Seems like with every passing day, I read yet another interesting and provocative article about trouble in the premium financing space, the life insurance products they’re funding or both. Much like the articles I read about current events, some have a statesmanlike quality while others are clearly political. I don’t know how all this interesting and provocative discourse will play out. I have hunch, though, that the answer is suggested by the lyrics of a song from the 1960s, Universal Soldier.
While it doesn’t get anywhere near the same level of coverage, I’m quite certain that the ill winds buffeting some third-party premium financing arrangements are buffeting split-dollar plans as well.
The more I read and hear about the trouble with leveraged life insurance plans or the policies themselves, the more restive I become about when the great minds in the industry will turn their attention to fixing those broken plans. I’ve concluded that I shouldn’t hold my breath. I now figure that either Godot or the Iceman will get here long before we’ll see the charge of the plan rescue brigade.
After all, just look at all the materials, programs, systems, technology and intellectual firepower behind the marketing and implementing of leveraged plans. But when things go awry, as they’re doing today in many cases, it’s a whole different kettle of fish. Why? Because the sum of the multi-disciplinary skill sets, time commitment and communication among professionals who don’t understand one another’s terminology enough to get on the same page, and the sheer attention span required of a rescue team is far greater than the chance of the respective parties’ being adequately compensated for their time and effort. With all the potential new sales and planning projects on the table, why bother with this stuff? Okay, maybe, just maybe, there’s an opportunity to replace a policy or to sell it in a life settlement. But the compensation from those transactions flows to the life insurance professionals. The other advisors will have to bill the client directly for the time it takes them to show the client that there is a fire in the theatre and all exits are clearly marked “expensive.” Good luck with that.
It gets worse.
Professional Turnover
Aside from all the reasons that make a rescue operation so difficult in nominal terms, three things are happening out there that make it more even difficult in real terms. First, with every passing year, it’s more likely that the life insurance professionals who sold the case are no longer on the scene. That’s also true of any estate planners and tax advisors who were involved at the outset. These professionals were the storehouse of institutional memory about how and why the plan was put together in the first place and how it was going to be managed. They were also the storehouse of the original illustrations and sometimes even the original documents. In some cases, these professionals’ successors maintained everything so well that the case didn’t skip a beat. But going forward, that’ll be the exception, not the rule. In most cases, the “new” team will have to start from scratch, which will involve new conversations with clients about fees.
Lack of Illustration Support
Second, it will be increasingly difficult to get illustrations and administrative support for aging policies. Depending on the carrier, product series and vintage, and even the market space in which the policy was designed and sold, I suspect that there will be less and less ability to render illustrations from different perspectives or under different assumptions or constructs. Their systems can only do so much. But the lack of illustration support will definitely hamper the rescue team’s ability to do “what-if” analyses of alternative solutions.
Unhappy Clients
Of course, there’s a one more thing that make this whole situation more problematic. A client who hears for (what they claim is) the first time that the policy and plan are in peril will ask some very simple, straightforward questions. “How did this happen?” “Why didn’t anyone tell me about this years ago?” “You mean it’ll cost me that much to fix it? Are you serious?” I suspect that there won’t be a crowd control problem among advisors lining up to have that conversation with the client.
This isn’t transitory.
Problems with deteriorating life insurance plans will only get worse. And solutions, if any, will only involve ever increasing economic and tax cost. I fear it will take many more observers than this one lonely voice to get the word out. Perhaps the laudable efforts to urge policyholders to review and manage their policies, whether or not leveraged and whether or not for the real purpose of replacing or selling the policies, will at least call attention to the problems attending these leveraged plans. Hope springs eternal, even in the Fall.
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