done, but if there was ever a time to have a look at the way your plan is structured – now is the time given the current cash flow needs, expanded estate tax exemption levels and many other considerations.

Bottom line though, NOBODY wants to pay 2x, 3x, or even 10x more for than they have to, for a product that is not performing, or may have risk of losing its long-term value. It’s time to have independent due diligence done on that side of your portfolio. E-mail us at [email protected] to start that process.

Steve Olson

Steve Olson CFP®, AEP® CEO | Family Wealth Advisor

Steve Olson’s experience spans over a decade of focused tax planning, legal strategy interpretation, investment management, and advisory services to wealthy individuals and families throughout the U.S. Over the course of his still young career, Steve provides counsel and management on individual assets and portfolios—encompassing a combination of securities, real estate, privately held businesses and other alternative investments—ranging in value from $5 million to over $400 million in value.

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