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The compensation structure \u2013 commissions are heaped upfront and then there are no revenues throughout the life of the insured.\u00a0 This is a tough business model.\u00a0 A firm must place new business in order to support the infrastructure necessary to service existing clients.\u00a0 The Madison Group discloses commissions on every life insurance placement so that we can explain to the clients how this works and our pledge to deliver benefits through our succession planning and corporate mission.<\/p>\n
All policies have maturity features. Older policies sometimes had unfortunate maturity features which thankfully, no longer exist.\u00a0 These provisions made sense,\u00a0 actuarially, at the time they were incorporated into the life insurance policy contract. The intent was to reduce the policy expenses and in so doing, reduce premium, by reducing the reserve requirements.\u00a0 Sometimes the policy maturity feature resulted in the policy to \u201cage out\u201d\u00a0 typically between the insured\u2019s age 95 or age 100.\u00a0 This maturity feature results in the policyowner receiving the cash value and if cash value is in excess of premiums paid, the excess would be subject to ordinary income tax.\u00a0 This outcome is vastly different than the perfectly reasonable expectation and the typical outcome of the policy owner receiving an income tax free life insurance benefit.\u00a0\u00a0 Some companies have been proactive in allowing policyowners to fix this maturity feature and not have policies mature.\u00a0 Other companies have not been as accommodating and policyowners of policies that mature prior to the insured\u2019s death are indeed in a very undesirable and contractually defensible but ultimately unfair position. The fix is in the servicing, monitoring, and taking corrective action when needed on all life insurance policies.\u00a0 Life insurance policies require this active management. Many buyers are misinformed in thinking it is not essential to favorable outcomes. If life insurance policies are properly managed,\u00a0 the insurance advisor has informed the client of this maturity feature long in advance and has proposed various solutions.\u00a0 Again, today\u2019s policies do not have maturity features that cause the policy to \u201cage out\u201d.\u00a0 They will last throughout the lifetime of the insured regardless of how long the insured lives if the policy is properly funded.<\/p>\n
A good proxy for how life insurance can and should work is a guaranteed premium policy.\u00a0 These policies are in the minority.\u00a0 Most of all life insurance policies are current assumption policies.\u00a0 The difference is a guaranteed premium policy puts the responsibility on the insurance company to deliver the benefit for the premium stipulated,\u00a0 regardless of the insurance company\u2019s mortality experience, expenses, or investment returns.\u00a0 The majority of life insurance policies are current assumption policies which put the onus on the insured to manage the policy in a way that delivers a benefit.\u00a0 This may cause the policyowner to pay more premium or if investments are outperforming the as-placed illustration, the policyowner may pay less premium.\u00a0 On all current assumption policies, if you are in the benefit delivery business, you use conservative assumptions, monitor them carefully, and adjust as called for.\u00a0 There are several ways to adjust the policy which do not require additional premium and still deliver a death benefit.\u00a0 The guaranteed premium policy, as a proxy,\u00a0 is expected to deliver between a 3-6% tax-free internal rate of return as measured by premium-to-death benefit at extended actuarial life expectancy (based upon the population of affluent insureds as evidenced by M Financials\u2019 reinsurance company) of age 90 for individuals and age 100 for couples.\u00a0 The guaranteed policies can be funded with this range of illustrated IRR\u2019s\u00a0 with a premium guarantee and a benefit guarantee for the life of the insureds regardless of how long they live.\u00a0 Therefore, we like to use guaranteed policies as a proxy to compare to current assumption policies which can perform better but with increased risk of additional premium required.<\/p>\n
All life insurance gets more expensive as the insured ages.\u00a0 The life insurance premiums may be level, but underlying the level premium, the fundamental expense features of a life insurance policy are that each year that the insured ages, the cost of insurance increases.\u00a0 Most insurance companies reinsure their policies so that they are paying the increased cost of insurance to a reinsurance company.\u00a0 The way a permanent life insurance policy offsets that mortality curve, which looks much like a hockey stick, is to put enough excess premium in the early years to begin to build income tax deferred cash values. The accumulation of these cash values replace the need for life insurance so that at older ages, less insurance is being purchased and cash values make up the majority of the benefit.\u00a0 This is an example of why life insurance is not a commodity, but a financial product requiring ongoing management.\u00a0 In the case of a guaranteed premium policy, the same fundamentals are at work, but the insurance company has assumed the risk.\u00a0 Flexibility, premium and risk tolerance typically factor into which is best. We often use guaranteed and current assumption policies in combination to create a customized life insurance\u00a0 portfolio.<\/p>\n
In term insurance, there are no cash values.\u00a0 Practically all term insurance today is a level premium term for a specified duration such as 10-, 15-, 20- or 30-years.\u00a0 The rising mortality charges are levelized which means you overpay for the first half of the policy\u2019s duration and underpay for the second half.\u00a0 The level premium became more popular because it was psychologically easier for a policyowner to commit to a level premium than to pay an annual increasing term premium.\u00a0 All term insurance\u00a0 \u201cterm-inates\u201d at the end of the specified period of coverage.\u00a0 It is, as the name implies, appropriate for a specified duration.\u00a0 It is not appropriate to collect a death benefit since no term policy duration matches the actuarial life expectancy of the insured. This is intentional and why the premiums are so low.\u00a0 Most term policies do not extend beyond age 80.\u00a0 This does not mean term insurance is a bad policy; it just means you need to make sure you have the right policy for the planning purpose.\u00a0 Term insurance is excellent for most buy\/sell agreements with unrelated partners who plan to monetize the business around retirement age.\u00a0 It is typically not a good policy for family enterprises where the ownership is expected to be held for longer periods of time, often until death.<\/p>\n
When life insurance is properly structured, it is the ideal asset to mitigate estate taxes or any financial liability at the death of the insured.\u00a0 As an example, estate taxes (aka death taxes) are an off-balance sheet liability.\u00a0 Balance sheets typically do not reflect a future estate tax. If the estate tax remains, this liability is going to appear at some uncertain time in the future.\u00a0 Meanwhile, life insurance is ideally suited to match that liability.\u00a0\u00a0 This is classic asset and liability matching.\u00a0 Life insurance is also an off-balance sheet asset, typically owned by a trust.\u00a0 This asset will monetize at the exact time that the estate tax liability appears.\u00a0 As we know, the more often you match your assets with a liability, the less often you find yourself in a difficult financial position.\u00a0 The most unique attribute of life insurance is once a policy is placed, if the insured dies shortly thereafter, the benefit pays.\u00a0 Full stop.\u00a0 The Madison Group has delivered over $500MM in life insurance benefits. As a 53-year-old firm, we are delivering, on average, $40+MM in benefits a year over the last several years.\u00a0 Not only does life insurance pay a benefit when properly structured, it typically pays within weeks of the policy owner making a claim by furnishing a death certificate for the insured. We have never experienced any claim disputes and interest is accrued at 4% from the date of death until the claim is paid.\u00a0 The truth is that permanent life insurance is not even insurance in the classic sense.\u00a0 Term insurance is pure insurance because it assigns a large uncertain risk for a smaller certain premium.\u00a0 Permanent life insurance insures a large certain risk (the insured\u2019s death) at a cumulative premium that is significantly less than the benefit that will be delivered.\u00a0 Therefore, permanent insurance is better understood as an investment.<\/p>\n
The Madison Group often inherits policies from clients who no longer are receiving any service.\u00a0 This is too common and we feel it is a directly correlated to the compensation structure.\u00a0 We service those policies to make sure that they are going to deliver the benefit and inform the policyowner of any provisions which they should be aware of.\u00a0 I recommend anyone who is utilizing life insurance to recognize that all life insurance companies are not alike. There are approximately 25 top tier companies and there is no reason to work with any company that is not a top tier company.\u00a0 Additionally, all life insurance distribution\/advisory firms are not alike.\u00a0 The most important question that should be asked whenever anyone is dealing with a life insurance professional is, \u201cWhat is your succession plan?\u00a0 What kind of service can I expect from you?\u00a0 What type of assurances do I have that you will deliver these services?\u201d\u00a0 As mentioned, there is a big disconnect between the compensation structure and the servicing tail of the life insurance policy.\u00a0 Dealing with this , in my opinion, is the number one responsibility of any professional life insurance organization.<\/p>\n
In summary, you should be able to recognize the difference between someone who is in the life insurance sales business as opposed to someone in the benefit delivery business.\u00a0 If you\u2019re in the sales business, you try to make a policy look as good as it can possibly look.\u00a0 This is typically using aggressive assumptions on earnings and, perhaps, solving for a permanent policy for limited duration i.e., age 100, in order to show a lower premium and make a sale.\u00a0 If you\u2019re in the benefit delivery business, you are concerned about how premiums will be paid in the future. Does the trust have the proper resources?\u00a0 Are we using conservative assumptions with the hope that we will be able to report better than illustrated performance and perhaps, even reduced premiums in the later years?<\/p>\n
This is the fork in the road and which path you take makes all the difference.<\/p>\n
\u201cAs long as there\u2019s one person on earth who remembers you, it isn\u2019t over.\u201d
-Oscar Hammerstein, Musical Carousel<\/p>\n
Mark J. Richards, CLU, ChFC, CFP, AEP<\/em> [\/et_pb_text][et_pb_divider _builder_version=”4.10.1″ _module_preset=”default” global_colors_info=”{}”][\/et_pb_divider][et_pb_button button_url=”https:\/\/familyenterpriseusa.com\/polling-and-research\/contact-congress-stop-tax-proposals-that-hurt-family-businesses\/” button_text=”Contact Congress Now – It Only Takes a Minute” button_alignment=”center” admin_label=”Call to Action Button” _builder_version=”4.11.3″ _module_preset=”default” custom_button=”on” global_colors_info=”{}”][\/et_pb_button][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=”3.25″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”FEUSA Statement” _builder_version=”4.8.2″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” link_option_url=”https:\/\/familyenterpriseusa.com\/donate-2\/” global_colors_info=”{}”]<\/p>\n Family Enterprise USA<\/a> advocates for American Family business. We help family businesses communicate their challenges and contributions to American economic freedom to Legislators. We represent all American family businesses; not just specific industries and provide research to enhance the opportunity for success. We help family businesses continue to establish their unique business legacy. Family Enterprise USA is a 501(c)(3) non-profit organization.. Family foundations can donate.<\/a><\/p>\n [\/et_pb_text][et_pb_button button_url=”https:\/\/familyenterpriseusa.com\/donate-2\/” button_text=”Are you an FEUSA Member? 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The articles are more alarming than informing. This is an attempt […]<\/p>\n","protected":false},"author":2,"featured_media":1235,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","content-type":"","footnotes":""},"categories":[48,3,92,78],"tags":[],"class_list":["post-4318","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-family-businesses","category-feusa","category-multi-generational-business","category-in-the-news"],"acf":[],"_links":{"self":[{"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=\/wp\/v2\/posts\/4318","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4318"}],"version-history":[{"count":5,"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=\/wp\/v2\/posts\/4318\/revisions"}],"predecessor-version":[{"id":4325,"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=\/wp\/v2\/posts\/4318\/revisions\/4325"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=\/wp\/v2\/media\/1235"}],"wp:attachment":[{"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4318"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4318"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/familyenterpriseusa.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4318"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
President & CEO<\/em>
The Madison Group, Inc.<\/em>
Over 50 Years of Making Legacies Happen<\/em><\/p>\n
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