by Guest » Thu Feb 10, 2011 06:52 am
I have a single-premium whole life policy that I purchased for $100,000 a few years ago. If I understand it correctly, it has a $450,000 face value, and the additional premium has been applied towards purchasing an additional insurance rider each year. The annual premiums are a little over $15,000 annually, and the premise on which the policy was sold to me was that the annual dividends and extra premium that I paid originally would be sufficient (at least under then-current projections) to not only pay the premiums each year but to build up substantial cash value in the policy as I grew older. The policy was really intended more as an investment vehicle than a life insurance policy, and I don't need any additional insurance beyond the face value amount; I was told that the additional rider is being purchased from the extra single-payment proceeds that I used to buy the policy in order that it not be considered a MEC.
At some point last year, my agent had me fill out a form that authorized the insurer to take out a loan against the policy itself in order to pay that year's annual premium, and then authorized me to use ALIR to pay back the loan. (I confess that I did not and perhaps still do not understand this transaction.) In any event, I received a Form 1099-R this month indicating that I received a distribution equal to the amount of my annual premium payment plus the interest on the loan. Of course, I never received any cash distribution, so I am now looking at having a tax liability on $15,000 plus of phantom "income," which does not please me.
Can anyone explain to me why this was considered a taxable event and what I should be doing in the future to make sure that it does not happen again? Did my agent advise me incorrectly in using a loan against my policy in order to pay the annual premium? Was/is there some other alternative for paying the annual premium that should have been used and that should be used in the future?
Thanks in advance.
At some point last year, my agent had me fill out a form that authorized the insurer to take out a loan against the policy itself in order to pay that year's annual premium, and then authorized me to use ALIR to pay back the loan. (I confess that I did not and perhaps still do not understand this transaction.) In any event, I received a Form 1099-R this month indicating that I received a distribution equal to the amount of my annual premium payment plus the interest on the loan. Of course, I never received any cash distribution, so I am now looking at having a tax liability on $15,000 plus of phantom "income," which does not please me.
Can anyone explain to me why this was considered a taxable event and what I should be doing in the future to make sure that it does not happen again? Did my agent advise me incorrectly in using a loan against my policy in order to pay the annual premium? Was/is there some other alternative for paying the annual premium that should have been used and that should be used in the future?
Thanks in advance.
Posted: Sat Feb 12, 2011 07:54 pm Post Subject:
Does FINRA consider it an investment?
We've been down this road before, and FINRA does NOT consider the insurance an investment, but the cash value in the separate account is. It is a management investment company regulated under the Investment Company Act of 1940. The fact that it is piggy-backed onto the life insurance DOES NOT make the insurance an investment. Read the FINRA market conduct rules and you'll see that LIFE INSURANCE OR ANNUITIES ARE NOT TO BE MARKETED AS AN INVESTMENT. Period. Argue all you want, this is not my definition.
Posted: Sun Feb 13, 2011 03:49 am Post Subject:
Max,
You obviously don't remember how this works. If some bozo, or Director of Marketing, at an insurance company calls a Variable Universal Life Policy (yeah, forget all about the life designation) an investment, then, by God, that's what it is - an investment.
As "we" seem to have completely missed the FRAUD issue you and I have been discussing in this thread from the very beginning, I think you'd have a better chance explaing why a SPWL policy has ongoing premiums.
Good luck, Mark
Posted: Sun Feb 13, 2011 03:53 am Post Subject:
fjkarja, Please give me the name and contact information for someone you've sold life insurance to (whether you hate the policy or not) as an investment. I'd really like to chat with them about your presentation.
Posted: Sun Feb 13, 2011 10:45 am Post Subject:
InsInvestigator, you should read what I post. I sell life insurance for the death benefit. I've sold one VUL policy in 20 years in the business and 100% of the money is in the guaranteed bucket.
I'm not arguing that one can call a VUL policy an investment instead of life insurance. I am arguing that one needs to call VUL an investment AND life insurance.
Max, you have not heard me single out the insurance component and call it an investment. I'm talking about the policy as a whole. It is both an investment and insurance.
VUL combines annually renewable term insurance with a side fund that can be invested in separate accounts. If that isn't insurance + investment, I don't know what is.
Posted: Sun Feb 13, 2011 10:56 am Post Subject:
Since a prospectus is needed to sell VUL, why don't we see what the prospectus says about this issue (bolding is mine):
Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined that this Contract is a good investment, nor has the SEC determined that this prospectus is complete or accurate. It is a criminal offense to state otherwise.
The Contract may be purchased through registered representatives located in banks and other financial institutions. Investment in a variable life insurance contract is subject to risk, including the possible loss of your money. An investment in MPremierSM VUL is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation (“FDIC”) or any other governmental agency.
Posted: Sun Feb 13, 2011 11:00 am Post Subject:
Max, you are obviously not registered. VUL must be sold by prospectus. All VUL prospectuses talk about it being an investment. A registered person can't sell a registered product and not call it an investment. An insurance agent can't sell insurance and not call it insurance. VUL must be called an investment. VUL must be called insurance.
Posted: Mon Feb 14, 2011 05:31 am Post Subject:
VUL combines annually renewable term insurance with a side fund that can be invested in separate accounts. If that isn't insurance + investment, I don't know what is
Yes. Insurance + investment . . . side fund . . . separate accounts. Now you're using the terminology that most RRs fail to use and which FINRA essentially requires. Unfortunately, "insurance + investment" does not equal INVESTMENT. FINRA market conduct rules specifically prohibit the sale of variable insurance products as investments. FINRA's primary concern is the marketing as it relates to the separate account, as they are with the marketing of mutual funds. State insurance laws and regulations have something to say about the inappropriateness of marketing life insurance as an investment as well.
Of course, anyone can talk about the investment component of the contract as an investment, as one must. But to describe the "policy as a whole" as an investment is inappropriate and that's exactly what FINRA rules prohibit. And that's what I called you on. And I will continue to call out anyone who does so. It's just wrong.
And so is the failure to let someone know when they are considering applying for a VUL policy that it comes with no guarantees -- no interest guarantees and no death benefit guarantees (yes, I know about the secondary guarantees, and all that crapola, but, if you want to know the truth, the state Insurance Guarantee Associations don't give a darn about secondary guarantees, and the only part of the VUL contract that's protected in the event of an insurer insolvency is the separate account).
You can have life insurance and you can have investments, but you can't put the two together and call them an investment. For the same reason that nonvariable life insurance is not an investment. Despite what the sales scripts and marketing dept hype is all about. Mark Colbert could probably give you the case law citations to back that up (I'm sure I could find some on my own, but I'm guessing he has them all committed to memory).
Now, as to the one VUL sale in your career, what exactly is the benefit of putting someone into that kind of a contract and leaving the money in the guaranteed account? Certainly that's not the only place it's ever been, is it?
If yes, plain vanilla Whole Life would probably have been more suitable in the long run, despite the initial premium possibly being more costly per month for the same death benefit. Then again, most of today's suitability rules were not in place just 6-7 years ago. So why not a 20-year term policy and a side fund in mutual funds. An S&P 500 index fund would most likely have done far better than the guaranteed account.
But in the guaranteed fund, the NAR will conspire with the ART premiums to erode the CV, especially if you marketed the policy with a (typical) minimum illustrated premium and that's all the owner has been paying. Is the client aware of this?
Posted: Mon Feb 14, 2011 07:32 pm Post Subject:
Geez, Max, I've never even come close to saying that it could legally just be called an investment. I've been pretty clear all along that it must be called both an insurance and an investment. Whereas, you seem to be pretty clear all along not to call it an investment.
A registered rep MUST call it an investment. They also MUST call it insurance.
Maybe you can show me because I don't think that I've ever seen any guidance from FINRA that says not to describe variable life as an investment. I've seen plenty of stuff that has said that when the subject was fixed insurance. I'm not saying that you are wrong. I am saying that I haven't seen it.
The prospectus doesn't see "This is the insurance part and this is the investment part".
In using the term "investment", the prospectus is referring to the entire contract and not specifically to one part of it.
Posted: Mon Feb 14, 2011 07:38 pm Post Subject:
A guarantee backed by the claims paying ability of the insurance company is a guaranty. One can decide for themselves if this is a strong enough guaranty.
You can look at the Guaranty Associations as a guaranty, but since they are unfunded, I don't know how good of a guaranty this really is. It's not like if the big boys failed, the little guys could make good on the promises.
Many people would say that that these days a guaranty by the U.S. government isn't even that good.
The point is that a guaranty isn't crapola. If the insurance company has money, a secondary guaranty keeps the policy in force regardless of insurance costs and returns. If that is crap, all of the guarantees in a WL contract are also crapola since they are all just based upon the insurance company's claim paying ability.
Posted: Mon Feb 14, 2011 07:44 pm Post Subject:
Now, as to the one VUL sale in your career, what exactly is the benefit of putting someone into that kind of a contract and leaving the money in the guaranteed account? Certainly that's not the only place it's ever been, is it?
If yes, plain vanilla Whole Life would probably have been more suitable in the long run, despite the initial premium possibly being more costly per month for the same death benefit. Then again, most of today's suitability rules were not in place just 6-7 years ago. So why not a 20-year term policy and a side fund in mutual funds. An S&P 500 index fund would most likely have done far better than the guaranteed account.
Yes, it's the only place that it's ever been. The guaranteed account was paying more than anything that could be found in a traditional product.
This was a single premium sale. WL might have been better in the long run. Can you guarantee that a 70 year old with some health issues would be around for the long term. I can't. Term + a side fund might do better. IWe don't know. You don't know. It certainly can't be used for someone who doesn't want the risk. Her poliocy is guaranteed until she is well into her j90's. It works for her.
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