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: Fri Feb 18, 2011 11:51 am Post Subject:
I do use some UL. However, it is almost always done on a secondary guarantee basis. It is the functional equivalent of level term insurance until age 120 (or whatever age we use). The cash surrender value will almost always be zero. The insurance will lapse once a premium is missed.
So rather than sell a person UL with a secondary guarantee -- a "guarantee" that evaporates as soon as one premium payment is missed (beyond the initial period of guarantee) -- as I've pointed out in numerous other running battles with ULSG proponents, why not just sell them a UL policy with a PROPERLY CALCULATED premium that will not allow the policy to lapse?
Why not? Because the cost is too much for most individuals to bear, and, more importantly, most agents would be afraid to ask a client for that amount of money. So they use the illustration software to run a hypo based on what they think they can get the client to pay, plug in an interest rate in the nonguaranteed column that wildly inflates the performance of the contract, call it an investment, retirement plan, or any other words to that effect, leading the client to believe they are obtaining more than a mere life insurance policy.
And the agent probably never shares with the client what it means in the guaranteed columns when the CV is $0 and the DB is $0. "Oh, don't worry about that, Mr. Client, the state just makes us put that there. It's just a technicality. You know."
It's laudable that you found a company that wrote a policy as a standard risk, compared to all the substandard offers. Unfortunately, the substandard risk now owns an unsuitable product that will never do what a whole life policy would have done, even if it was rated substandard.
By your own admission in one of the myriad posts you left above, the client will reach old age with no cash value. But as long as she pays premiums, she'll have a death benefit, so all is well. And what happens when she misses that one premium payment because she's on her death bed? Are you man enough to stand there and tell the family what you've told us? Something on the order of:
"Sorry, I sold your mom a policy I HAVE NEVER BELIEVED IN, knowing it was not really suitable for her, BUT IT PAID A SLIGHTLY HIGHER RATE OF INTEREST, although, unfortunately, her age consumed all of that along the way. And I was sure she would have died before the policy lapsed. So here's the name of my Errors & Omissions insurance company, and my policy number. I have a $1 million limit of liability. Feel free to file a claim."
Because that's what you did, isn't it? It's what you've posted above, just not in so many words.
Posted: Fri Feb 18, 2011 12:19 pm Post Subject:
So rather than sell a person UL with a secondary guarantee -- a "guarantee" that evaporates as soon as one premium payment is missed (beyond the initial period of guarantee) -- as I've pointed out in numerous other running battles with ULSG proponents, why not just sell them a UL policy with a PROPERLY CALCULATED premium that will not allow the policy to lapse?
Max, it would be one thing if you were asking a question seeking an answer. Instead, you are showing yourself to not be very smart with these products as you did just a few months ago when it was quite obvious to all involved in the conversation that you didn't even know that these products existed.
First of all, maybe you can explain how a "properly calculated premium" will stop a policy from lapsing. One missed premium won't stop it from lapsing, but many will still cause it to lapse.
Let’s make up some numbers. Judy is going to buy a $500,000 UL policy. The target premium is $500. It has a secondary guarantee at $250. Judy doesn’t need the cash. She can easily afford the premium.
Which is Judy going to choose:
A)Pay $250 and have coverage that will last forever, but the policy will lapse if a premium is missed.
B)Pay $500 and have coverage that will last forever with some safety built in if she can’t pay some premiums.
C)Pay $250 and only get $250,000 of coverage with some safety built in if she can’t pay some premiums.
Judy is going to choose “A” every time.
Posted: Fri Feb 18, 2011 12:33 pm Post Subject:
Why not? Because the cost is too much for most individuals to bear, and, more importantly, most agents would be afraid to ask a client for that amount of money. So they use the illustration software to run a hypo based on what they think they can get the client to pay, plug in an interest rate in the nonguaranteed column that wildly inflates the performance of the contract, call it an investment, retirement plan, or any other words to that effect, leading the client to believe they are obtaining more than a mere life insurance policy.
And the agent probably never shares with the client what it means in the guaranteed columns when the CV is $0 and the DB is $0. "Oh, don't worry about that, Mr. Client, the state just makes us put that there. It's just a technicality. You know."
Max, you are unknowledgeable with these products. That isn't how they are sold. In fact, with some companies, the only thing that can be illustrated is the minimum premium.
Because of the design of the products, putting in extra cash with many of these products doesn’t improve the results because they always just pay the minimum guarantee and charge the maximum amount of insurance charges. So, unless it is a ton of extra cash, the cash surrender value will still be very low and missed payments will still cause the policy to lapse.
Stop thinking of these products as universal life. Yes, they are built on a UL chasis, but what they really are is level term policies.
Ex. Jim buys a 30 year level term policy from Genworth for $400. Alternatively, he can buy a UL product from them with a secondary guarantee for $400 and the coverage will be guaranteed for 30 years. In either case, coverage is guaranteed for 30 years unless he misses a premium, in which case the policy will lapse. These policies can be designed to last for 1 year, 2 years, 3 years….10 years…15 years….33 years…40 years….lifetime.
The key, though, to understanding them is that they are the functional equivalent of level term.
Posted: Fri Feb 18, 2011 12:42 pm Post Subject:
By your own admission in one of the myriad posts you left above, the client will reach old age with no cash value. But as long as she pays premiums, she'll have a death benefit, so all is well. And what happens when she misses that one premium payment because she's on her death bed? Are you man enough to stand there and tell the family what you've told us? Something on the order of:
You may want to work on your reading comprehension. By my own admission the policy will lapse at age 95 if she only earns the minimums. The client knows this. Her kids know this. Her CPA knows this. Her attorney knows this. She'll be lucky to see 80, let alone 95.
Let's not confuse these issues because unlike the previous posts, this is not a secondary guarantee product. If it was, and the cash value hit $0, she would still have insurance. If it happens here, her policy will lapse without a gigantic premium.
It’s a shame that your reading comprehension isn’t better. This was done with a single premium. We aren’t worried about missed premiums causing lapses.
Posted: Fri Feb 18, 2011 12:58 pm Post Subject:
"Sorry, I sold your mom a policy I HAVE NEVER BELIEVED IN, knowing it was not really suitable for her, BUT IT PAID A SLIGHTLY HIGHER RATE OF INTEREST, although, unfortunately, her age consumed all of that along the way. And I was sure she would have died before the policy lapsed. So here's the name of my Errors & Omissions insurance company, and my policy number. I have a $1 million limit of liability. Feel free to file a claim."
I never sell something I don’t believe in. I sold a single premium life insurance policy that guaranteed an unhealthy person coverage until age 95. The fact that it is wrapped inside of a VUL wrapper and I don’t like VUL doesn’t change the fact that she has a guaranteed death benefit until age 95 and that is what she wanted.
I could have used a policy that paid a lower rate of guaranteed interest and combined with a worse risk classification, the policy would have been guaranteed to 85 if we were lucky. That is somehow better?
We could have guaranteed the policy longer by having a lower death benefit. We could have had a higher death benefit and guaranteed the policy for a shorter period of time. Everyone is happy with what we did except Max, the California insurance teacher. Max, it appears, thinks that we should have purchased a whole life policy at a substandard rating that would have a lower death benefit unless she lived well into her 90’s and even then, it might still be lower.
Posted: Fri Feb 18, 2011 05:42 pm Post Subject:
Hey fkjaru, would you like to see what my case would look like? Please tell me who you are so the ass-whooping can commence.
Ladies and gentlemen of the jury:
Our unregistered guest, who has taken quite a stand on his belief that a Variable Universal Life Product is nothing more than a level term policy with some sort of investment fund added on made a statement I would like to bring to your attention:
I never sell something I don’t believe in. I sold a single premium life insurance policy that guaranteed an unhealthy person coverage until age 95. The fact that it is wrapped inside of a VUL wrapper and I don’t like VUL doesn’t change the fact that she has a guaranteed death benefit until age 95 and that is what she wanted.
Wouldn't his first sentence
I never sell something I don't believe in
lead an ordinary insurance consumer - a person lacking the specialized insurance expertise required [by law] to sell variable products in the United States of America, to believe he was both morally and ethically sincere in the sale of this product?
Ladies and gentlemen; if you were a grocer who didn't approve of a certain fruit/vegetable supplier because you were not 100% confident the products would be fresh and free of salmonella. Could you sell raw hamburger or other cuts of beef to your loyal customers if you had even the slightest inkling it may be infected with E-Coli?
No, of course you wouldn’t, because you would “never sell something you don’t believe in.”
With that in mind, ladies and gentlemen, how confident would you feel purchasing a life insurance policy - one intended to provide for your loved ones when your heart stops beating if the agent stated (in writing)
Max, let me preface this by saying that I can't stand VUL and that it makes lousy insurance and a lousy investment.
I sold it as life insurance. I explained to her and her children what VUL is, and explained why I don't like it and that all of the money was going into the fixed account.
Here is a statement made to a Licensed Life Insurance Fraud Expert who works with many different regulatory agencies throughout the United States.
Mark, are you intentionally being an idiot? I have all sorts of problems with VUL as I have mentioned.
Does this agent sound like he's 100% confident in the products he sells to senior citizens in less than perfect health? He continues:
WTF? Seriously, you want to treat me like some guy who is out selling VUL as a retirement plan when I think that it absolutely blows and typically will end up with the person having no insurance and no investments so I don't use the product.
There is a point that you seem intent to completely ignore. Sure, I don't like VUL. I don't like the investment risk inside of an insurance product. I think that M&E expenses that increase as the insurer's actual risk go down is complete B.S.
Why I am negative towards VUL:
Primarily it is the cost and the cost structure. The costs tend to be obscene. What's my definition of obscene. An example would be a 5% sales load with no break points. Another example would be insurance costs that are triple what one would pay with a 30 year level term policy.
Ladies and gentlemen, this agent has clearly given you a number of resons why he does not support he very product he claims he is licensed to sell. However, we cannot be 100% sure of this because he has repeatedly failed to identify himself or give the name(s) of the companies for which he solicits insurance products.
If this agent is absolutely confident of his ability to act in a legal, moral and ethical manner, he should have no problem whatsoever standing up to his challengers. Instead, I think you’ll find that he will continue to argue anonymously, hiding behind acronyms he seems to spontaneously create.
Posted: Fri Feb 18, 2011 09:04 pm Post Subject:
First of all, maybe you can explain how a "properly calculated premium" will stop a policy from lapsing. One missed premium won't stop it from lapsing, but many will still cause it to lapse.
Sure, YOU talk about a "target premium" which is the minimum necessary to fund the policy for a while at the "current" level, but is not sufficient to prevent a lapse if interest crediting declines. I talk about the "guideline level" premium which is enough to fund the policy to endowment without becoming a MEC. Two very different scenarios.
A)Pay $250 and have coverage that will last forever, but the policy will lapse if a premium is missed.
That's a hoot! A lapsed policy that lasts forever. Prove that one to me or a jury, why don't you?
That isn't how they are sold. In fact, with some companies, the only thing that can be illustrated is the minimum premium.
Name one company and UL policy form from that company that only allows the policy to be illustrated with minimum premium . . . and I'll show you a company that does not sell any of that UL.
UL policies are sold with minimum premiums because agents do not run illustrations with accurate values. They inflate the NON-GUARANTEED values specifically to create a lower than required premiums based on pie-in-the-sky assumptions. If you wanted to be fair, you would only run an illustration with the GUARANTEED COLUMN based on sufficient premium to have $1 or more in cash value at the endowment age. THAT would not be a minimum premium, it would be a WORST CASE SCENARIO, and that policy would not lapse and no secondary guarantee is needed. No company I am aware of would prevent an agent from running that illustration by forcing them to run only a minimum premium calculation. So, please, tell us which company does exactly that, because I'd like to know.
Even if a "minimum premium" was plugged in, what would it show in the guaranteed column? A policy lapse in 5-12 years, most likely. Do you even discuss the GUARANTEED column and its implication with a client?
Don't even begin to call me unknowledgeable in the ways of Universal Life. I'll let you sell it, you tell me who bought it, and I'll go in behind you and show the client how it really works -- by reading the contract and explaining only what is in the contract, and then replace it with something else that client recognizes is in their best interest because I show them how that contract works.
Posted: Fri Feb 18, 2011 09:34 pm Post Subject:
As an expert witness, shouldn’t you be a witness for somebody? In this case, the client likes what we did, her children like it, her CPA likes it, and her attorney likes it. So, while I understand that I would be the defendant, I am curious as to who would be the plaintiff?
The fact that you are going through this exercise makes it obvious that you think that I did something wrong. Yet, for the life of me, I can’t figure out what that would be other than not liking VUL. Yet, if you understand VUL, you would also understand that my dislike of the product has nothing to do with this sale.
Let me walk you through this because you don’t understand why a person who dislikes VUL could make this sale.
Let’s compare a typical VUL sale to what I did. For simplicity sake, let’s just look at insurance costs and M&E. I’m using fictional numbers to make the point. Real numbers would change the dollars, but not the magnitude of the difference.
Typical VUL sale:
Client buys a $500,000 death benefit and pays a $10,000 premium. Let’s assume a COI of $10 per thousand and an M&E charge of 1.1%. $5000 goes into the separate account and the net amount at risk is $495,000. Insurance costs will be $4950 and M&E will be $55 for total costs of $5,005.
If the separate account has $100,000, the net amount at risk will be $400,000. The insurance costs will be $4,000 and the M&E will be $1,100 for total costs of $5,100.
This VUL sale:
The client buys a $500,000 death benefit and pays a $200,000 single premium. None of the money goes into a separate account. It all goes into the fixed bucket. The fixed bucket has no M&E charge. The net amount at risk is $300,000. The insurance costs are $3000 and the M&E is $0 for a total cost of $3,000.
I have lots of issues with VUL, but you should be smart enough to see that when a VUL is used in this manner, it is the equivalent of a UL instead, but with the flexibility to use separate accounts if we ever wanted to do so. The costs are about 60% more when using separate accounts and this assumes that the separate accounts had expense ratios of $0.
If it was a typical separate account with an ER of 1%, the total fees with $200,000 would be about $7000 instead of $3000 with the money in the general account. Figuring in the expense ratios, the fees are 133% more if we would have used this as a typical VUL.
Let’s look at what we did for this client. Forget about product names. She had a lump sum of money sitting in a checking account. She has no need for the money and wants it to go to her kids when she dies. She used the lump sum to purchase an insurance policy that guarantees her a level death benefit provided that she dies before age 95. If she lives pas then, it is possible, that there won’t be insurance.
She had the option of having the policy last longer and having a smaller death benefit. She also had the option of the having the policy explode sooner and having a bigger death benefit. The structure was agreed upon by her and her kids and given the green light by her CPA and attorney.
So, if there is a problem with what we did, what is it? What would you recommend?
Posted: Fri Feb 18, 2011 09:40 pm Post Subject:
If this agent is absolutely confident of his ability to act in a legal, moral and ethical manner, he should have no problem whatsoever standing up to his challengers. Instead, I think you’ll find that he will continue to argue anonymously, hiding behind acronyms he seems to spontaneously create.
Let me tell you what isn't ethical. You calling me unethical for refusing to give up my anonymity is what is unethical. You know that I'm a registered rep based upon my ability to sell VUL. You also know that as a registered rep, if I posted in a non-anonymous manner, it would be considered advertising so I could not do so without getting my B/D to approve all of my posts in advance. A B/D compliance officer isn't going to take the time to approve internet postings on a board that nobody reads.
So, quit the BS when you know that I don't have a choice. Max is free to use his name all that he would like since he is not a registered rep. Of course, that won't stop him from talking about them.
Posted: Fri Feb 18, 2011 10:12 pm Post Subject:
Max, I'm going to just ignore most of what you wrote because it is obvious that you don't understand these policies. This says it all:
Even if a "minimum premium" was plugged in, what would it show in the guaranteed column? A policy lapse in 5-12 years, most likely. Do you even discuss the GUARANTEED column and its implication with a client?
If you understood these policies, you would understand that the secondary guarantee promises that the policy will stay in force even when the guaranteed column equals zero.
I am looking at an illustration for a preferred 45 year old male for $1,000,000. The premium is $8300. We have to look at the guaranteed column because that is the only column. It can ONLY be run at guaranteed rates. The guaranteed rate is 3%. The cash surrender value is $0 in all years.
The account value becomes $0 in year 10.
So, when does it lapse? It doesn’t. It is guaranteed until age 121 as long as the premiums are paid.
I did say something wrong. The policy can be illustrated with a greater than minimum premium, but it can’t be illustrated with a greater than minimum guaranteed interest rate.
What happens if $12,000/year goes into the policy instead? The account value equals $0 at age 71 instead of age 55. The policy still has a constant death benefit of $1,000,000 until age 121.
If you understood these policies you would understand that they are designed to be funded at minimum levels.
Despite the fact that they are called “universal life”, the product design makes them the functional equivalent of level term policies.
You will not argue this point unless you don’t understand the policies, and you do not understand these policies.
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