It comes as little surprise that life insurance sales have slowed during 2011, according to LIMRA’s U.S. Individual Life Insurance Sales report.  The downturn in individual life insurance sales is related in part to the exodus of carriers from the no-lapse UL market, says Ashley Durham, senior analyst, product research at LIMRA. “Part of the slowdown in growth is a reflection of a few companies moving away from lifetime death benefit guarantee universal life (UL) products,” she said in a press release.

Universal Life carriers are exiting the lifetime death benefit guarantee UL (“no lapse UL”) market in spite of the product’s popularity. Sun Life, for instance, exited the market in 2010. Where no-lapse universal life represented 97% of its life business in 2007, today it makes up only 32% of its business. Many carriers that are staying in the no-lapse market are raising their rates, increasing the likelihood of no-lapse’s continued decline.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of universal life in Advisor’s Journal, see Can Term Life Coupled with a Mutual Fund Investment Replace a Variable Universal Life Policy? (CC 10-77).

For an in-depth description of variable universal life policies, see AUS Main Library: Section 25 B—Variable Universal Life (VUL).

Why is this Topic Important to Wealth Managers? Discusses group term life insurance policies in general.  Provides a useful tool for client business planning when evaluating group term policy options. Also provides links to additional resources and materials to answer all your group term life insurance questions.

Generally, an employer may provide employees with up to $50,000 of group term life insurance protection each year without cost to employees.[1] However, the exclusion is not available unless the insurance provided under the plan satisfies the definition of “group term life insurance”.

When life insurance provided by an employer meets the following requirements it may qualify as group term life insurance providing special tax exclusion by employees.[2]The life insurance must meet four conditions to meet the definition of group life insurance under the code:

(1) It must provide a general death benefit, excludable from gross income under IRC Section 101(a). Under the regulations, travel insurance and accident and health insurance (including amounts payable under a double indemnity clause rider) do not provide a general death benefit.[3] Employer contributions for such benefits are contributions to a health plan under IRC Section 106 instead of section 79.

(2) It must be provided to a group of employees as compensation for personal services performed as an employee. A group of employees is all employees of an employer, or fewer than all if membership in the group is determined solely on the basis of age, marital status, or factors related to employment such as membership in a union, duties performed, compensation received and length of service.

As a general rule, life insurance provided to a group cannot qualify as group term life insurance for income tax purposes unless, at some time during the calendar year, it is provided to at least 10 full-time employees who are members of the group of employees of the employer.

However, insurance for fewer than 10 employees may also qualify as group term life insurance if: (1) it is provided for all full-time employees; and (2) the amount of protection is computed either as a uniform percentage of compensation or on the basis of coverage brackets established by the insurer under which no bracket exceeds 2½ times the next lower bracket and the lowest bracket is at least 10% of the highest bracket; eligibility and amount of coverage may be based on evidence of insurability but determined solely on the basis of a medical questionnaire completed by the employee and not requiring a physical examination.[4]

(3) The insurance must be provided under a policy carried directly or indirectly by the employer. A policy meets this requirement generally if the employer pays any part of the cost (directly or through another person). The policy can be a master policy or a group of individual policies.

(4) The amount of insurance provided each employee must be computed under a formula that precludes individual selection of such amounts. The formula must be based on factors such as age, years of service, compensation or position. This requirement may be satisfied even if the amount of insurance provided is determined under alternative schedules based on the amount each employee elects to contribute. However, the amount of insurance under each schedule must be computed under a formula that precludes individual selection.

For more information on this topic see AdvisorFYI: Group-Term Life Policy Tax Consequences.

For a detailed discussion on group term life insurance see TaxFacts: Group Term Insurance.

Tomorrow’s blogticle will continue to discuss issues related to the practice of wealth management.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] Treas. Reg. §1.79-1(a).

[3] Treas. Reg. §1.79-1(f)(3).

[4] Treas. Reg. §1.79-1(c).

The New York Department of Insurance, Office of General Counsel, held on February 25, 2011 that insurance carriers cannot refuse to convert a term policy to a permanent policy on the ground that the policy will be sold on the secondary market. The primary issue in the case was whether the converted policy is a “new” policy that must satisfy anew the insurable interest requirement. Nevertheless, this ruling will not affect all term policies, since many term life insurance policies are not convertible. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of life settlements, see Advisor’s Main Library: B–The Life Settlement Industry.

Last month, we discussed the obvious relevance of pricing competitiveness to overall life insurance product suitability. This month, we discuss the stability of pricing representations which is also a factor of suitability.  After all, pricing that appears competitive at the time of sale/purchase but which cannot be maintained can be worse than a less-competitive product with more stable pricing representations.

For instance, while premiums are often considered the price/cost of a life insurance policy, the premium is not the price/cost of a life insurance policy (unless contractually guaranteed like in term life insurance or guaranteed universal life insurance) any more than the $2,000 contributed to an Individual Retirement Account (IRA) is the cost of the IRA. In both cases, the cost is the sum of what is deducted from the premium/contribution.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of suitability in Advisor’s Journal, see Life Insurance Product Suitability (CC 10-90), Financial Strength and Claims-Paying Ability (CC 10-115) & Cost Competitiveness of Life Insurance (CC 11-11).

Although supervising the cost of insurance embedded in life insurance premiums has historically been the domain of state insurance commissioners, the U.S. District Court for the Central District of California has intervened in one recent case, ruling on January 19 that Conseco Life Insurance Co. cannot increase the premiums it charges 50,000 of its existing policyholders.

The premium increase was part of a plan by Conseco to reduce its long-term losses. Rather than post reserves, Conseco looked for a way to reduce its future liabilities by $173 million. They targeted two blocks of universal life policies that had lower than expected lapse rates, using a pricing formula that would explode the cost of insurance charged in the policies’ 21^st year after issuance. Customers who’d held the affected policies longest would have seen their premiums increase in 2010 or 2011.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of another carrier lawsuit in Advisor’s Journal, see Carriers Targeted by Suit Over Losses on Madoff Investments (CC 11-06).

For in-depth analysis of the income taxation of life insurance, see Advisor’s Main Library: A—Definition of “Life Insurance” For Income Tax Purposes.

Why is this Topic Important to Wealth Managers? Discusses group term life insurance policies in general.  Provides a useful tool to consider for client business planning.

The Internal Revenue Code provides an exclusion from income for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. [1] Thus, there are no tax consequences to the individual if the total amount of such policies does not exceed $50,000.  However, the imputed cost of coverage in excess of $50,000 must be included in income to the individual, using the IRS Premium Table, [2] and are subject to social security and Medicare taxes.

A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if:

1. The employer pays any cost of the life insurance, or
2. The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (known as the “straddle” rule).

A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee.  Also, because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements.

Example 1 – All employees for Employer X are in the 40 to 44 year age group.  According to the IRS Premium Table, the cost per thousand is .10.  The employer pays the full cost of the insurance.  If at least one employee is charged more than .10 per thousand of coverage, and at least one is charged less than .10, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000.

Example 2 - The facts are the same as Example 1, except all employees are charged the same rate, which is set by the third-party insurer.  The employer pays nothing toward the cost.  Therefore there is no taxable income to the employees.  It does not matter what the rate is, as the employer does not subsidize the cost or redistribute it between employees.

However, under the first example, the employer may be entitled to a deduction for the premiums paid on the life insurance policies for each employee.  [3] Under the second example, that option is not available.

Example 3 - A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly by her employer.  She is also entitled to $100,000 of optional insurance at her own expense.  This amount is also considered carried by the employer.  The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income.   If the optional policy were not considered carried by the employer, none of the $100,000 coverage would be included in income.

Tomorrow’s blogticle will continue with more 2011 market opportunities for wealth managers.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

[2] At page 13.

[3] IRC Sec. 162(a); see Rev. Rul. 56-400, 1956-2 CB 116; Advanced Markets AdvisorFX Tax Facts: Q 174, Are the premiums paid for group term life insurance deductible business expenses?

The financial strength and claims-paying ability of an insurer is one of the first questions asked when trying to ascertain suitability of life insurance products.   However, financial strength and claims-paying ability ratings of the insurer are only one of at least five major suitability considerations and are often misunderstood to mean more than just the financial strength and claims-paying ability of the insurer.  For instance, the answer to the question: “Is this a good product?” is all too often “Yes, the company is highly rated.”

An insurer that is highly rated for financial strength and claims-paying ability does not necessarily mean that every product they manufacture is suitable for every age/gender combination, every health risk class, every policy size, every product type, or every funding strategy. In the same way that no investment company offers the best investment products for every client situation, no life insurance company offers products that are best in all client situations. Instead, certain life insurers excel in manufacturing products that are particularly competitive in certain client situations just like certain investment companies are known for certain types of mutual funds.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the suitability standard in Advisor’s Journal, see Life Insurance Product Suitability (CC 10-90).

We invite your questions and comments by posting them in our blog AdvisorFYI or by calling the Panel of Experts.

Insurance companies have been getting a lot of press the last few years. But this time, it’s not a story about a health insurance carrier denying a father-of-five cancer patient’s potentially life-saving treatment. It’s a Los Angeles Times story pillorying life insurance company American General and several other carriers for rescinding life insurance policies after the insured’s death.

According to the Los Angeles Times article, $372 million in life insurance benefits were denied beneficiaries in 2009, doubling over the past decade even as life insurance policy sales have decreased.

The article breaks down the denied death benefits by insurance company, finding that some carriers deny death benefits more than others. The prime target …… read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of a life insurance company’s right to rescind a policy after issuance, see Advisor’s Main Library: Section 20 C—Payment Of Proceeds.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Life insurance product suitability is taking on all new importance.  Last year, the first breach of fiduciary duty lawsuit involving the suitability of a trust-owned life insurance (TOLI) policy was adjudicated.  Over the past two years, FINRA arbitrations involving breach of fiduciary duty for product suitability have doubled, and litigation against agents and brokers involving product suitability under the common-law definition of breach of fiduciary duty is also on the rise.

Also, New York Producer Disclosure Regulations impose a higher standard of care on agents/brokers beginning in 2011, and the Dodd-Frank Wall Street Reform and Consumer Protection Act empowers the SEC to impose a fiduciary standard of care sometime thereafter, which it appears to be leaning towards.  This column will, therefore, discuss life insurance product suitability and its growing relevance.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the suitability and fiduciary standards in Advisor’s Journal, see Dodd-Frank Wall Street Reform and Consumer Protection Act (CC 10-35) & What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act (CC 10 40).

We invite your questions and comments by posting them below or by calling the Panel of Experts.