Numerous financial instruments and products are used in financial planning. Life insurance is an example of both because it assists individuals accomplish financial goals via a financial mechanism that is legally structured differently from other financial planning products such as 401(k)s and individual retirement accounts.
This paper examines the broad net Congress cast to capture event contracts under the Commodities Futures Trading Commission's (CFTC) jurisdiction and the exclusion the CFTC crafted allowing traditional indemnity-based insurance to remain within the jurisdiction of state insurance regulation.
CBI Comments on Treasury's TRIP Data Call for CaptivesJasonSchupp1
Every year the Federal Insurance Office (FIO), as administrator of the Terrorism Risk Insurance Program, requires participating insurers to respond to a detailed data call.
Among other changes, FIO recently announced its intention to improve the data it collects from captive insurers. A captive is an insurance company that is owned by its policyholder. In many cases, a large corporation sets up a captive to manage retained risks, directly access reinsurance, and capture substantial tax advantages.
Many of these corporations also use captives to directly extract billions of dollars in benefits from government programs such as the Terrorism Risk Insurance Program and Federal Home Loan Bank system. In fact, prior data calls revealed that large corporations are expected to receive up to 95% of Terrorism Risk Insurance Program payouts through their captive insurers.
CBI has offered a number of practical suggestions to FIO to improve its data call templates and instructions. These suggestions, if adopted, would make it more likely captives will provide data that leads to useful insights for Congress and other stakeholders.
The Insurance Act 2015 has introduced the most significant reform to insurance law in over 100 years. The Act impacts all those involved in the insurance sector. In this report we review key markets' response to the Act and outline the practical steps you should have addressed ahead of the Act coming into force.
Visit our hub to access information and resources tailored to brokers: www.brownejacobson.com/brokers
The NAIC & Center for Insurance Policy and Research have placed a special call for policy position briefs exploring the “potential development of a federal program to provide pandemic related business interruption coverage.”
The Centers for Better Insurance has submitted the attached short policy brief proposing the Payroll Risk Insurance Act.
This proposal starts from the premise that the States must be fundamentally accountable for any pandemic business income coverage program because:
• The orders triggering pandemic business income loss originate and terminate as decisions made by the individual States; and
• The responsibility to manage the economic consequences of those individual State decisions should likewise reside with the respective States.
CBI Comments to FinCEN on Beneficial Ownership of CpativesJasonSchupp1
In response to this ANPR, CBI draws FinCEN’s attention to how U.S. domiciled captive insurance companies may interact with the provisions and intent of the Corporate Transparency Act (CTA).
This paper examines the broad net Congress cast to capture event contracts under the Commodities Futures Trading Commission's (CFTC) jurisdiction and the exclusion the CFTC crafted allowing traditional indemnity-based insurance to remain within the jurisdiction of state insurance regulation.
CBI Comments on Treasury's TRIP Data Call for CaptivesJasonSchupp1
Every year the Federal Insurance Office (FIO), as administrator of the Terrorism Risk Insurance Program, requires participating insurers to respond to a detailed data call.
Among other changes, FIO recently announced its intention to improve the data it collects from captive insurers. A captive is an insurance company that is owned by its policyholder. In many cases, a large corporation sets up a captive to manage retained risks, directly access reinsurance, and capture substantial tax advantages.
Many of these corporations also use captives to directly extract billions of dollars in benefits from government programs such as the Terrorism Risk Insurance Program and Federal Home Loan Bank system. In fact, prior data calls revealed that large corporations are expected to receive up to 95% of Terrorism Risk Insurance Program payouts through their captive insurers.
CBI has offered a number of practical suggestions to FIO to improve its data call templates and instructions. These suggestions, if adopted, would make it more likely captives will provide data that leads to useful insights for Congress and other stakeholders.
The Insurance Act 2015 has introduced the most significant reform to insurance law in over 100 years. The Act impacts all those involved in the insurance sector. In this report we review key markets' response to the Act and outline the practical steps you should have addressed ahead of the Act coming into force.
Visit our hub to access information and resources tailored to brokers: www.brownejacobson.com/brokers
The NAIC & Center for Insurance Policy and Research have placed a special call for policy position briefs exploring the “potential development of a federal program to provide pandemic related business interruption coverage.”
The Centers for Better Insurance has submitted the attached short policy brief proposing the Payroll Risk Insurance Act.
This proposal starts from the premise that the States must be fundamentally accountable for any pandemic business income coverage program because:
• The orders triggering pandemic business income loss originate and terminate as decisions made by the individual States; and
• The responsibility to manage the economic consequences of those individual State decisions should likewise reside with the respective States.
CBI Comments to FinCEN on Beneficial Ownership of CpativesJasonSchupp1
In response to this ANPR, CBI draws FinCEN’s attention to how U.S. domiciled captive insurance companies may interact with the provisions and intent of the Corporate Transparency Act (CTA).
How to Achieve Claims Excellence And Not Breach New Complaints LegislationMarian Unera
Insurance claims management has come under the spotlight and poor claims handling is cited as one of the major culprits when it comes to insurance grievances.
Enterprise Act 2016 and its impact on brokers - survey resultsBrowne Jacobson LLP
From 4 May 2017, the Enterprise Act updated the law to enable policyholders to recover unlimited damages caused by the late payment of claims from insurers. This is not a penalty against insurers for negligently delaying payment. Policyholders must demonstrate and evidence the actual loss they have suffered and show that it was caused by a delay in the payment of a claim. Any damages claim against the insurer must be brought within 1 year of the claims payment under the policy.
We have conducted a survey of insurers, brokers and loss adjusters to understand the expected impact of the Act. Here’s a summary of the key findings.
Visit our hub to access information and resources tailored to brokers: www.brownejacobson.com/brokers
Using Unfair and Deceptive Acts and Practices Statutes to Challenge Reinsurer...NationalUnderwriter
Although the viability of a claim for violation of an unfair and deceptive acts and practices statute in the reinsurance
context is still in its infancy, the possibility of those claims must be considered by cedents and reinsurers alike in their claims activities, at least in jurisdictions where such claims are viable.
Webinar on Hidden Fees in 401k plans. How they impact plan holders and the potential liability that business owners and fiduciaries are now exposed to.
Business Continuity Protection ProgramJasonSchupp1
On May 21 the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA), and the Independent Insurance Agents & Brokers of America, Inc. (Big “I") released their proposal to address future pandemics: The Business Continuity Protection Program (BCPP).
This paper is provided by NAPLIA.
The Investment Advisor’s Guide to Errors & Omissions Insurance will help you anticipate areas of underwriter concern as it relates to your specific investment practice, helping you internally evaluate your risk exposures and better define your activities and professional services.
How to Form and Operate a Network of Competing ProvidersPolsinelli PC
The Health Law Section of the Colorado Bar Association, together with the American Health Lawyers Association, hosted the 2nd Annual Colorado Health Law Symposium, a regional event co-sponsored by the nation's largest educational organization devoted to legal issues in the health industry. Mitchell Raup, Polsinelli Antitrust Shareholder presented How to Form and Operate a Network of Competing Providers at the symposium.
The health care reform law calls for the creation of state-based insurance Exchanges. This Legislative Brief provides an overview of state progress toward creating the Exchanges and the role of entities typically involved with the insurance placement process (such as brokers and agents) under the Exchanges. It also discusses the emergence of private health insurance Exchanges.
How to Achieve Claims Excellence And Not Breach New Complaints LegislationMarian Unera
Insurance claims management has come under the spotlight and poor claims handling is cited as one of the major culprits when it comes to insurance grievances.
Enterprise Act 2016 and its impact on brokers - survey resultsBrowne Jacobson LLP
From 4 May 2017, the Enterprise Act updated the law to enable policyholders to recover unlimited damages caused by the late payment of claims from insurers. This is not a penalty against insurers for negligently delaying payment. Policyholders must demonstrate and evidence the actual loss they have suffered and show that it was caused by a delay in the payment of a claim. Any damages claim against the insurer must be brought within 1 year of the claims payment under the policy.
We have conducted a survey of insurers, brokers and loss adjusters to understand the expected impact of the Act. Here’s a summary of the key findings.
Visit our hub to access information and resources tailored to brokers: www.brownejacobson.com/brokers
Using Unfair and Deceptive Acts and Practices Statutes to Challenge Reinsurer...NationalUnderwriter
Although the viability of a claim for violation of an unfair and deceptive acts and practices statute in the reinsurance
context is still in its infancy, the possibility of those claims must be considered by cedents and reinsurers alike in their claims activities, at least in jurisdictions where such claims are viable.
Webinar on Hidden Fees in 401k plans. How they impact plan holders and the potential liability that business owners and fiduciaries are now exposed to.
Business Continuity Protection ProgramJasonSchupp1
On May 21 the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA), and the Independent Insurance Agents & Brokers of America, Inc. (Big “I") released their proposal to address future pandemics: The Business Continuity Protection Program (BCPP).
This paper is provided by NAPLIA.
The Investment Advisor’s Guide to Errors & Omissions Insurance will help you anticipate areas of underwriter concern as it relates to your specific investment practice, helping you internally evaluate your risk exposures and better define your activities and professional services.
How to Form and Operate a Network of Competing ProvidersPolsinelli PC
The Health Law Section of the Colorado Bar Association, together with the American Health Lawyers Association, hosted the 2nd Annual Colorado Health Law Symposium, a regional event co-sponsored by the nation's largest educational organization devoted to legal issues in the health industry. Mitchell Raup, Polsinelli Antitrust Shareholder presented How to Form and Operate a Network of Competing Providers at the symposium.
The health care reform law calls for the creation of state-based insurance Exchanges. This Legislative Brief provides an overview of state progress toward creating the Exchanges and the role of entities typically involved with the insurance placement process (such as brokers and agents) under the Exchanges. It also discusses the emergence of private health insurance Exchanges.
3 Things Every Sales Team Needs to Be Thinking About in 2017Drift
Thinking about your sales team's goals for 2017? Drift's VP of Sales shares 3 things you can do to improve conversion rates and drive more revenue.
Read the full story on the Drift blog here: http://blog.drift.com/sales-team-tips
ACA Healthcare legislation and attempts at increasing regulation of self-funding and stop loss coverage are driving more employers toward stop loss captives.
This M Intelligence piece will explore the product mechanics and design considerations of Whole Life (WL) insurance. There are two general categories of WL...
The Insurance Act 2015 comes into effect today, meaning that any insurance or reinsurance contract entered into or varied from today will be governed by the Act.
The effects of the Act are far reaching: changing insurance legislation that has been in place for over a century, and impacting on any transaction governed by the laws of England, Wales, Scotland and Northern Ireland, with a potential to affect organisations across the world.
Beyond the secular forces that we describe in our Future of Insurance series1, more immediate and cyclical issues will be shaping the insurance executive agenda i n 2 016 .2 Commercial insurers (including reinsurers) face tough times ahead with underwriting margins that are being pressured by softening prices and a potentially volatile interest rate environment.
Like the rest of the financial services industry, insurers are subject to increasingly complex and prescriptive regulations and standards. In the year ahead, insurers will need to focus on the new U.S.Department of Labor fiduciary standard, which is likely to have a significant effect on how insurance products are sold. Moreover, global developments, especially those related to the developing International Capital Standard, will require insurers to closely monitor – and ideally contribute to – official discussions about how globally active insurers should manage capital
Commercial insurance risk and liability review, February 2016Browne Jacobson LLP
Our annual review provides a comprehensive review of some of the most important judgments and legal developments during 2015 and our analysis of some of the changes on the horizon for 2016 and beyond. We have covered a lot of ground this year so I hope you will be able to find a number of updates that are relevant and useful to you.
If you would like to know more about any of the topics, please feel free to contact any of the authors of the articles.
https://www.brownejacobson.com/insurance/training-and-resources/legal-updates/2016/01/commercial-insurance-risk-and-liability-review-2015-2016
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1. Moneycation
Published by Moneycation™
Newsletter: December 23, 2014
Volume 2, Issue 15
Life insurance in financial planning
Life insurance is a financial matter that is often complicated,
time consuming and expensive. People are often naturally
cautious of life insurance when they cannot understand the labyrinth of policy terms, scenarios and
cost structures. This is a financially healthy view and reflects awareness of possible red flags in the
policy purchase process. Life insurance provides policy holders with several potential advantages:
• Creditor protection
• Beneficiary coverage
• Tax-free retirement saving
• Fixed-income investing
• Cash-value insurance loans
These advantages are not guaranteed and vary depending on state laws, insurance company policy
and insurance terms. If they are used correctly, then the financial benefits of life-insurance is
conducive to some financial plans. The diagram below is an example of insurance structure.
Source: Justin Arndt; CC BY-SA 3.0
Chart and Structure of a Life Insurance Policy
2. Terms
The terms of life insurance influence cost, however these conditions are not always favorable. For
example, in a CBS Moneywatch report, it is pointed out that the age of an insured person at the
time of death affects pay outs. If this age range is unrealistic, then the benefits of the insurance are
less likely to be obtained. When reviewing a policy ask specific questions that clarify broad claims.
For example, if an insurance agents says the return of policy X will be Y amount per year that may
be true, but is that before or after additional surcharges and fees? The U.S. Securities and Exchange
Commission further details how insurance premiums are calculated in the excerpt below:
“Life insurance premiums are based on...mortality (how many people of a given age group
die at a particular age); persistency (what percentage of a pool of insured individuals
continue to pay premiums on their policies x years into the policy’s life), or lapse rates (what
percentage of a pool of insured individuals stop paying premiums on their policies x years
into the policy’s life); and expected profits (the rate of return expected by the insurer). They
may also include additional assumptions such as longevity improvements... All policies with
an investment component also rely on investment return assumptions.”
Careful review of life-insurance policy payout terms, qualification and requirements are essential to
ensure the correct policy and coverage are in place. Otherwise, unforeseen costs may be incurred
and/or prohibitive coverage requirements may reduce the utility and value of a particular life
insurance policy. For example, in the case of long-term care health insurance, if a rider states that
90-days must pass before coverage begins, then the usefulness of that health care coverage is
severely restricted in the first three months of illness, after which a patient may have already
recovered an no longer need long-term care.
Regulation
The insurance industry is largely regulated by state governments and the National Association of
Insurance Commissioners, which represent the states via their respective commissioners'
participation in the organization. However, the ability of state governments to effectively oversee
insurance transactions, practices and instruments is controversial. This is due in part to the limited
authority of the NAIC per Susan Randall in the Florida State University Law Review.
“The NAIC is a voluntary organization of state insurance commissioners and has no power
to force state reform. Second, the NAIC, as a private, nongovernmental entity funded largely
by the insurance industry, is highly susceptible to industry influence.”
Yet according to the NAIC, insurance industry regulations ensure several forms of oversight. These
rules protect consumers, maintain commercial standards and help the industry itself. For example,
regulation of stranger originated life insurance or STOLI has been controversial in the past and
continues to be due to a lack of “insurable interest” that is required by governmental rules. The
different kinds of insurance regulations are listed below:
• Consumers protection
• Market price controls
• Product provisions
3. • Insurer licensing
• Accounting standardization
Another factor that poses possible fiscal and even systemic difficulties is the variance between state
regulations. For instance, in the Commonwealth of Virginia, variable annuities are not creditor
protected, but these financial instruments do have such legal security in other states. The variance in
oversight is potentially unstable due to changes in the banking practices of insurance companies per
Peter Coy of Businessweek. Moreover, Coy states insurance company liabilities or debt they owe is
increasingly becoming short-term and less secure.
As evident in the AIG failure in 2008, ensuring enough capital to withstand a financial crisis is in
the hands of lawmakers and regulatory organizations. So far, any risks posed by the insurance
infrastructure is for the most part either considered to be of no great urgency or has not acquired
enough attention by legislators. This sentiment regarding insurance law and state standards is
clarified by David Zaring of the New York Times.
“The insurance law taught in law school is usually composed of a set of appellate decisions
related to contract law and consumer protection, rather than on the regulation of the industry
for safety and soundness by expert agencies. To the extent that state insurance commissioners
focus on the solvency of insurers, they do so from a consumer protection perspective. That
means they consider whether firms are likely to be able to pay out on their policies, rather
than on the effect that they have on the financial system as a whole.”
In terms of consumers, the lack of, or regulatory limitation within the insurance industry is
ameliorated in part by being aware of the stability and credibility of the insurance company they
choose to do business with. Companies such as New York Life that have been in existence since the
1800s and pride themselves on their continuity incorporate their financial stability into their brand.
Although this may cost insured persons, the knowledge that their insurance is low risk is an
additional assurance.
Accounting
Insurance industry accounting practices are not the same as other businesses, therefore a set of
accounting rules is used in addition to generally accepted accounting principles for the purpose of
standardizing insurance company accounting. These rules or statutory accounting principles are
maintained and developed by the NAIC. SAP affect areas of bookkeeping such as asset recognition,
loan loss reserves and expensing; they are relevant to insurance businesses and not necessarily
detailed by GAAP.
In 2013, FASB and IASB exposure drafts began a process of rule changes that would impact how
insurers update their accounts if implemented. PricewaterhouseCoopers LLP states the costs of
these rules would outweigh the benefits and that a single global standard would be more efficient.
Moreover, the rule changes proposed by the draft standards would affect the insurance industry
accounting in the following way.
“Proposed guidance would require discounting of incurred losses with limited exceptions...
premiums from life insurance would no longer be recognized as revenue when due. Instead,
4. insurance revenue would be allocated to individual periods based on the expected pattern of
incurred claims and release from risk. In addition, deposit elements such as cash surrender
values in life insurance products and experience adjustments in property/casualty contracts
would be excluded from premium and claim information presented in the income statement.
There also could be a significant increase in disclosures on risks, assumptions, and
sensitivities to changes in estimates and assumptions.”
The impact of these new rules on consumers and policyholders partly depends on whether or not
the rules become a part of GAAP and how insurers account for any costs associated with the
changes. Insurance premiums could rise or payout formulas could be adjusted. To illustrate, since
premiums due or accounts receivable are able to be recorded as revenue, then cash flow, a measure
of liquidity is unrealistically higher since it has not been received yet. The new rules, if
implemented, would be more likely to consider the premiums due as a balance sheet item . Possible
company actions in response to this could be adjusting flexible payment schedules to be more
consistent, or increasing front-end cost on financial services or mutual fund management. In fact,
the changes could be far more dramatic per the following PricewaterhouseCoopers excerpt:
“Many legacy finance and actuarial processes will not be able to sufficiently deal with the
proposed changes to insurance accounting, pending regulatory and reporting changes, or to
respond to market opportunities, competitive threats, economic pressures, and stakeholder
expectations.”
Regardless of what accounting standards change, it is advantageous to access the financial records
of life insurance businesses via the NAIC's InsData records, directly from the companies or from
SEC filings in the case of publicly traded companies. These documents and disclosures within them
are revealing about insurer accounting practices and financial management. Such being the case,
financial reports are a tool for investors and/or those interested in insurance products and services.
However, they are not the only mechanism or resource available for evaluating insurers financial
health.
Evaluation
While referring to financial reports, company credit ratings and state licensing and registration data
is wise when assessing insurers and their issuers, consumers might also carefully look at the
practical uses of the financial instruments themselves. To illustrate, the insurance needs of a single
person with no debt and no children are far different from those of an indebted single parent of
three.
Identification and incorporation of financial planning goals, in addition to individual and family
needs is prudent before embarking on a long-term life insurance contract. Completing a life
insurance question list such as the one provided by the Motley Fool Insurance Center is one way to
accomplish this task. Items to consider are listed below:
• Financial objectives ex. Retirement income
• Kinds of insurance ex. Variable life insurance
• Costs and benefits ex. Net return on investment
• Riders ex. Long-term care inclusion
5. • Insurance life-cycle ex. Policy expiration
By implementing a financial planning process that includes investigation of variables such as those
listed above, consumers or future policyholders become more informed about their personal needs,
which policy if any serves these needs, and how well an insurer is able to meet those needs. A
methodology also serves as a roadmap for navigating some of the more complex or complicated
aspects of acquiring insurance by reducing reliance on insurance agents' professional biases. In
other words, being an informed consumer helps prevent purchase of unsuitable or unneeded
financial instruments.
Life insurance comes in several forms, and sometimes hybrid policies such as variable universal
life policies are possible. The table below helps clarify why each kind of life insurance is used and
the pros and cons of using them.
Life Insurance Comparison
Purpose Advantages Disadvantages
Whole life policies Full-life coverage Retirement income, death
benefit, tax-free growth
High cost
Variable life polices Investment,
beneficiary protection
Cash-value account, death
benefits, growth
High cost
Universal life policies Flexibility Tax hedge, income growth Complexity
Term life policies Beneficiary coverage Death benefits Rising costs
Qualification
When evaluating the decision to buy life insurance, the qualification process is relevant because it
is used in determining approval and cost. Prior to being approved for life insurance coverage,
applicants are tested, records are documented and risk is evaluated using credit scores and other
metrics. Factors such as age, marital status, smoking habits, hobbies and controllable health
conditions such as asthma are all used when determining qualification and cost. Premium costs rise
with age because the risk to the insurer also rises.
Qualification for life insurance is not always guaranteed. This is because applicants with no pre-
existing life insurance who suddenly become terminally ill will soon cost the life insurance a lot of
money in death benefits and increase insolvency risk. Buying life insurance while healthy avoids
the risk of being denied life insurance coverage. However, there are guaranteed life insurance
policies that do not require examination offered to members of the American Association or Retired
Persons.
Costs
Costs are an important factor in determining how useful and insurance policy is. Although
insurance payments can be structured with flexible or fixed payment schedules for convenience,
numerous variables affect the quality and cost of life insurance. For instance, according to the Wall
Street Journal, insurance agents have an advantage over brokers because they can offer lower rates
6. by working with a single insurer.
Being aware of all the factors that influence a policy as well as the various types of policies is
important. To build consumer awareness, also consult and compare insurance ratings from
companies such as A.M. Best, and take time reviewing the policy details before signing anything.
Several costs are associated with insurance products:
• Policy premiums
• Underperformance surcharges
• Cost increases
• Management expenses
• Hidden fees
• Early withdrawal penalties
To further illustrate the potential perils of life insurance, consider the indexed variable life
insurance policy. According to John Jamieson of Daily Finance, these financial instruments are
essentially toxic to a financial plan because of the exorbitant costs to consumers. What is more,
policyholder pitfalls are hidden within a sometimes complicated array of financial terminology,
insurance structure and changeable fee structures. He describes it in the following way:
“Welcome to the wonderful world of indexed universal life insurance...These dogs with fleas
are generally sold to those with high incomes....The illustrations are not realistic and fail to
speak plain English as to what is going to happen with these policies...If you have been sold
one of these policies, examine the illustration you were shown and notice the cost of
insurance cannibalizing the cash value in the later years of the policy. Study the cost of
insurance, which will never be plainly spelled out in dollars and cents.”
The warning “consumer beware” is as relevant to life insurance is no different to that of any other
financial instrument. The Idaho Department of Insurance among others recommend knowing the
insurance company, shopping around for rates and avoiding confusing life insurance for a reason.
Sales pressure tactics, obfuscation, lack of clarity and a focus on an advantages are just a few of the
ways to be duped in to buying the wrong product or service.
Products and services
The usefulness of insurance instruments and their pre-requisite fiduciary counseling is contingent
upon individual, and not life-insurance representatives' goals. In other words, sales agents are likely
to try and influence the financial decision making process.
Without knowing what financial objectives to follow beforehand, life-insurance is not excluded
from being the right or wrong financial choice. One way to be sure is to ascertain the various pros
and cons of life insurance instruments. The chart below illustrates an example of how a life-
insurance policy is structured in terms of ownership, management and distribution.
Several products and services are available within life insurance policies. Each one of these
financial tools have advantages and disadvantages. Being aware of the pros and cons and their
relevance to individual and household financial goals is key to making the right choice. The sample
7. table below is a helpful example that shows a way to compare products and services and can be
adapted to suit individual preferences.
Life Insurance Components
Purpose Advantages Disadvantages
Guaranteed annuities Fixed income Less uncertainty Lower rate of return
Variable annuities Retirement income Higher potential ROI Higher risk
Mutual funds Capital growth, income Dividends, selection Management fees
Cash value Retirement savings Tax-free growth Opportunity cost
Death benefit Estate planning Family security Non-transferable
Annuities
Annuities are financial instruments that provide their holders an income after having invested a
certain amount of money into the annuity lifecycle. The annuity lifecycle includes all the stages of
an annuity such as purchase, payments and annuity income or distribution. When investments are
made or appreciate in value, they do so via variable or fixed rates of return. The annuity income can
be either immediate or deferred. Payments can be structured via downpayment, and with fixed or
non-fixed periodic scheduling.
Life insurance agents will sometimes refer to annuities in terms of the “annuity life-cycle”.
Depending on the specific annuity, this represents the different stages in an annuity plan. These
stages include purchase, accumulation and distribution. To illustrate, deferred compensation
annuities are first bought, then premiums are paid into the annuity policy, then at a later date,
distributions being. Unlike deferred annuities, immediate annuities begin paying after purchase.
The advantages and disadvantages of annuities vary based on the issuing company, the state of
insurance and the annuity structure. The features of an annuity are also relevant because they affect
how much annuity income the insured receives, the length of time during which distributions are
made and the actual value of the distributions relative to total cost. Some variables to look for in
annuity are listed below:
• Rate of return
• Fees, expenses and surcharges
• Distribution income
• Payment terms
• Terms of agreement
Annuities are often used in retirement planning to provide a tax-free source of income in addition to
Social Security and pensions. Since life insurance policies are not subject to the same legal
restrictions as individual retirement accounts, they enable retirees to save more for retirement while
also accumulating tax free growth. For example, individual retirement accounts have annual
contribution caps that limit retirement saving; annuities help bridge the difference.
8. Settlements
Sometimes, no matter how well a financial plan is designed, something goes wrong. Unforeseen
circumstances prompt insured parties to adjust or improvise in lieu of a pre-existing plan. Life
settlements are a tool of improvisation because they are only taken out when policy holders
surrender or give up their life insurance policy.
According to the Life Insurance Settlement Association, doing this does not have to be a terrible
deal for consumers because life settlements offer better value than surrendering a policy without
settlement.
Life insurance settlements allow an opportunity to
earn a premium on the cash value of life insurance
policies via sale in a secondary market. When life
settlements are securitized, they are subject to the
Securities Exchange Acts of 1933 and 1934. The
diagram on the right is an example Life Insurance
Settlement Structure .
Life settlement brokers are also regulated by the
Financial Regulatory Authority (FINRA) and are
required to register with a self-regulating
organization per the Securities and Exchange
Commission. The benefits of life settlements to
policy holders are listed below:
• Policy liquidity
• Premium over cash surrender value
• Increased consumer welfare USGov-PD
• Alternatives to policy lapse
Sometimes, no matter how well a financial plan is designed, something goes wrong. Unforeseen
circumstances prompt insured parties to adjust or improvise in lieu of a pre-existing plan. Life
settlements are a tool of improvisation because they are only taken out when policy holders
surrender or give up their life insurance policy. According to the Life Insurance Settlement
Association, doing this does not have to be a terrible deal for consumers because life settlements
offer better value than surrendering a policy without settlement.
Stranger-originated life insurance
Stranger-originated life insurance or STOLI is a kind of life settlement because it involves the sale
of an insurance policy to a third party. However, in the case of STOLIs, the buyer does not have an
insurable interest or motive of financial security from the seller. Since an insurance policy can be
sold, strangers seeking to capitalize on others' death buy insurance policies for less than the payout
face value, but more than the policyholder would acquire from exiting the plan without sale.
The Missouri Department of Insurance recommends fully understanding the financial outcomes
before selling an insurance policy.. For instance, the insured may be able to keep the policy and still
9. receive money for the policy if it has an accelerated death benefit rider or stipulation attached to it.
In other words, the insured party does not have to die for payouts to be made under accelerated
death benefit rules. Another factor to consider is the income tax implication of sale vs. possible tax
free annuities in the future. I immediate cash flow is the reason for the sale, a life insurance loan
against a policy with cash value is also an alternative.
Loans
Life insurance policies that have 'cash value' can be borrowed against. These policies are structured
so that a portion of monthly premiums are invested in financial instruments which build value over
time.
The amount of money in your cash value account will depend on previous loans and their
repayment, length of contributions, types of financial instruments invested in and net cash value.
Some useful considerations regarding insurance loans are pointed out below:
• Borrow up to the full amount of your cash value
• Loans against insurance cash value are sometimes not taxable
• Paying back loans on life insurance is optional
• The cost of an insurance loan is determined by your insurer
• Cash value remains in the insurance policy
• Cash surrender value is reduced by insurance loans
Steps to take when borrowing against life insurance
The terms of life insurance companies specify exactly if and how much you can borrow from your
life insurance. The best source of information regarding what you can or can't do is your insurance
policy itself. That said, borrowing against your life insurance involves a few steps that can make the
process seem clearer.
i) Determine cash value: The first step in borrowing against a life insurance policy is to determine if
it has cash value. Cash value policies can all be borrowed against and exclude term life insurance
which does not accumulate cash value. Your insurance cash value can be found on your most recent
policy statement.
ii) Read your insurance policy. Reading your insurance policy will help you determine what is
involved in the loan, the terms of agreement, any fees, surcharges or otherwise unknown
information associated with the loan.
iii) Call your insurance agent: After you have become familiar with the loan process, call your life
insurance agent to inquire about borrowing against the cash value of your loan. What your
insurance agent says should match the information in your policy.
iv) Fill out required forms: Borrowing against your life insurance may require you to fill out
paperwork or online forms. These forms confirm you understand the terms of the loan and waives
the insurance company of liability associated with non-agreement of terms.
10. Additional life insurance loan information
As with many other types of loans, the quicker a life insurance loan is paid back, the less interest
will be paid which saves you money. If a life insurance loan is not repaid, the amount of the loan
may be deducted from the death benefit in addition to the cash surrender value of the policy. In
other words, you will be penalized for not paying the loan back, but it is not obligatory.
Taking a life insurance loan may increase the amount of your monthly premium if the interest from
the loan is not completely offset by the earnings from the life insurance policy. Conversely, if your
insurance investments consistently earn enough to pay for premiums and interest, and you
participate in a premium offset plan that includes loan interest, then no interest will be due if it is
covered by the plan.
Two benefits of life insurance loans are that the loan is often not taxable and the interest rates may
be competitive. These benefits can partially or completely offset the fees paid to insurance
companies for the policy. Thus, if you anticipate the need to make loans in the future, having a cash
value insurance policy does have some advantages in comparison to other sources of financing.
Borrowing against life insurance requires you to have a cash value insurance policy such as
universal life or whole life insurance. The amount of the loan available is determined by the cash
value of the policy. Interest and borrowing terms are specified by the insurance company's policy
and/or terms of agreement and insurance contract. Premiums may increase or the insurance policy
may be cancelled if the income bearing instruments within the insurance policy cannot match or
surpass the required loan and insurance costs.
There are some benefits to insurance loans such as not having to pay them back, tax-free financing,
and lower interest rates. However, if the loan is not repaid, the death benefit of the policy may be
reduced along with cash surrender value. This can increase the cost of insurance if a new policy has
to be established. It is important to read the specifics of the loan and contact your life insurance
agent directly so as to be informed of insurance company and policy specific information regarding
borrowing from your life insurance policy.
Riders
Instead of having multiple insurance polices, riders or add-ons allow options not covered by
standard insurance coverage. Not having to take out more than one policy has multiple benefits
including lower overall premiums despite multi-line discounts, less paperwork and simpler
financial planning that accounts for contingencies.
To illustrate insurance riders, why buy a variable life insurance policy with flexible payment
options in addition to a whole life policy for the purpose of accounting for the effect of disability on
premium payments? Consolidating coverage via a whole life insurance policy with a disability
premium waiver is a better option if the rider costs less than the variable policy, especially if the
whole life policy includes all the options and benefits of the variable policy.
According to the Missouri Department of Insurance, a potential rider to consider include accidental
death benefits that payout to beneficiaries in the event of an event not covered by standard
11. insurance. Fox business points out the disability income, term life insurance conversion, accelerated
death benefits and critical illness riders are all add ons not necessarily included in an insurance
policy. What this also implies is that insurance shoppers might benefit from comparing policies to
see if what is included as a rider in one policy is standard in another, especially if premiums are
equal for the sample policy structure.
Life changes
When it comes to financial planning and insurance, the future is just as important as the present.
Being aware of events and circumstances that are a natural part of life are significant and influential
on individual and household budgets and financial plans. For example, getting married, growing old
and having children are all life events that impact financial needs. When choosing life insurance,
understanding future needs and possibilities and taking them in to account helps avoid costly
mistakes later on, reduces opportunity cost and facilitates effective rather than defective financial
planning. The example of divorce illustrates how a major life change affects life insurance.
Divorce is generally not considered a pleasant thing by many people, but just in death and estate
planning, insurance changes relating to divorce may be something divorcees would consider in their
settlements or post-divorce lives. Although in some cases it may be impossible and emotionally not
worthwhile to be financially pragmatic, though it could be of benefit to both parties to give some
thought to insurance related concerns.
Depending on the type of policy, changes incurred from divorce may be drastic or minimal. Issues
such as divorce settlement terms, judicial decree, federal regulations, family and individual needs
can all affect coverage after the divorce. For individuals who are soon to be, or recently divorced
there may be several issues to consider before proceeding with changes to insurance policies. This
article will first outline some of those concerns and then discuss how and what changes may occur.
Some of the matters that divorcees encounter in terms of their insurance coverage are listed below:
• Spousal employer insurance termination
• Civil versus financial separation dates
• Multi-car and/or multi-line policy rate increases
• Changes in insurance service providers
• Cost benefits of retaining existing policies
• Insurance priorities such as children, auto, health etc.
Once a decision is made either by court decree or mutual consent via annulment of marriage, the
process of changing insurance policies can begin. Depending on what the court decides it could
mean anything from surrendering life insurance policies to allowing mutual collaboration. In other
words, the decision to change insurance shouldn't really be made until the divorce is final.
Moreover, as the following video explains, in some cases, the court may also require divorce related
life insurance to ensure future payments to one or other of the spouses and/or their household.
Different insurance policies have different regulations and requirements associated with divorce
decrees and settlements. Life insurance settlements can be more complicated than automobile
insurance due to the fact beneficiaries, and retirement income may be involved in addition to
12. changes that may not fall within the original contract terms. Speaking with a life insurance agent,
reading the contract and researching regulatory laws can assist one in knowing what one has a right
to thereby empowering both parties in the divorce to keep as many benefits and advantages of the
original policy as possible.
In cases involving the dissolution of previous policies, one is charged with the task of finding new
insurance and/or re-establishing contracts with previous insurance companies. The companies that
offer the most flexible terms of service and agreement may be the best choice as such terms may
include continuation of pre-existing terms as an individual despite the divorce.
The following tips are intended for higher financial benefits and not necessarily emotional peace of
mind but may be worth considering nonetheless:
Maintenance of existing coverage: Change allows insurance companies to insert new caveats,
reset interest rate terms, fee schedules etc. Keeping old policies alive avoids such changes.
Consider children's needs: Dissolving life insurance policies can mean less potential coverage for
children in the event of illness or death of one or more of the parents. If children are a priority,
consider the effects of the divorce settlement on their needs.
Reassess insurance requirements: After divorce insurance needs may change, increasing
deductibles, shedding insurance on things like your ex-spouse's gold watch collection may be wise.
If the benefits outweigh the costs, trimming insurance coverage might be a good idea.
Collaborate for financial gain: Sometimes divorce involves complete emotional, psychological,
physical and financial annulment of a relationship. If however, that is not the case, there may be
advantages to keeping old policies intact for as long as legally possible. Those benefits can include
family discounts, non-adjusted premiums, higher coverage values and less paperwork.
Review applicable law: Depending on what type of coverage one had during the marriage, Federal
laws may allow continuation of various policies such as Health insurance regardless of severance of
relationship i.e. in the case of spousal coverage via an employer, coverage can continue unchanged
up to 3 years in some cases. However, this may not suit or be applicable for every divorced couple.
Insurance agents, divorce lawyers and insurance managers may be able to assist with the legal
regulations. Nevertheless, it doesn't hurt to double check to make sure they're giving you the best
deal.
Divorce is likely to have some impact on insurance of one kind or another. Insurance that existed
before the marriage may stay intact and untouchable as previously held property, however
insurance such as life insurance acquired during the marriage are subject to settlement terms. There
may be some flexibility concerning health insurance continuation, but the bottom line is keeping as
much coverage with few if any disadvantageous changes to coverage, terms or cost.
Conclusion
Life insurance is a financial instrument that serves to protect financial needs and interests in
addition to being a potential source of retirement savings. Life insurance products do have some