All Nerd's Eye View Articles On Insurance Planning

Using A 1035 Exchange To Turn An Unneeded Life Insurance Policy Into An Annuity

January 1, 2025 07:01 am 0 Comments CATEGORY: Insurance

Occasionally, an owner of a permanent life insurance policy may decide that they no longer need their policy – either because the death benefit is no longer necessary or because they simply want to access the policy's underlying cash value for their living expenses in retirement. Unlike term life insurance, permanent life insurance doesn't simply lapse when the owner stops paying premiums. Moreover, withdrawing the policy's underlying cash value can trigger significant tax consequences due to the tax-deferred treatment of the funds in the policy.

For example, surrendering or selling a life insurance policy immediately triggers taxation on any underlying gains in the policy's cash value, which can result in a large spike in taxable income. And while policy loans are normally a tax-free option to access cash value, the compounding interest can make them costly over time. Worse, if the loan balance approaches or equals the policy's cash value, the policy may lapse, triggering immediate taxation of the underlying gains (which is especially problematic since most or all of the policy's cash value is then used to pay off the loan, and therefore isn't available to cover the subsequent tax bill).

An alternative strategy is to execute a 1035 exchange, replacing the no-longer-needed life insurance policy for an annuity. In doing so, the policy's cash value and embedded gains carry over from the life insurance policy to the annuity, retaining the funds' tax deferral. Upon annuitizing the contract, payments are taxed as part (tax-free) return of basis and part (taxable) income, spreading out the tax consequences over the entire term of the annuity.

However, exchanging a life insurance policy for an annuity works best when the policyowner plans to annuitize relatively quickly. This is due to non-annuitized withdrawals after the exchange being subject to tax on a Last-In, First-Out (LIFO) basis, meaning they're 100% taxable up to the total amount of gain in the contract. To avoid this, policyowners can withdraw funds directly from the life insurance policy prior to initiating the 1035 exchange, where the withdrawal will be taxed on a First-In, First-Out (FIFO) basis and be fully tax-free up to the total amount of basis in the policy. Notably, it's important to remember that any cash received as part of the 1035 exchange – or withdrawals made immediately before the exchange – can be treated by the IRS as "boot" and taxed up to the full amount of the withdrawal. Which makes it essential for a sufficient amount of time to pass between the withdrawal and the 1035 exchange to prevent unintended tax consequences.

The key point is that, as life circumstances change over time, tools like permanent life insurance may no longer meet an individual's needs. And while other strategies like taking a policy loan or simply surrendering the policy might be viable in some circumstances, a 1035 exchange into an annuity can be a more tax-efficient way to access the policy's underlying value when the need for life insurance is replaced by a need for retirement income. Because ultimately, spreading the tax impact of withdrawing the funds over several years usually results in a lower overall tax burden, allowing the owner to keep more of the funds to use as they like!

Instant-Issue Term Life Insurance: What Are The Costs Of Low-Hassle Coverage, And When Are They Worth It?

March 22, 2023 07:01 am 0 Comments CATEGORY: Insurance

Traditionally, when a person applies for individual life insurance, they would need to go through an extensive underwriting process that lasts several weeks (or months) and may include personal and family health questionnaires, interviews, and/or physical examinations. Though this process was time-consuming and intrusive from the perspective of the person applying for insurance, it was considered a 'necessary evil' in order for the insurance company to feel comfortable issuing the policy on the person’s life. In more recent years, however, insurance carriers have increasingly offered “instant-issue” term life insurance policies, where a decision is made whether or not to issue a policy for a person within minutes of their submitting an application, with no additional underwriting.

Although these policies make it possible to fast-track the insurance application process for some individuals (who might otherwise be stymied by the traditional underwriting process), they aren’t necessarily right for everyone. For instance, because instant-issue policies require insurers to arrive at a decision without knowing the full details of an applicant’s current health or medical situation, they are generally only offered to the healthiest individuals – while those with pre-existing health conditions (who might still be eligible for insurance through the traditional underwriting process) might be declined after applying for an instant-issue policy. Which frustratingly can make it more difficult (or expensive) to subsequently be insured through traditional underwriting, since the fact of having been declined – albeit for an instant-issue policy with higher health standards than traditional underwriting – can create a ‘black mark’ on the individual’s health history.

Consequently, despite the convenience of instant-issue policies, it’s important not to automatically assume that they will always be the right choice for a person looking to apply for life insurance. Instead, it can be better to weigh the potential benefits of instant-issue (which, beyond the speed and convenience of obtaining coverage, can also avoid the scenario of a previously unknown medical issue coming up during underwriting and jeopardizing the person’s ability to obtain coverage) against the potential costs (which can include higher premiums than traditional underwriting, limits on the amount of death benefit available, and inability to convert to permanent insurance).

Financial advisors can play a key role in helping their clients weigh these factors against their own needs, and – in situations where the client just needs to get at least some coverage in place – guiding them towards a decision that will lead to action. Because ultimately, one of the greatest benefits of instant-issue life insurance is that it can make it much more convenient for healthier individuals to obtain life insurance – which could make it well worth the potential higher costs and other risks involved if the convenience of instant-issue is what catalyzes the client to actually get coverage to begin with!

Using Medicaid Annuities To Protect Retirement Assets When A Spouse Requires Long-Term Institutional Care

November 17, 2021 07:03 am 12 Comments CATEGORY: Insurance

According to the latest 2021 Genworth Cost of Care study, a private room in a nursing home costs almost $300/day, or nearly $9,000 per month. Fortunately, individuals in need of such institutional health care, who don’t have the means to pay for such care themselves, can generally rely on Medicaid to cover at least most of those long-term institutional care costs. However, as a means-tested program operated as a Federal-state partnership, Medicaid places extremely low limits not just on an individual’s income, but also on their “Countable Assets” that they are entitled to keep before they can qualify for coverage. Accordingly, those who will eventually rely on Medicaid to cover their cost of care must ‘spend down’ their own income and assets first… which can have a significant impact on the individual’s (and their families’) standard of living. Which raises the question of what planning can be done to help protect at least the other members of the family in situations where a Medicaid spend-down must occur.

While the limits on Countable Assets (including most of an individual’s assets such as cash, investments, bank accounts, and real estate) vary by state, the most commonly observed is a mere $2,000 in 2021. However, to allow a healthy spouse (with an ill partner applying for Medicaid) to maintain at least a minimal level of the couple’s assets and income to live on, the Medicaid rules include standards that set the amount of income and assets that can be maintained from the couple’s assets (and the institutionalized individual’s income) to maintain the healthy spouse’s standard of living without an obligation to spend them down for the ill spouse’s care.

To prevent couples from simply trying to ‘impoverish’ themselves to qualify for Medicaid, though, Medicaid rules include a five-year “Look-Back Period” (2½ years for California), which prevents recipients from simply giving away assets to (non-spouse) family members to meet Medicaid’s asset limits. Notably, though, when it comes to spousal income, the treatment is different, with the healthy spouse’s income generally being left out of the eligibility calculation altogether.

As a result, one strategy for married couples to preserve assets in light of the Look-Back Period for asset transfers, but the exclusion of the healthy spouse’s income, is to purchase a “Medicaid Annuity”. Essentially, assets in excess of the Countable Asset limit are used to purchase a Medicaid Annuity (such that the couple’s assets are within their allowed Countable Asset limit); then, annuity payments are made payable only to the healthy spouse. In doing so, the Countable Assets that would have otherwise been required to have been spent down to pay for the care of the institutionalized spouse are removed – but not as a gift, avoiding a look-back penalty period – and instead become income of the healthy spouse (which are effectively ignored for purposes of Medicaid eligibility).

Notably, though, not all states currently permit the use of Medicaid Annuities. And in states that do, to be Medicaid-compliant, the Medicaid Annuity must name the State (in those states that permit their use) as the remainder beneficiary for no less than the amount of Medicaid benefits it paid on behalf of the institutionalized individual. Which doesn’t limit the healthy spouse’s ability to leverage the Medicaid annuity for their own standard of living… but does mean that at least if both spouses do not survive the Medicaid annuity payout period, the State can recover Medicaid benefits it paid before those assets are bequeathed to subsequent heirs.

Ultimately, the key point is that for seniors or chronically disabled individuals who may need Medicaid benefits for their long-term care but fear the impact that spending down assets will have on their healthy spouse’s own standard of living, the Medicaid Annuity is a useful tool (at least in the states that permit them) to help the couple preserve assets by converting them into an annuity income stream. Which can be a valuable option to consider, especially in light of the last-minute ‘crisis’ nature that is often characteristic of Medicaid planning, when it’s too late to simply gift assets to family members by the time it’s necessary!

The Overlooked ROI Of Return Of Premium Term Insurance

April 14, 2021 07:08 am 8 Comments CATEGORY: Insurance

Philosophically, financial advisors can have quite polarized viewpoints when it comes to the relative importance of protection and accumulation benefits of life insurance. On one end of the spectrum is a “buy term and invest the difference” philosophy that prioritizes protection above all else at the lowest cost possible. On the other end of the spectrum, the philosophy relies heavily on the accumulation aspects of life insurance, promoting insurance as a primary (if not the only) vehicle for saving for retirement. As is often the case, it is possible to go too far in either extreme.

Return Of Premium (ROP) term insurance offers a unique ‘middle ground’ strategy that might warrant more attention than it currently receives. ROP term insurance offers standard term life insurance coverage with a rider that returns all premiums paid (tax-free) in the event that an insured outlives the term of their life insurance coverage. So, for instance, if an insured buys a 30-year term policy for $1,000 per year and outlives the entire term of their policy, the full $30,000 premium paid will be returned to the policyowner tax-free.

While the mechanics of ROP term insurance are straightforward, the potential ROI from such policies is often misunderstood. A common criticism of ROP term is that a policyowner is “…just getting the money you paid toward premiums” and it is, therefore, “money that has lost out on years of compound interest.” However, this is the wrong way to think about ROP term insurance, because it is neglecting the value of the insurance that was obtained throughout the term of the policy. A fairer comparison would be to back out the cost of comparable term coverage and then treat the difference in cost between the two policies as the effective ‘investment’ that ultimately results in receiving the tax-free return of premium at the end of the policy term. And when ROP term insurance is looked at through this lens, the ROI can actually be quite attractive.

The return potential of ROP term insurance is attributed to various factors, including (a) the tax-free nature of the return of premium, (b) a form of mortality-credit-enhanced yield inherent to ROP riders (i.e., some insureds will pay for the ROP rider and pass away without receiving anything from the rider), and (c) an element of lapse-supported pricing within ROP term policies (i.e., many policyowners will purchase coverage and either intentionally or unintentionally let it lapse, resulting in premiums paid without receiving any return of premium benefit).

As a result, for those who know they want to purchase term coverage and keep it in place for the full term, adding an ROP rider is effectively an opportunity to add a side accumulation account to term coverage with some unique investment characteristics that can be quite attractive (similar to the attractiveness of mortality credits within income annuities). Some caveats to consider as well. First, since you do have to keep the coverage in force to reap the benefits, insureds may lose some flexibility to replace a policy with a cheaper alternative that may become available in the future or just let the policy lapse because they decide they no longer want the coverage. Second, the dynamics described above actually result in longer-term policies generally being cheaper than shorter-term policies, so the ROI tends to be most attractive for 30-year term policies. Third, and perhaps most important of all, the market is quite thin and at the time of writing this, there appears to only be one carrier in the market.

Ultimately, for clients who want term coverage and are willing to commit to maintaining coverage for the full term, ROP term insurance has some unique characteristics that can make it an attractive consideration. In addition to the financial benefits, the return of premium may give peace of mind to clients who are otherwise averse to carrying prudent coverage due to the ‘use-it-or-lose-it’ nature of term insurance. So although ROP term insurance may fall in an awkward middle-ground of providing both protection (primary) and accumulation (secondary) benefits that is not particularly popular among advisors, ROP term insurance may be worth a closer look!

Assisted Reproductive Technology (ART) Tax And Insurance Planning For Individuals With Fertility Challenges

December 18, 2019 11:27 am 8 Comments CATEGORY: Insurance

The Code of Laws of the United States defines Assisted Reproductive Technology (ART) as “all treatments or procedures which include the handling of human oocytes [eggs] or embryos”. For many individuals and couples with fertility struggles, ART has made biological parenthood possible. According to data from the Centers for Disease Control and Prevention, fertility treatments are on the rise with 284,385 ART cycles performed in the U.S. in 2017, and approximately 1.7% of all live births in the U.S. involve ART. The most common ART procedure is IVF; other procedures include Gamete Intrafallopian Transfer (GIFT), Zygote Intrafallopian Transfer (ZIFT), Intracytoplasmic Sperm Injection (ICSI), and Artificial Insemination.

As ART enables exciting new family opportunities, though, it also presents a number of financial and legal issues. For many, the extremely high costs and limited coverage by insurance companies create a high barrier to access ART procedures, forcing many to pay for treatments out of pocket, which have given rise to the proposal of several pieces of legislation in an effort to help make ART more accessible through insurance coverage. However, despite legislative efforts to expand insurance coverage for ART procedures, there is still no Federal requirement for insurers to provide ART coverage to policyholders. In turn, though, the lack of Federal laws requiring insurers to provide ART coverage has led thirteen states to pass their own “mandate-to-cover” laws (AK, CT, DE, HI, IL, MD, MA, MT, NJ, NY, OH, RI, and WV), and three have passed “mandate-to-offer” laws (CA, TX, LA) for residents and workers in those states. “Mandate-to-cover” laws require that some or all insurance plans have to cover certain fertility treatments, and “Mandate-to-offer” laws require that insurance providers offer certain testing and treatment services (although employers can decide which of those benefits, if any, to offer those covered by their plans). Some of these “mandate” states also carry certain exemptions for costs related to surrogacy, religious employers, and restrictions for same-sex couples.

Financial advisors can offer great value to their clients by reviewing their current health insurance policies and helping them understand whether their coverage includes fertility treatments, especially for individuals and couples living in non-mandate states. Some individuals may have access to coverage for ART procedures through employer-based group coverage, benefits available to government workers or military servicemembers, or public benefits like Medicare. Some employees who reside in non-mandate states, but who have employers with main offices in mandate states, may be able to benefit from the mandate-state policies as well.

A growing number of technology companies like Google, Facebook, and Spotify are also adding ART processes, such as egg freezing and IVF cycles, to their employee benefits packages. Advisors may want to encourage their clients to explore risk-sharing programs, scholarships and grants, and even traveling abroad where fertility treatments are offered at significantly lower cost (at least relative to the pricing of such services in the US).

The costs of ART procedures may also be mitigated by leveraging the tax code. The IRS considers “fertility enhancements” that help the taxpayer “overcome an inability to have children” as deductible medical expenses that can be claimed as itemized deductions (if the usual key thresholds for itemizing medical expense deductions are met). These deduction-eligible fertility enhancements include “procedures such as in vitro fertilization” and “surgery, including an operation to reverse prior surgery that prevented the person operated on from having children.”

Access to employer-provided tax-preferenced savings accounts, such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), may provide additional tax-saving opportunities. A one-time IRA rollover to an HSA, called a Qualified HSA Funding Distribution (QHFD), can also be used to help fund expenses if income or liquidity is low.

Ultimately, the key point is that the cost of ART procedures can be unpredictable and potentially very expensive. While managing the costs of ART may take some creativity, advisors can help their clients successfully navigate the legal and financial complexities to minimize the emotional and financial burdens often experienced by those pursuing fertility treatments.

Figuring Out The “Best” Healthcare Option For “Early” Retirees

August 7, 2019 07:11 am 18 Comments CATEGORY: Insurance

Given the skyrocketing cost of healthcare (as well as the increasing need for it as we age), it’s not too surprising that Baby Boomers’ biggest worry is how they’re going to afford their medical costs in retirement. Thankfully, however, Medicare (which is available to individuals who paid – or have spouses who have paid – Medicare taxes for at least 10 years and are at 65 years of age or older) is the de facto option for healthcare for retirees. And it’s actually quite affordable – at least relative to the underlying costs of care – due to the fact that Medicare taxes already cover between 77% and 99% of a Medicare recipient’s premiums (such that they only have to pay the net remaining premium out of pocket).

The caveat, however, is that, while the majority of individuals plan to retire at some point after they reach age 65, there is still a non-trivial number of individuals, whether by choice or by need, who retire before they are eligible for Medicare (or even Social Security, for that matter) and still need health insurance coverage (and can’t just simply be added to their still-working spouse’s employer-sponsored plan).

Fortunately, early retirees do have a few options as they consider the best way to obtain health coverage in early (pre-Medicare) retirement. For workers who retire from a company with greater than 20 employees, COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage allows newly-separated employees (or employees who work so few hours that they’re not eligible for their employer’s health plan) to continue their existing insurance coverage at the same (full-premium) cost (plus an administrative fee that is usually capped at a maximum of 2% of the premium). However, COBRA coverage generally lasts only 18 months, and thus can only (except under certain conditions) be used to bridge short gaps before Medicare eligibility begins. Another option for retirees looking to continue their coverage using the same health insurance provider is to “convert” the plan under the group to an individual plan… at least, as long as the plan allows for such a conversion. Again, though, this isn’t always an ideal alternative, as there’s no requirement that the terms (or cost) of such an individual policy are the same as their “old” group plan.

Meanwhile, retirees who (either due to eligibility or cost) decide that either COBRA coverage or a conversion policy isn't the right choice for them, may choose to simply purchase health insurance using their state-approved exchange created under the Affordable Care Act. However, while retirees can’t be denied coverage for a pre-existing medical condition, coverage can only be purchased during specific open enrollment periods, or within 60 days that the employer’s plan is terminated (which means time is of the essence after retiring to make a decision).

Ultimately, though, the key point is simply to realize that, while retirees may be understandably worried about their healthcare costs eating away at their life savings, the availability of Medicare ameliorates those concerns to a significant degree. However, for those who aren’t yet eligible for Medicare, the issue of securing health insurance to bridge the gap until they reach age 65 becomes less clear… particularly for those whose budgets aren’t exactly robust. Regardless, the good news is that there are options, with coverage that is guaranteed (at least if timely obtained). But the range of choices means it is necessary to conduct a thorough cost/benefit analysis when finding the best option between purchasing COBRA coverage, converting an existing group health plan to individual coverage, and/or purchasing insurance via a state-approved health insurance exchange.

Could MoneyGuidePro Become Free As Envestnet Scales Its Insurance/Annuity Exchange?

June 27, 2019 07:01 am 5 Comments CATEGORY: Insurance

On March 1, 2019, Envestnet, announced that they were partnering with Fiduciary Exchange (a company which integrates “brokerage, insurance, and advisory ecosystems”) to launch their new Envestnet Insurance Exchange, thereby providing a platform for RIAs to purchase fee-based insurance and annuity products directly from carriers on behalf of their clients, instead of through a commission-based insurance agent.

In and of itself, this is good news for the RIA community; as insurance companies are starting to bring no-commission, fee-based insurance and annuity products to market, RIAs will have a marketplace to shop for them, saving clients the cost of the otherwise-applicable commission (since the RIA is already being paid directly by the client in the first place).

Except, given other recent Envestnet acquisitions and initiatives, their Insurance Exchange could end out being a much bigger deal than much of the industry currently appreciates. To the point that someday, Envestnet might even make their other software – including the recently acquired MoneyGuidePro – free to advisors, just to further expand their Envestnet Insurance Exchange (and other investment marketplaces).

In this episode of #OfficeHours with Michael Kitces, we discuss how comprehensive financial planning actually has its roots in product sales, the real opportunity Envestnet likely saw when it purchased MoneyGuidePro, and why integrating it with its Insurance Exchange could eventually make MoneyGuidePro free and become the most disruptive shift to hit Advisor FinTech in years.

Over 30 years ago, comprehensive financial planning originated as a means to an end, where a financial product salesperson would use a plan to help a prospect define their goals, and then show how various products (that the salesperson earned a commission to sell and implement) would allow the client to achieve those goals. And even though the landscape has changed dramatically since then, financial plans are still often a means to an end even for advisors who don’t sell “products,” per se, since they’re still trying to “sell” the need for clients to save and invest… with them.

Yet the strange mystery is why those increasingly popular financial planning tools haven’t actually illustrated what happens, in the planning software itself, when various different products are added into the plan. The software illustrates a need, but then it’s necessary to provide a separate product illustration, which is completely independent of the plan that was supposed to validate the need!

The gap between financial planning software projections and product-specific illustrations began to close a couple of years ago, though, when MoneyGuidePro rolled out a partnership with Covr that gave them the ability to illustrate life insurance products (and even apply for those products) all within the confines of MoneyGuidePro itself.

It’s not a big leap, then, to understand why Envestnet decided to pay a half-billion dollars last year for MoneyGuidePro… not because they were merely champing at the bit to get into the financial planning software business, but because Envestnet wanted a platform that was primed for deeper insurance and annuity integrations. And if that’s the case, and Envestnet can effectively leverage MoneyGuidePro to support its Insurance Exchange, the next question becomes… could Envestnet turn around and make the software that it paid a half-billion dollars for, free?

Which isn’t such a crazy proposition when we consider that, given the dollar volume of just variable annuities alone, Envestnet will only need to capture a minuscule slice of that market share in order generate the same revenue that all the RIAs and broker-dealers are paying annually in MoneyGuidePro subscription fees… even if Envestnet is “only” paid 25 basis points from the annuity companies on their platform. And if MoneyGuidePro is free, then it won’t take much convincing for advisors to make the switch away from other financial planning software providers, and potentially save themselves thousands of dollars a year… while further growing Envestnet’s Insurance Exchange opportunities.

Ultimately, the key point is to realize that the free-to-use software model has become the standard in recent years (think Facebook, Google, etc.), and is even gaining traction even within the financial services industry (think RIA custodian technology from Schwab, Fidelity, and TD Ameritrade). And in a world where most advisors are still writing checks each year for their various software tools, Envestnet’s acquisition of MoneyGuidePro and introduction of its Insurance Exchange could be enormously disruptive to the current FinTech landscape. Of course, it remains to be seen whether Envestnet’s Insurance Exchange really gains acceptance in the advisor community… but FinTech competitors, in particular, should be figuring out now how they’re going to respond if it does!

Due Diligence For Life Insurance: Going Beyond The Hypothetical Policy Illustration

May 15, 2019 07:08 am 7 Comments CATEGORY: Insurance

In theory, the whole point of having a “product illustration” is to show how the product is anticipated to work… whether it’s a mechanical device, or an intangible like a life insurance policy. Except the caveat is that, ironically, intangible assets like life insurance policies sometimes have even more “moving parts” than a mechanical device, making it remarkably difficult to understand how it actually works. Or even to determine the underlying “mechanical” assumptions that are driving the outcomes of the illustration in the first place.

In this guest post, life insurance expert Barry Flagg, founder of Veralytic (a company that produces life insurance due diligence tools), highlights the challenges of effectively identifying and understanding the moving parts in a typical life insurance policy illustration. Which over the years have become so problematic, that recently issued regulations from the New York Department of Financial Services (NY DFS Regulation 187) have suggested that life insurance illustrations should no longer be permitted as a means to compare life insurance policies… because, in essence, they’re too vague and uncertain for fiduciaries to actually rely upon!

For instance, while the core of any life insurance policy (or any other) illustration is its projected earnings or growth, after being reduced by its projected Cost Of Insurance (COI) charges and other expenses, the reality is that not all life insurance companies illustrate these costs and expected returns in the same manner. For instance, sometimes COI charges are “pure” and include only the raw Cost Of Insurance expenses, but in other times COIs are “loaded” with distribution or other costs. Certain “premium loads” may apply charges based on the premiums paid, but use an underlying “target premium” calculation to determine those charges, rather than uniformly applying them to all premiums. And while life insurance policies do typically get projected at a specified rate of return, insurance companies can and sometimes do add additional – but not necessarily guaranteed – return assumptions on top, which means even insurance policies with the same projected return input are not necessarily being projected at the same rate of return!

The challenge of these dynamics in life insurance policy illustrations is not only that it’s sometimes difficult to call what costs are or are not being included, and what the “real” projected rate of return is, but that the potential to not have results that align with (non-guaranteed) assumptions means that two otherwise-identical life insurance policy illustrations may have a substantively different level of risk about whether the assumptions will actually be fulfilled. A risk that, itself, is not typically reflected in a life insurance policy illustration.

As a result, the reality is that “best practices” in doing due diligence on a life insurance policy illustration entails far more than just looking at the illustration to see which policy is projected to maintain the death benefit the longest, or accumulate the highest (not-necessarily-guaranteed-or-even-likely) cash flow. Instead, effective due diligence for life insurance policies must dig deeper, or use third-party support tools, to truly understand the costs and risks underlying the projected opportunity.

NY Insurance Regulation 187: Are Life Insurance Policy Illustrations Too “Misleading” For Comparison Purposes?

May 1, 2019 07:04 am 4 Comments CATEGORY: Insurance

On July 18^thof 2018, the New York Department of Financial Services (NY DFS) issued a new Best Interest Rule (Regulation 187) that (re)defines the meaning of “clients’ best interests” for life insurance product recommendations effective February 2020, including the due diligence obligations that apply to life insurance recommendations. Previously, due diligence for life insurance product recommendations was governed by the National Association of Insurance Commissions (NAIC) Life Insurance Illustrations Model Regulation #582 (as adopted by each State).

And perhaps surprisingly, NY DFS Regulation 187 prohibits such life insurance policy illustration comparisons as due diligence for product recommendation (despite attorneys for the life insurance industry lobbying to “expressly include” illustration comparisons, which NY DFS rejected). The Rule's omission of illustrations comparisons is also consistent with guidance from other financial, insurance, and banking industry authorities warning against illustration comparisons as “misleading”, “fundamentally inappropriate”, and unreliable. Instead, NY DFS Regulation 187 requires product recommendations be based on a careful, skilled, prudent, and diligent evaluation of costs, performance, and risks relative to benefits.

In this guest post, Barry Flagg, an insurance expert and founder of Veralytic (which publishes pricing and performance research on life insurance policies), explores the details of the new NY DFS Regulation 187, the fundamental problems with life insurance policy illustrations (especially when used for comparison purposes), what Regulation 187 will require for life insurance due diligence in the future, and how fiduciary advisors must adjust when doing their own due diligence on behalf of clients.

The key issue, though, is simply that because of the number of “moving parts” that underlie life insurance policy illustrations for cash value life insurance, it’s not enough to merely look at which policy is projected to have more cash value, or requiring less in premiums, in the long run. Because underlying those projections are assumptions about returns (which may not be realistic relative to the company’s actual general account investments or historical results), along with assumptions about costs (which may not be guaranteed nor even stable and consistent with the company’s historical costs). And in fact, because life insurance policy illustrations have historically been used as a point of comparison, insurance companies have had unhealthy incentives to ‘game’ their policy illustrations to project cash value more favorably… without necessarily acknowledging the underlying risk of what may be very tenuous assumptions.

More broadly, the NY Best Interest Rule is also significant given the broad efforts to more clearly define clients’ best interests (e.g., the DOL Rule and the SEC Best Interest Rule), and given NY DFS “reputation as a first mover on important insurance regulation matters”, there is now an increased likelihood of additional state-level fiduciary regulation on life insurance, matching the recent trend of state fiduciary rules on investment advice and recommendations as well. And given the predominant use of illustration comparisons as supposed due diligence, the questionable use of illustration comparisons for product recommendations, the growing legislative and regulatory activity around re‑defining clients’ best interests for product recommendations, and NY DFS’s standing as first-mover on important insurance regulation, the NY Best Interest Rule for life insurance raises significant ethical and practice management considerations for CFP professionals and other fiduciaries advisors – both in and outside New York - about how advisors should do basic due diligence to determine whether one proposed life insurance policy is really better or worse than another.

End-Of-Year Medicare Planning Opportunities During The Open Enrollment Period

November 21, 2018 07:05 am 0 Comments CATEGORY: Insurance

Comparing Original Medicare to Medicare Advantage

The final weeks of the year are some of the busiest for financial advisors as they help their clients not only plan for the upcoming year but wrap up their planning for the current year before it ends. Often, that work is heavily geared towards end-of-year tax planning strategies, such as partial Roth conversions, tax loss (or gains) harvesting, and now deduction bunching under the Tax Cuts and Jobs Act. But the end of the year also offers advisors the opportunity to help clients over 65 potentially save money (or preserve access to key doctors) during the Medicare Open Enrollment Period, which runs each year from October 15 through December 7, by making changes to their coverage (which then take effect on January 1) that generally can’t happen during the other 44 weeks of the year.

The first key adjustment opportunity – and important annual review process – is to assess whether any changes need to be made to a Medicare enrollee’s Part D prescription drug plan, as providers do change formularies (the list of available favorably-priced drugs) from year to year, and failure to monitor the situation can lead to a spike in medical costs if key drugs are suddenly no longer covered.

For those who are over age 65 and don’t have a Part D prescription drug plan, the next option during the annual Open Enrollment Period is to add one. The caveat, however, is that, for individuals that did not sign up for Part D during their initial enrollment period (which is a six-month window spanning the three months prior to and after their 65th birthday) they will almost certainly have to pay an ongoing “late enrollment penalty” in addition to their regular premiums, unless they have “creditable coverage” from another prescription drug plan in retirement. Though for those who already face a late enrollment penalty, waiting further will just further increase the penalty from here!

In some cases, though, the key Medicare change opportunity is not just to switch Part D prescription drug plans, but to change the entire Medicare plan itself – from original Medicare to a Medicare Advantage (Part C) plan, or vice versa. Medicare Advantage plans are offered through various private insurance companies (rather than through the Federal Government) and are often lower cost than traditional Medicare (with often an even wider range of benefits, including not only Part B and Part D coverage but sometimes even dental and vision coverage as well). However, Medicare Advantage plans encourage (or really, require) individuals to utilize providers with whom the carriers have negotiated concessions and discounts (i.e., in the Advantage plan’s “network”)… which means it’s necessary to monitor the plans each year to ensure that the desired doctors are available, or otherwise switch plans to another that includes the desired doctors. And those who relocate may wish to switch altogether into (or out from) a Medicare Advantage plan, as the quality of network (and therefore popularity of the plans) varies tremendously from one geographic region to another.

Ultimately, though, the key point is simply to recognize that, while the last couple of months of the year are especially hectic, there are several opportunities for planners to add real value for their clients. And for older clients, it goes beyond just end-of-year tax planning, but also helping them perform an annual “check-up” on their Medicare coverage, which can end up saving them not only time and money, but can ensure that they continue to see the doctors they want to see (and take the prescription drugs they want/need to take) in the first place!