This Month:
Guaranteed Universal Life for municipal bond investors
Behold! The Mortality Credit
Life insurance industry outlook 2010
Individual life sales slowly recover after difficult first half of 2009
What we think about life insurance
Life insurance industry profitable in 2009 despite ongoing capital challenges
What life producers can look for in 2010
Life insurance as an asset class
Life Insurance: Back to the future
GLBA -10 years later
6 opportunities for impaired risk sales
Give your clients financial security


Guaranteed Universal Life for municipal bond investors

by Richard Blaser

Richard O. Blaser, JD, LLM, CLU, ChFC, is High-Net-Worth Marketing Director at The Hartford. He can be reached at Richard.Blaser@hartfordlife.com.

Given the current uncertainty about the future of the federal estate tax laws, many wealthy clients are on the fence about what to do about their potential estate tax liability. Most know that the failure to plan will lead to a potential disaster down the road. But without the motivation of a current estate tax, many will procrastinate and will miss perhaps the best opportunity to plan they will see in their lifetime.

Why is 2010 a particularly good time to complete an estate plan? There are two good reasons. First, because federal interest rates are close to their all time lows and both the stock and real estate markets seem poised for future growth. And the second, equally important reason is the availability of guaranteed universal life insurance at reasonable rates.

Guaranteed universal life insurance is, of course a form of life insurance where, in a nutshell, if and when the premiums are paid, as outlined in the policy illustration, the death benefit is guaranteed to be paid by the insurance carrier. This type of life insurance was first offered by the major carriers about 10 years ago in response to concerns of the general buying population who was still reeling from universal life insurance policies that were predicated on achieving double digit interest rates or by those who had purchased a variable universal life insurance policy that were not meeting their earnings projections.

An interesting irony between the estate tax and the insurance marketplace is that as the future of the estate tax has become more and more uncertain wealthy individuals have trended towards certainty in their insurance planning by purchasing guaranteed universal life insurance policies. These wealthy individuals like guaranteed universal life insurance because it can remove almost all risk from the investment component of their estate plan, with the exception that the death benefit of the policy is subject to the claims-paying ability of the carrier. High-net-worth individuals are effectively using guaranteed universal life insurance to pre-pay their estate taxes.

In the simplest context, imagine a 70-year-old client is facing a $10,000,000 estate tax liability. If the client waited until death to pay the income taxes the taxes would be a dollar-for-dollar expense. However, if in anticipation of paying the estate tax the client decided to purchase guaranteed universal life insurance under a single premium. He or she could purchase the $10,000,000 necessary to pay the tax for a single premium payment of $4,183,000, saving nearly 60 percent in today's dollars. In this hypothetical example, the internal rate of return on the policy at age 85 would be over 5.98 percent or 10.21 percent if the internal rate of return was tax-effected at a 45 percent estate tax rate. Actual results will vary.

The number may make perfect sense and it may seem very easy. However, it is never that easy when dealing with high-net-worth clients. The insurance needs to be worked into their overall estate and financial plan so as to minimize gift taxes and remove the proceeds from the insured's taxable estate.

One strategy that high-net-worth bond investors can utilize in today's low interest rate environment is to purchase life insurance without gift taxes is a gift and note sale strategy. Typically, this particular estate planning strategy is utilized with assets that are likely to appreciate or produce very high amounts of income. However, in today's interest-rate environment, the gift and note sale strategy can work well even with municipal bonds.

Consider the following example. Mr. Hart, age 72, has $25,000,000 of assets, including a $10,000,000 municipal bond portfolio that is earning 4.79 percent. To implement the strategy, Mr. Hart creates an income tax defective irrevocable trust (IDIT) and seeds the trust with an initial gift equal to his lifetime gift tax exemption of $1,000,000. Shortly after the IDIT is seeded, Mr. Hart transfers his bond portfolio to a Limited Liability Company (LLC) and sells the LLC interests to the IDIT in return for a three year interest-only promissory note. The interest rate on the note is fixed for three years at the short term applicable federal rate (which was .79 percent in May of 2010).

Each year the $10,000,000 bond portfolio will generate $479,000 of interest and the trustee will pay $79,000 back to Mr. Hart in the form of an interest payment. The income tax defective nature of the IDIT eliminates any income taxes associated with the payment of the interest from the IDIT to Mr. Hart and the $400,000 balance will be retained by the trust. If Mr. Hart uses the $1,000,000 seed money and the excess bond interest of $400,000 a year for the next three years to purchase a guaranteed universal life insurance policy, Mr. Hart could purchase $4,600,000 of guaranteed universal life insurance. Once all the premiums have been paid, the bond portfolio may be returned to Mr. Hart as a repayment of principal, with the life insurance policy remaining in the trust for the payment of the estate taxes.

From a tax and financial perspective, this particular strategy is very appealing to a bond investor for a number of reasons. First, the bonds don't have to be sold. Second, it shifts the bond income to the trust for a period of years without gift taxes. And third, it is temporary in that the bonds are returned to the client after a period of years. It is also easy to understand the basic transaction. Of course there are technical nuances that need to be explored by the client's attorney. But at its core, so long as the bond yield exceeds the applicable federal rate at the time of transaction, the wealth will be transferred.

What has the investor accomplished? He has purchased $4,600,000 in future dollars for a cost of $2,200,000 in today's dollars. What would the client have done if he had not implemented this strategy? The likely answer is that he would have used the interest to buy more bonds, even though he does not need the money and is in a very high income tax bracket.

When comparing the strategy of buying more municipal bonds to buying life insurance you end up with the same federal tax result, no income taxes. What is also interesting is what the insurance company is doing with the money. When a premium is paid, part of that premium is going to pay for the insurance charges and the net premium will be invested by the insurance company in its general account, which often consists of a large bond portfolio. The investor is trading the liquidity of purchasing additional bonds for the possibility of achieving a much higher internal rate of return for his or her beneficiaries via the life insurance policy death benefit. In effect, a guaranteed universal life insurance policy works as a tax exempt, zero-coupon bond that matures at death.

Clients wanting to utilize guaranteed universal life insurance in their estate planning may want to act sooner rather than later. Given the current interest rate environment and the internal costs associated with reserving for these types of policies, it is uncertain how long insurance companies will be able to maintain these policies at competitive rates. Many insurance carriers have already left the guaranteed universal life marketplace and others are being forced to raise their rates. It remains to be seen how high the rates may go or how many insurance companies will exit the marketplace. It may be that guaranteed universal life, the flower of today, could be gone tomorrow.

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Behold! The Mortality Credit

by Jay DeVivo

Jay DeVivo is Founder of String Financial, LLC. String Financial develops investing and income planning applications that engage DC plan participants in the retirement planning process. He can be reached at jrd@stringfinancial.com.

Five 95 year-old widows are sitting around a kitchen table, drinking tea, and reading the July 2010 issue of LIFE&Health Advisor. As the group was concluding their discussion as to why the current issue was the best the group had read in quite some time, Hilda had an idea.

"I saw on bankrate.com that one year CDs are yielding 1.58 percent. Why don't we each kick in $1,000 and when the CD matures, split the money among those of us who are still standing?" Her four friends quickly agreed.

Shortly before the CD matured, Gertrude, who was particularly observant of actuarial tables, passed on. A few weeks later, as Gertrude's four friends were basking in the nearly 27 percent return on their risk-free investment, Hilda poured a second cup of tea and sighed, "Ahh, the power of mortality credits!"

While, the power of mortality credits is more dramatic with 95 year olds in a tontine (a conceit stolen shamelessly from Moshe Milevsky), they can still be useful income boosters in any retiree's portfolio. Why then, don't more investors share Hilda's appreciation for them?

The most common product that employs mortality credits is the life-contingent immediate annuity. The objection most frequently cited to immediate annuities (life-contingent or otherwise) is "loss of control". Why is fear of "losing control" so difficult to overcome? Consider the cohort now on the cusp of retirement:

In their working lives, the onus for financing their retirement security shifted from their employer and the government to them. They responded by diverting a meaningful chunk of their paycheck to fund this gap. Now as they surrender their ID badge, they surrender their ability to generate a paycheck and must rely upon a lifetime of forgone spending to sustain them against an unpredictable future. Asking them to hand over 10 percent, 20 percent or 30 percent of their portfolios to an insurance company upon retirement is asking them to perform some pretty remarkable psychological gymnastics.

While it is easy to empathize with retirees' desire to maintain "control" over their assets, we need to start helping investors understand that "control" is largely illusory. Let's look at control in the context of selecting investments, ongoing portfolio management, and mortality.

Selecting investments

Many investors choose actively managed funds. Most will have wished they didn't. There are several "it is easier for a camel to pass through the eye of needle than a money manager to consistently outperform an index" statistics one could cite. Consider these from Standard & Poor's:

Ongoing portfolio decisions

DALBAR's 2009 Quantitative Analysis of Investor Behavior found that investors consistently underperform the market. As illustrated in Figure 1, for the 20-year period ending in 2008, investor returns did not even keep up with inflation.

It is not fund managers underperforming indices, but investor behavior that is to blame for these dismal results. The QAIB found that the average mutual fund holding period during the time frame averaged from 3.18 years for equity funds to 4.26 years for asset allocation funds. Investors were done in by the erroneous belief they could beat the market (greed), or selling at the wrong time (fear).

Relative performance of annuities

Based on the rates quoted by www.immediateannuities.com in May 2009, a $100,000 single life immediate annuity would pay a 65 year-old $661 per month for life. This works out to an annual return of over 7.9 percent. At ages 70 and 75, those annual returns increase to 9.1 percent and 10.7 percent respectively. Mortality credits allow investors to earn equity-like returns without the volatility or market risk. If interest rates increase from their current historic lows, the effective returns of immediate annuities will be higher.

What about my heirs?

Most investors have a bequeath motive. Since life-contingent payments end upon the insured's death, mitigating longevity risk and bequeathing assets appear to be mutually exclusive goals. That is not necessarily the case.

Meet Bob. When Bob retired at 65, he had has amassed a retirement nest egg of $1 million, allocated 60 percent to the S&P 500 and 40 percent to the Barclays Capital U.S. Treasury Index. He planned on withdrawing about $40,000 per year to meet expenses in excess of Social Security, and figured those expenses would increase by about three percent annually. Bob was feeling pretty good about his plan.

Unfortunately, Bob's retirement party coincided with his millennium party. At the end of his first decade in retirement, Bob's portfolio is worth about $590k.

Will Bob's savings get him to his 100th birthday?

One way to address this question would be employ a sophisticated model to give us the likelihood of success at different confidence levels. Let's instead keep it simple and assume the next 25 years looks exactly like the last 25 years. Should that come to pass, Bob will be penniless by age 90.

If instead of electing to "control" his entire retirement portfolio, Bob allocates one third of his nest egg to a life-contingent annuity upon retirement, holding everything else the same, he will have about $960k when his original portfolio flamed out. At 100, he will still have more than $285k. What about his bequeath desires?

As Figure 2 illustrates, not only does the annuity provide longevity protection, but it also enables a greater bequest if Bob dies at any time after age 75 than if Bob maintained full "control" of his assets. The loss Bob's heirs would experience if he dies unexpectedly early is modest compared to the gain they (and, more importantly, Bob) reap if he lives to a ripe old age.

This is but a single scenario. The point is not that immediate annuities belong in every portfolio, but that many objections are based on misconceptions. If we can help investors better understand the costs, benefits, tradeoffs, and risks inherent in all of their options, we can help them make better decisions.

To achieve the lofty goal of preparing investors to enjoy retirement, the industry needs to rethink its approach to education and companies need to recast themselves as solution providers. The product-centric approach the industry has historically pursued has allowed confusion to flourish. Most investors (and too many advisors) cannot differentiate between SPIAs, and EIAs, VAs, or FAs; they are all part of the same confusing alphabet-soup of "annuities", about which they know little more than to be wary of those who coming bearing them.

Since we are a nation of under-savers, mortality credits should play a more prominent role in the retirement income solution. However, until we figure out how to connect with investors, they cannot be optimally leveraged. It is, to be sure, a mammoth challenge. As early education efforts fell short of expectations, it is not difficult to understand why individual insurers have shifted their focus to making income products more palatable. Providing access to principal or death benefits placated investors' objections and makes products easier to sell, but in neutering the mortality credit, many investors are not as well served.

Insurers are uniquely equipped among financial institutions to help retirees manage the risk of outliving their assets, but to capitalize on their inherent advantages, they must be willing to get creative and try new approaches to help investors appreciate the power of the mortality credit.

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Life insurance industry outlook 2010

by Doug French

Doug French is a Principal at Ernst & Young's Insurance and Actuarial Advisory Services.

The year 2010 will be difficult for life insurers as the U.S. economy slowly recovers from the aftermath of financial events. Lagging employment, continued tight credit, weakened residential and commercial real estate and a behavioral consumer shift from consumption to savings are contributing to a delayed economic recovery. The U.S. life insurance industry will likely face an extended period of weak earnings, slow growth and greater regulatory oversight.

Many life insurers are reacting by following a "back-to-basics" strategy which should help them weather the storm. Regaining profitability and growing the business within the current economy will require creative, pro-active steps to improve strategy and execution.

Optimize capital in response to ongoing pressures

Industry surplus (plus AVR) declined 13 percent from 2007 to 2008, and 2009 to date remains flat. As debt and equity markets recover value, life insurers will need to optimize their deployment of capital in response to continuing challenges. Insurers with operations in Europe may face additional pressure on already constrained capital levels when Solvency II takes effect in 2012.

Traditional sources of capital will meet most of the industry's short-term needs, and well-capitalized reinsurers will selectively assume risks. With spreads over treasuries returning to pre-crisis levels, the cost of debt will be more attractive in 2010. A full market recovery for non-traditional sources of capital is still years away, which may force companies to alter or eliminate products dependent on these sources.

Internally generated sources of capital will be critical, and with investment yields remaining low, companies should be exploring ways to strengthen prices for in-force business, such as increasing non-guaranteed fees. As products are re-designed and re-priced, risk/reward trade-offs need to favor capital strength and profitability. Capital and fiscal discipline should be the criterion for decision making at all levels.

During the financial crisis, most companies found that the capital cushion required to weather the storm far exceeded their existing economic capital models. In 2010, companies will need to develop contingency plans for a wider range of extreme events, including liquidity crises, forced liquidation of assets into frozen secondary markets and limitations on transfers of capital within the enterprise.

Build more robust risk management capacity with stronger governance and transparency

Insurers often do not have leading practices in place to identify and monitor the wide variety of risks they face. Business units and chief risk officers (CROs) should work closely together to escalate emerging risks to executive management and the board. Individuals at every level need to take an active role in setting and maintaining a reporting paradigm that allows key stakeholders to understand the results and implications across an expanded range of adverse scenarios. These challenging times provide an opportunity to employ effective enterprise risk management programs to further increase management transparency and encourage consistency in aligning risk tolerance with risk appetite.

The CRO must drive operating company risk budgets, set clear lines of authority for risk assumption and execute approved responses when risk limits are exceeded. The CRO also faces heightened demands from regulators and rating agencies on risks assumed and capacity. As external stakeholders and regulators set guidelines for enterprise reporting, demands on operating companies will increase. In addition to collaborating on setting enterprise risk levels, local operating companies will need to increase their risk monitoring levels, the range of scenarios used for modeling risk and scrutiny of regulatory capital and liquidity for new and in-force business. Modeling tasks will expand in 2010 as dynamic capital forecasting, asset liability management, portfolio optimization, hedging and stress testing all vie for attention.

A key consideration for insurers is the need to understand the links between risk management and capital management. Often, decisions to allocate capital do not explicitly take risk into consideration in a disciplined, consistent and comprehensive manner. Without management and board support for risk management initiatives, CROs will not have the resources and power to improve the decision-making process.

Focus on core businesses and readdress product and distribution strategies

As the economy stabilizes, insurers need to evaluate and implement tactical and strategic decisions about non-core businesses, products, and distribution channels. These decisions are crucial in helping insurers rebuild capital and position their companies for future growth.

Insurers will continue withdrawing from non-core businesses in 2010, as they conserve capital and reallocate it among those businesses with the best chance of future success. Withdrawal creates opportunities for better-capitalized companies to increase market share as weaker competitors close or sell operations that add marginal value. In addition, better-capitalized companies will also remain focused on their core business, which further contributes to industry consolidation.

As insurers seek ways to reduce their risks, they are re-designing and re-pricing products. This presents an opportunity to reach broader markets by developing products to match consumer demands altered by the financial crisis. Companies with relatively strong capital and surplus who are willing to innovate in key product areas may gain market share in 2010.Those who are able to provide greater transparency may also be better positioned to gain distribution and access to customers.

Operate successfully in a changing regulatory environment

Insurers should anticipate enhanced regulatory oversight in 2010 and will need to evaluate the impact of a more intense regulatory environment on their business models, capital requirements, and governance structures. Washington is centered on stimulating economic recovery, while maintaining broad concerns about systemic risk and consumer protection. At the same time, insurance regulatory change is compounded by debate over the roles of state versus federal oversight of solvency, insurance products and processes.

Until U.S. GAAP and International Financial Reporting Standards truly converge, U.S. insurers will face significant challenges. Furthermore, Solvency II is gaining ground in Europe with the passage of the framework directive in May 2009. Insurers rebuilding capital levels are concerned about the additional impact of Solvency II on their fragile capital positions and the significant implementation costs. Solvency II's global standards, solid governance and supervisory principles will influence how European companies manage their business in the future. The impact in the U.S. remains to be seen.

Improve effectiveness of company infrastructure

The recent recession led to a decline in premium and investment income, an increase in policy lapses and loans and greater regulatory and other stakeholder demands on reporting and governance. Insurers need to examine cost reduction across their entire infrastructure (people, organization, processes and systems), and look for ways to optimize their operations in a low-growth environment in 2010 that could last several years.

As in the past, costs will likely be reduced through process re-engineering and headcount reduction. But in the current environment, insurers will need to move beyond that to address cost reduction through transformation. Greater sustainable value creation will require streamlining and consolidating organizational structures, driving greater automation by eliminating manual business processes and consolidating redundant legacy systems. Taking a more comprehensive view of cost reduction will enable insurers to achieve overall operating efficiency, improve business performance and enhance competitive positioning.

Advances in IT resource management are making many infrastructure improvements possible. The pooling and sharing of physical IT resources (virtualization) and the outsourcing of computer hardware and applications (cloud computing) can lower costs, enable rapid business model innovation and provide for better disaster recovery and mitigation.

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Individual life sales slowly recover after difficult first half of 2009

Total new annualized premium for individual life insurance declined five percent in the fourth quarter of 2009, resulting in a 15 percent reduction for the year as compared to 2008, according to LIMRA's quarterly individual life insurance sales survey.

"After an extremely rocky first half of 2009 where we were down 26 percent in the first quarter and 21 percent in the second, individual life insurance sales began to show improvement in the third and fourth quarters," said Ashley Durham, LIMRA senior analyst for product research. "We are encouraged that all product sales are showing signs of recovery."

After falling by about 30 percent in the first and second quarters, the drop in universal life (UL) sales was reduced to 15 percent in the third quarter. By fourth quarter, UL sales were only three percent lower than they were in fourth quarter 2008. Overall, 2009 UL premium declined 20 percent as compared to 2008.

Guarantees continue to be important to consumers. Guaranteed death benefit universal life (GDBUL) sales only fell by about 11 percent in 2009, while non-death benefit guarantee UL products dropped 26 percent. As a result, GDBUL market share of UL sales increased to 53 percent, up from 48 percent in 2008.

"It's interesting that as UL premium has declined over the past year, UL policy count has grown," noted Durham. "UL policies in 2009 were up five percent over 2008. We are selling more smaller-face policies to more people. This trend reverses what we have observed for the last decade."

UL still represents the largest share of the annualized premium at 38 percent, with whole life and term at 28 percent and 27 percent respectively.

Fourth quarter variable products sales remain depressed, down 36 percent compared to prior year but this marks a more than 50 percent increase over prior quarter. For the year, variable products declined by half.

Simple and affordable, term continued to be appealing to consumers and as a result, sales remained steady throughout the year. In the fourth quarter, sales were up one percent, ending 2009 down only one percent.

After single digit drops in the first two quarters of the year, whole life sales increased 12 percent in the third quarter and another 12 in the fourth quarter. Marking a four percent gain in 2009, whole life is the only product line to perform better in 2009 than in 2008. Along with whole life's increase in premium sales, policy count also increased, up six percent in the fourth quarter.

Overall, total individual life insurance policy count increased three percent for the quarter and dropped two percent for the year.

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What we think about life insurance

by Rich Brugger

Rich Brugger is vice president, marketing, Prudential Individual Life. He can be reached at richard.brugger@prudential.com.

Many consumers have been hit where it hurts the most, their wallets. They've lost value in their homes, retirement accounts and equity portfolios.

Now they are forced to do more with less. A 2009 survey by Prudential Life showed 70 percent of consumers surveyed have cut back on routine expenditures like dining out, shopping or going to coffee shops and 32 percent have had to dip into savings in order to pay routine bills. Many are trying to replenish their savings.

Needless to say, the financial crisis has affected consumers financially and emotionally.

The economic downturn has also affected insurance carriers. You now see the influence of credit costs in the pricing of term insurance and policies that offer secondary guarantees. Many companies have re-priced their products and some even pulled product lines from their portfolios entirely.

I do not need to tell you the effect of the financial crisis on distributors. Just consider how credit costs have affected sales concepts, such as premium financing. We've all seen executive benefit plans come under fire and corporate owned life insurance is back on the front burner.

What are consumers thinking about life insurance?

To help answer this question we surveyed 1000 people between June and July of this year online. Respondents invited to participate included males and females between the ages of 30 and 59 responsible for household financial decisions including investments, life insurance and planning for retirement. The majority of respondents had incomes or assets greater than $100,000.

We were surprised by the results. Ninety percent of those surveyed indicate a loss of assets and about one in two of these individuals have experienced a traumatic financial event such as a loss of a job and income, reduced retirement contributions or healthcare in the last 18 months.

So where's the good news?

We learned that 94 percent of respondents with individual life insurance kept their coverage in place and 93 percent consider life insurance "a must."

Some additional findings of interest told us that:

Feeling better? I thought you would. Keep reading.

I told you it would get better.

At the same time, 75 percent strongly prefer their death benefit to be in effect for life, even if it means paying extra for the policy.

So let me get this straight

The financial crisis has made many people value their life insurance more and realize they may not be able to rely solely on the insurance provided by their employer.

In addition, many Americans recognize the value of permanent protection and are finally thinking it might just be better to buy life insurance when you are young and healthy. Understanding products is still an issue but people may be more willing to take the time to learn. Fewer than three in 10 have a good understanding of permanent products, but more than half said they're interested in learning about the benefits of permanent life insurance.

Seventy percent say it's important to work with a financial professional who will take the time to teach and educate them about financial matters including life insurance.

This industry can help

Assets that offset the need for life insurance may be diminished or gone, potentially translating into an increased need for life insurance. Our job is to help consumers understand they should reevaluate their needs and educate them about product choices. Oddly enough the financial crisis seems to have served as a wake-up call for many consumers who are now mulling over some of the things we have been saying for years.

Now is not the time to "hunker down" and wait for the storm to pass. Many consumers appear ready to have the conversations they (and sometimes we) have been putting off for years. The data revealed by our survey can serve as a springboard for these conversations. Now is the time to schedule annual reviews. Now is the time to talk to annuity and investment clients about life insurance. Now is the time to talk to clients about the benefits of permanent life insurance. Now is the time to talk to clients about term conversions. Now is the time to talk to your clients.

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How to keep your impaired risk cases moving forward

by Allan D. Gersten, CLU, CFP, ChFC

Allan D. Gersten, CLU, ChFC, CFP, is Chairman and CEO of First American Insurance Underwriters, Inc, Needham, Mass. He can be reached at 800-444-8715 or at agersten@faiu.com.

Even a challenging or extremely difficult impaired risk case can obtain a positive result from a thorough and knowledgeable underwriting approach. What this suggests is that life insurance underwriting is both science and art. Informed analysis and thorough fact gathering are the basic, essential and objective tools for moving a case forward. At the same time, there is often a subjective element that should be taken into consideration in the overall evaluation and decision process.

Because many insurance company underwriters use manual criteria, decisions can vary from company to company for a particular risk. A cancer history evaluated with the same stage, grade, treatment and background might carry a larger or smaller, flat extra rating with a carrier, while another can offer a standard rate with no flat extra based on their experience with that type of risk, their reinsurance alliances, and their unique business and cost model.

By adding the subjective evaluation when deciding on a case, it's quite possible to obtain a broad divergence of offers that usually makes the difference between closing the case or not. Heart impairments, for example, may have a wide divergence of offers from carriers since these cases require the evaluation of an immense amount of information, with particular dynamics that add to the challenge. The construction, proper evaluation and ultimate presentation of a difficult case begins with indentifying all the relevant facts, the Attending Physician's Statement materials and other required information and then collecting it.

The next step is a comprehensive, well-written, comprehensive and positively presented summary of the case. It is important to portray the client based on the good, the bad and the ugly aspects of the file. A well-written summary can be very beneficial and can put the case in a good light.

With this background, the next step is to be alert to what we can call "the red flags of impaired risk." Your chances of receiving very good offers go up if you are aware of the following six critical impaired risk issues:

Your client has been declined or rated by your primary company (or a competitor's client)

When this occurs, it is an opportunity for a producer to assure the client that that the process will continue, what the price range may be and the likelihood of receiving other offers. However, before moving forward, it is necessary to understand the factual issues or the subjective interpretation that caused a company to decline, rate or postpone a case.

At times, an insurance company will communicate the information to the broker, but in other cases it may helpful having an underwriter speak with the original carrier to obtain a more complete understanding of what went into the decision. In many cases, a skilled underwriter can gain insight into the company underwriter's thought process. It is unfortunate to experience these delays and surprises when a pre-underwriting process can help avoid them.

The prospect or client has a potentially challenging underwriting situation due to a chronic medical condition, poor personal habits, lifestyle issues or limited available information

In approaching the case evaluation process, it is essential to recognize that no two cases are exactly alike. Even though some may appear to be similar, it is critical to remember that each one is unique. Ironically, perhaps, this is the value of experience and is a refreshing, necessary and productive mindset when reviewing and presenting the file.

APS information may be vague, incomplete, incorrect or even in conflict with the client's actual situation. Clients are often poorly informed or sometimes in denial. On the other hand, files can be incorrect, inconclusive, misdirecting, misleading and just plain wrong. Sometimes, the client should have obtained a second opinion. Having open communication with everyone involved is critical to obtaining the appropriate solution.

Multiple impairments are challenging for most insurance companies, depending on the particular combination and their relative severity, stability and control

Without question, the perception of importance, stability and severity by the underwriter is critical for obtaining an acceptable offer.

Some carriers will discount a second or third impairment and work with the most important or dominant one when rating a case. Others, however, may have a good system for providing credits or reductions to the rates that the proposed insured qualifies for that can improve the offer. There can also be inconsistencies in the patient's treatment. Simply put, most cases present opportunities to improve offers if everyone's mind is open and all work together where appropriate with one objective in mind.

Unresolved medical status can very often stop the progress of a case in its tracks

This has become an area of growing concern, particularly with internists, who are often recommending that a client see a specialist. In most cases, the specialist's responses and testing must be completed before a carrier will make an offer. This is also why it may be preferable to have a client's insurance needs secured before having the next regular medical check up.

This problem is being resolved if the broker tells the client proactively that insurance should be purchased when a person is healthy and before starting with a round of doctor visitations for a possible malady. This is the equivalent of not trying to insure a building when there is fire or even billowing smoke. Under such conditions it is an uphill struggle in a life insurance transaction.

Substance and alcohol abuse, driving history, moral issues, as well as financial matters, should be presented in the most advantageous way possible

Candidly, such factors tend to be dealt with quite harshly by most insurance carriers.

At the same time, there are companies that make informed, intelligent offers when provided with all the information. By failing to uncover and present all the facts, a client is placed at a disadvantage when the underwriter is reviewing the application. We need to remind ourselves that leaving out relevant information can place a client at a disadvantage with an underwriter. It can help if the insured composes a carefully outlined and well-written cover letter. The underwriter needs help in justifying the offer.

It's worth noting that underwriting in the lifestyle area of risk is often very uneven and results in limited positive offers. Usually, it is necessary for a considerable period of distance in time pass from the occurrence to the offer. Stability, time and motivational and compliance status of the client are important precursors to obtaining positive results. To have the best chance of success, it is imperative that the client is open, forthright and offers all relevant details regarding the history and status of the issue at hand.

For example, a supplemental letter for an applicant who tested positive for cocaine use in the past that details the facts can be useful in obtaining good results. This is particularly true if the letter clarifies for the underwriter that this was a limited, short-term use and presents a clear picture of the proposed insured's stability.

Older age clients with medical impairments represent particular challenges and opportunity for producers

Clients in their 70s and 80s present a tremendous opportunity for significant wealth transfer and wealth preservation cases. It goes without saying that it is neither surprising nor unusual for older clients to have either current or past physical or mental issues.

The underwriting challenge is recognizing the degree of importance of that history and or current status as it relates to the probability of securing a result that works for the client. These cases can be subjective.

When comparing clients in their 70s to those in their 80s, an insurance company has much more flexibility in offering a rated policy for the younger one than the older client. There is little or no flexibility for many carriers when faced with offering a policy to 80 plus-year-olds with higher than a table B. The reality is that the pricing for such a policy would usually be impractical.

The evaluation of certain impairments for these ages can sometimes be more aggressive with great offers when compared with the same impairment underwritten conservatively with a younger proposed insured. For example, an 85-year-old male with prostate cancer using a "watchful waiting" method of dealing with the cancer can receive a standard non smoker policy while a 55-year-old with the same diagnosis who decides on the same treatment would be summarily declined for coverage by all carriers. However, the reverse can often occur when the older client has a heart condition that may call for a 100 percent rating surcharge while the same carrier may make a standard offer by utilizing credits and table shaving to the younger client with the same medical history.

When it comes to every case, but impaired risk cases in particular, there's value in maintaining an open mind, since there is often more than one way to solve an underwriting problem, including what may appear to be a particularly difficult one.

At times, it's necessary to pursue every possible solution to obtain the best possible answer, or any answer for that matter. This extra effort should be made even if you feel that you have the correct solution in hand. This work requires appropriate resources, patience, persistence, diligence and know-how. And since it makes a difference for both clients and producers, it is well worth the effort.

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Life insurance industry profitable in 2009 despite ongoing capital challenges

Estimate $16 billion net income in 2009 after $20 billion in capital losses

The life insurance industry is still working through capital losses and capital constraints resulting from the 2008 financial crisis with some success, according to a study by Conning Research and Consulting.

"We project net after-tax statutory income of $16 billion for 2009, less than half the pre-crisis figure of 2007, despite capital losses of $20 billion in the year," said Terence Martin, analyst at Conning Research & Consulting. "Even with a $16 billion capital infusion in 2009, the industry is still well below pre-crisis 2007 levels, and capital leverage ratios have risen dramatically. The industry will continue to face capital constraints in the short term, even as capital losses abate."

The Conning Research study, "Life-Annuity Forecast & Analysis 2009-2011," reviews and projects performance for the U.S. life-annuity industry and its key lines of business.

"Underpinning our 2009 forecast is a substantial partial release of the large reserves the industry set up in 2008 for individual annuity minimum guarantees," said Stephan Christiansen, director of research at Conning. "Annuities have been the volatile segment for the industry, generating a $4 billion loss for the combined 2008-2009 period, compared to a $12 billion gain in 2007 alone. Life insurance products, on the other hand, have been remarkably stable during the crisis, and this year will generate over $8 billion of net operating gain, in line with prior years."

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What life producers can look for in 2010

by Kenneth A. Shapiro

Kenneth A. Shapiro is the president of First American Insurance Underwriters, Inc., Needham, Mass. He can be reached at 800-444-8715 or at kshapiro@faiu.com.

If any words can capture the mood of consumers in the year ahead, they are gun shy and upbeat. Yet, if you want to understand your clients, this is a good place to start. If you bring clients solutions that help increase their confidence and are consistent with their feelings about the their future, you will be on track to do more business in 2010. In other words, the issue is not life insurance products, but the ability of the products to deliver the results clients want and expect.

Here are seven significant ideas that can help meet the challenges and opportunities created by clients who are both cautious and optimistic.

Consumers want flexibility

While death benefits are a given, it's the flexibility offered by UL/permanent life products that has a strong appeal, as more consumers recognize the value of cash, which makes the tax deferred feature of UL/permanent life insurance particularly attractive.

If a policyholder needs money, it can be available tax-free, as long as it doesn't exceed what has been paid on the policy, either as a withdrawal or a loan. This is far more preferable than running balances on high-interest charge cards. The overloan features on some policies provide additional flexibility.

The shock of seeing their 401(k) accounts decimated by the drop in the stock market has made consumers far more security conscious. Even though the market delivered solid gains this past year, investment vehicles such as UL products that offer a floor as well as a ceiling give skittish consumers a needed level of security.

While no single investment vehicle can meet a consumer's total needs, permanent life products offer the flexibility that many are looking for today. Survivorship estate planning

As the history of life insurance makes clear, "everything that goes around comes around". That's what's happening with survivorship life products, which are continuing to make an appearance after declining for several years.

Because the proceeds of this type of life policy are given to the beneficiary upon the death of the surviving spouse, the path where the money is going is completely clear so that there's no question about it winding up in the hands of the tax collector. As such, it's a simple and useful estate-planning tool and the cost is generally less than insuring two separate lives. Hybrid permanent life insurance that does more

With the continuing escalation of medical, rehabilitation and nursing home costs, we all know the value of long term care coverage, and so do your clients. But closing long term care sales, particularly individual policies, remains stubbornly difficult.

Some life companies recognize that while consumers want LTC coverage, they don't act because of the cost. By packaging an LTC rider with a UL policy, they make both more appealing. While LTC riders may not be the perfect solution, they generally accelerate the benefits of the life policy to help cover long term care expenses. If the rider is not used, the full benefits of the life policy remain intact.

As one company states, "It can be an affordable, hybrid solution to the �use it or lose it' dilemma of traditional long term care insurance." Guarantees are disappearing

In 2009, the notices began arriving from insurance companies indicating that they were either repricing certain Guaranteed UL products or withdrawing them from the market. The repricing appears to increase premiums from three to 12 percent, depending on the carrier and the policyholder's age and health.

Return-of-Premium term products are following a similar pattern, along with the longer durations, generally 25- and 30-year guaranteed premium term life. Some companies have left the 30-term market and others may certainly follow along.

Premium increases began occurring in 2009 and it's prudent to expect that trend to continue.

These products are being impacted by changes in long-term interest rate assumptions that threaten profitability, substantial increases in the cost of capital reserve requirements and returns that are not meeting minimum objectives.

Strong corporate profits open the door of opportunity

With corporate profits rebounding as a result of belt-tightening, downsizing, increased efficiency and prudent decision-making, companies have available cash to enhance both executive and employee benefits, which may have lagged behind over the past few years. They will be looking for ways to reward valued employees for their loyalty during the trying times of the last three years.

At the same time, the recent layoffs have spotlighted the issue of portability and will be an attractive feature for insurance buyers of many small- and medium-sized companies.

It is also worth noting that as businesses emerge from recession pressures, they will be looking for ways to regain financial stability. Without question, many will be seeking other than traditional sources, after having been rather severely burned.

Finally, companies will be seeking cost-effective solutions for rewarding and retaining key employees, such as defined benefit plans and for funding business continuity programs. Business owners and managers are consumers, too. And that's why UL products can be so effective, whether providing cash growth, executive bonuses, financing needed projects or supplemental retirement savings.

Clients are looking for an advanced level of service from advisors

Consumers are expecting all their advisors, including insurance advisors, to be far more proactive than ever before. They don't want to hear about after-the-fact problems and they certainly don't want someone bringing them bad news.

With changes in life insurance policies, the economy and the life events of policyholders, annual policy reviews are an essential service of advisors. Like every other investment, life insurance policies require regular attention and maintenance. And that includes a review meeting with their policyholders.

Even relatively new life policies need regular scrutiny. Since we are living longer due to improved medical care and more effective medications, life underwriting is more liberal. It's quite possible, that clients who bought policies just a few years ago can obtain more coverage at a lower cost today. The annual policy review is the opportunity to deliver this good news.

At the same time, consumers are far more aware than ever of policy performance issues, particularly if they have policies that have been in force for 15 years or longer. If a policy isn't performing on the assumptions of the original illustration, the review is the time to discuss options with a client. More than anything else, it's an enormous opportunity to be of service to clients.

Look for increases in life product pricing

Consumers certainly have benefited from lower life insurance costs resulting from updated mortality tables, more appealing products, and marketing strategies such as table shaving.

After several years of surprisingly low prices, the pendulum began to swing in the other direction in 2009, and the upward trend will most certainly continue in the year ahead. The change is mainly due to weakened investment returns, tighter margins, higher reinsurance costs and the need for insurance companies to add to their reserves. All this is not unexpected and is a reflection of what is happening throughout the economy following the recent recession.

With a clear upward pricing trend, it's incumbent on advisors to let clients know there is a cost attached to waiting. These conversations can certainly include policy reviews to make sure their existing life program continues to meet their objectives.

If there is an overriding message in all this, it is that advisors are well positioned with products and strategies that fit both the economic times and the expectations of clients. As consumers turn their attention to the future, particularly retirement, today's advisor comes armed with meaningful and trustworthy solutions.

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Life insurance as an asset class

by Adam Sherman

Adam Sherman, CFP, CLU and CHFC, is president and CEO of Firstrust Financial Resources in Philadelphia, Pa. He can be reached at www.firstrustfinancialresources.com.

Making the Case

Conventional wisdom dictates that the primary reason for owning life insurance is to have protection for your family against an untimely death that robs them of their main source of income and livelihood.

At the onset of creating a family, even before an investor has any wealth, they need insurance to protect their family and home first and foremost. As an investor begins accumulating wealth or inherits it, it is important to insure against potential portfolio volatility with a consistent fixed income tool within it that will also act as a wealth replacement device.

Additionally, life insurance is a tool for managing wealth and the transfer of wealth in a way that takes out some level of ambiguity caused by uncertain tax policies, unpredictable investment returns and the potential for unexpected death.

Welcome to the new age of life insurance; it's time this financial instrument is considered an asset class in and of itself. In the early half of 2009, life insurance has strengthened its foothold as a viable asset class for a portfolio and is actually helping many investors rebuild wealth that has been lost during the financial meltdown.

Any advisor, or investor for that matter, won't make much of an argument that equities, fixed-income and cash equivalents are considered "asset classes," but now is the time to consider life insurance as one, too. There are a variety of investments that are used to help negate the volatility these instruments face, however, not enough attention has been given to how life insurance, which is non-correlated to the ebbs and flows of the market, can help repair a client's retirement portfolio and how a death benefit should be considered an integral part of an investor's portfolio.

Let's face it, knowing where to put money now isn't easy. Given the turbulent market environment, more and more investors are looking for ways to insure returns inside their portfolios against the potential ravages of a bear market. Now, smart wealth advisors are suggesting to their individual investor clients that they should strongly consider how a contract with a life insurance company can sustain a retirement portfolio, and a lifestyle, through rough times.

While life insurance, like its cousin an annuity, has often been panned by pundits for issues ranging from expenses to liquidity concerns, it is precisely because of the unpredictability of the markets that these instruments, with the combination of investment and insurance benefits, have appeal now more than ever.

The core of all insurance products offer the purchaser an excellent benefit if the complexities of the transaction are completely understood. Life insurance fills a specific need and with the different types available, it is possible for someone to meet financial obligations an unforeseen death could bring. By completely educating a client on the rate of return offered by a life insurance death benefit, you will help provide a better understanding of the value the purchase brings to a diversified portfolio.

The Rate of Return

Most investors understand that when they invest in stocks, mutual funds or ETFs, that there is a "rate of return" that should be expected to bolster their portfolio. What many do not understand, however, is that based on the premiums paid, life insurance has a rate of return as well based on the death benefits within the policy.

As most investors understand, premiums are paid to the insurance company with an understanding that the company will fulfill its promise to pay a certain amount to the policy holder at death. What's more, since life insurance proceeds are generally paid income-tax free, the rate of return on death benefits is equivalent to an after tax yield.

This is Not Your Father's Life Insurance Policy

When your parents decided to buy life insurance, it was to serve two main purposes; to protect a family/business relationship or as a mechanism for the affluent to transfer wealth from generation to generation to avoid estate tax. These are still the main reasons behind purchasing a policy, however recent market volatility has added more value. Life insurance policies are emerging as an asset class among risk-averse and volatility scarred investors.

The Biggest Difference

The most significant change has taken place over the last four to five years. Today, once the policy holder has reached the age of 70 or 75 and he or she no longer needs the policy, it can be disposed of in a secondary marketplace. Institutions bid to buy the policy and then add it to their own portfolio as an investment vehicle. The seller can receive anywhere from 25 percent to 30 percent of the current face amount.

This new way to dispose of a life insurance policy has changed the way insurance is bought and sold. A potential buyer enters into that transaction saying, "Okay, if something happens and I need money during my retirement years, I have my insurance." That's a good thing.

For example, let's say that John purchased his life insurance policy to protect his business and 10 years later his small business grows by leaps and bounds; he is now liquid with $20 million cash on hand and no longer needs the $2 million policy. John can sell his outdated policy and get 25-30 percent of the face value of $2 million even if that policy has very little cash in it.

The buyer will assume all the responsibility necessary to keep that policy active until the insurance plan is paid in full and they receive $2 million.

What does this Means for Investors?

Major institutions are now looking at life insurance as an independent asset class. They are creating ETFs or indexes based on mortality. Goldman Sachs has begun releasing a mortality index. It predicts how many years it will take for a 65-year-old male to pass away.

What makes this asset class unique is the fact that it is non-correlated to the stock market. Whether the stock market goes up or down, people are still dying every day. That's a secure investment from Goldman Sachs' perspective!

Avoid Taxes

Life insurance policies receive favorable tax treatment. Benefits are payable tax free to the estate, income tax free to a beneficiary and, if owned by a third party, could potentially be estate tax free. This is known as an irrevocable insurance trust.

Life insurance policies also create another advantage: they allow money to grow on a tax-deferred basis inside the policy. The cash value and the returns can range from three to five percent on a fixed basis. They could also be variable returns that are linked to the stock market and will grow tax deferred inside this wrapper.

In a Nutshell

It's a different world today from when your parents purchased life insurance. Dynamics have changed and people are realizing the value of life insurance policies. This is a great tool for investors and a strong asset class to add to a portfolio, especially in uncertain economic times.

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Life Insurance: Back to the Future

by Gregory E. Schwabe, FLMI

Gregory E. Schwabe, FLMI, is National Marketing Director for First American Insurance Underwriters, Needham, Mass. He can be reached at 800-952-0820 or gschwabe@faiu.com.

If you make an objective review of the life insurance products available in today's market, you might just think the year is 1985. The current life products clearly have the shape and feel of plans that were marketed and sold 25 years ago. There is one notable change, however. Today's offerings lack the double-digit interest rates that were credited in the mid 1980s.

At that time, the prevailing products were Whole Life, Current Assumption UL, and Level Term with guarantee periods of up to 20 years. It doesn't take much imagination to see that this looks much like portfolios we'll be offering consumers in 2010.

What's happened? Has our industry lost its creativity and ability to innovate? Has there been little or no progress in the last quarter of a century? Anyone familiar with the history of life insurance knows that the industry is far more advanced than it was in 1985. At the same time, much has occurred of late that's "turning back the clock."

The "hot product" over the past several years has been Lifetime No Lapse Universal Life plans. However, reduced investment returns and fewer, but more costly capital sources, make it difficult for insurance companies to continue offering secondary No Lapse UL products at current pricing levels.

It appears that insurance carrier trends seem to be either to reprice products at higher rates or abandon the market in favor of a Current Assumption version.

We should expect to see UL plans with much improved accumulation values and possibly higher interest crediting in the coming months. At the same time, there will be fewer choices for secondary No Lapse plans.

UL products are now beginning to come to market offering some interesting riders that are targeted to consumer interests. For example, several life companies offer a no cost Charitable Benefit Rider, which allocates a percentage of the death benefit (usually one percent) to a client's favorite named charity. This may be particularly appealing to a client since the charitable allocation does not take away any of the proceeds to the beneficiary. It just pays the charity a percentage of the ultimate face amount of the policy.

There is one insurance product currently available that offers insureds and their dependents protection for global emergency travel services.The wide-ranging menu includes medical referrals and consultations with Western-trained, English-speaking physicians, foreign hospital admission guarantee, emergency evacuation to the nearest facility capable of offering appropriate care, critical care monitoring and prescription assistance. Again, this is a no-cost rider that offers protection whenever traveling 100 miles or more from home.

Several UL life products now offer a long term care or a living benefit rider that advances the policy proceeds in the event the insured becomes chronically ill. This rider also overcomes the client objection of "What if I buy long term care insurance and never use any of the benefits?" We may see more and more companies add this type of rider.

Other consumer-friendly riders available in today's market include an Overloan Protection Rider, which keeps a policy from lapsing due to a high loan balance and a Wellness for Life Rider that gives policyholders a percentage reduction in the cost of insurance rates for having biennial check ups and maintaining acceptable height and weight ratios.

There is also a Liquidity Guarantee Rider that returns to policyholders a high percentage of their premiums at the end of the surrender period.

Unlike the old Waiver of Premium benefit, the Waiver of Specified Premium Rider available today actually waives the full premium that was being paid before the insured became disabled. This keeps the policy growing in value, instead of just suspending the cost of insurance charges that were being deducted.

The one fixed life product on the market today that really wasn't available in the 1980s is the Index UL Life. A little slow to catch on with both advisors and consumers, the product is only available from a handful of insurance companies.

Index UL Life has most of the same features and benefits (including lifetime guarantees, for the time being) as other UL plans but with one difference. With a crediting rate tied to the S&P 500, NASDAQ-100 or the DJIA, it will provide greater non-guaranteed values than a traditional fixed UL product.

Changes in the reserving requirements are causing companies to look closely at their sales figures in the longer-term guarantee market, as well as Return of Premium (ROP) term. The cost of obtaining letters of credit has skyrocketed for insurance companies in recent months. The low interest yields have placed a strain on the performance of ROP term polices to the point where it is no longer profitable to offer the product to consumers.

Coupling this with slower than anticipated sales have caused some carriers to eliminate 30-year term plans and ROP products. Many are now repricing their 20-year plans higher and making other product adjustments, including commission reductions to agents. The major difference between 1985 term plans and those available now is the scarcity of Annual Renewable Term or annual increasing term plans, as well as five-year level term. The pricing of today's newer products make short-term level plans undesirable.

In light of these changes, producers can no longer tell clients that rates are going down and they can wait a little longer before replacing a current policy or applying for new coverage.

It can be in your clients' best interest to let them know that "now is the time to buy." Just like the retail ads proclaim "Lowest prices of the season," the time is right for consumers to stock up on term life or at least review the term coverage they currently have.

All this leads to the conclusion that advisors must be more alert than ever regarding life products. We can expect some products to change and be repriced, while others will disappear completely. At the same time, there will be new products that need to be understood and evaluated before recommending them to clients.

All in all, it certainly appears that the life industry is undergoing significant change in an attempt to right itself to meet both the challenges of difficult financial conditions and the needs of consumers, a situation that will undoubtedly continue for a long time.

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GLBA - 10 years later

by Jack Tatom

Jack Tatom is Director of Research for Networks Financial Institute at Indiana State University. NFI monitors regulatory issues and facilitates dialogue among industry participants. NFI will host an event on November 12 in Washington D.C. to commemorate the 10-year anniversary of GLBA. Additional information regarding the event is available at www.netwworksfinancialinstitute.org.

A decade after President Clinton signed the Financial Modernization Act of 1999 (also referred to as the Gramm-Leach-Bliley Act or GLBA), financial services regulation has exploded as an area of scrutiny and debate.

How has GLBA influenced changes in the banking, insurance and securities sectors? What has its role been in the current financial crisis? Looking back, what is its most significant legacy? And finally, what is the future of GLBA and how is it likely to be impacted by President Obama's proposed regulatory overhaul?

As the industry, including policymakers, tackles emerging "structural" failures including potential need for new approaches to regulation, it seems imperative to consider the issues and lessons from GLBA. The Act's primary objective was to repeal parts of the Glass Steagall Act of 1933, specifically those provisions that prohibited the offering of products outside a core service area such as banking products, securities or insurance. By creating "financial holding companies" the Act allowed banks, securities firms and insurance companies to offer each other's products. For example, a bank could create a financial services holding company to offer insurance or security services; and an insurance company could provide retail or investment banking services. Essentially, GLBA broke down the barriers to competition across the financial services portfolio.

GLBA did not result in a rush of financial services firms delving into new lines of business, except among the largest institutions. Beyond notable mergers (e.g. Citigroup and Travelers, JP Morgan and Chase) the industries response was primarily in the sale of non-traditional products, rather than the "manufacturing" of new products. As of June 29, 2009, there were 592 financial holding companies authorized by the Federal Reserve.

In the development of GLBA, primary concerns focused on consumer protection and privacy issues. Today, systemic risk, sub-prime credit and mortgage credit crisis issues introduce new concerns. Since 2007, several formidable critics have emerged to suggest that GLBA played a major role in the subprime mortgage and financial crisis of 2007-09. President Obama stated that the GLBA helped create the 2007 subprime crisis (Wall Street Journal, March 10, 2009). Nobel Laureate Joseph Stiglitz has also argued that GLBA helped create the crisis; and Nobel Laureate Paul Krugman (New York Times, March 29, 2008) asserted that former Senator Phil Gramm was the "Father of the Financial Crisis."

As new regulatory structures are considered, these "new" questions will need to be addressed. The subprime crisis was largely due to credit extensions among mortgage bankers and thrift institutions. Additionally, the creation of complex new products such as mortgage-backed securities, collateralized debt obligations (CMOs), auction rate securities and credit default swaps were developed and marketed outside traditional regulatory structures. These gaps will certainly be considered in any new system of regulation and oversight.

On the other hand, some analysts have noted that without GLBA the ability of the financial system to insulate investors from larger losses and instability would have been more restricted (Peter Wallison, Senate Banking Committee Testimony, May 6, 2009.) Some banks that had extensive investment banking operations have experienced relatively large losses (Citigroup, Bank of America); but, it was the largely non-bank affiliated Bear Stearns and Lehman Brothers whose failure is most closely linked to the financial crisis.

Looking forward, new regulation including that proposed by President Obama in June may or may not affect GLBA. Earlier proposals, such as the Paulson Blueprint, called for a move to regulation by risk type rather than function and critics of current regulation support this view. One question will be the politics of changing regulatory responsibility. For example, the Obama plan for regulatory reform proposes consolidating the Office of Thrift Supervision with the Office of the Comptroller of Currency. Additionally, the Obama plan calls for a Federal Office of Insurance to serve as a national center for insurance information and federal policy, as well as a coordinator for federal insurance policy in international policy coordination.

Additionally, the plan calls for separating consumer protection from the functional federal regulators to be controlled by a new Consumer Financial Protection Agency, operating under the Department of Treasury. Creation of the Consumer Financial Protection Agency along with the proposal for a "financial stability regulator" sets the stage for moving toward a more risk based structure of regulation instead of today's functional approach.

Looking Back, Looking Forward

Despite the criticism that GLBA contributed to the financial crisis, the only two large investment banks that were not previously part of financial holding companies (Morgan Stanley, Goldman Sachs) have become financial holding companies in order to improve their strength during the crisis. Smaller investment banks that do not also function as banks may remain so over the next decade if they survive as independent investment banks.

Several large financial holding companies have emerged over the past 10 years including J.P. Morgan Chase, Bank of America, Citigroup and Wells Fargo. There are about seven large foreign universal banks that rely primarily on deposit taking but also have securities. It is likely that efforts to expand product offerings, which have continued over more than three decades, will continue, even among the large financial holding companies. Moreover, some midsize and small banks will continue to offer a broad portfolio of financial products and services. There is no question the future of GLBA and financial services regulation in general is under review.

Networks Financial Institute at Indiana State University will address these questions at the "Gramm-Leach-Bliley Act at Ten" conference being held November 12, 2009 at the Ronald Reagan Building and International Trade Center in Washington, D.C. Speakers including Senator Gramm and leading scholars will take the podium at this event.

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6 opportunities for impaired risk sales

by Allan D. Gersten, CLU, CFP, ChFC

Allan D. Gersten, CLU, CFP, ChFC, is Chairman & CEO of First American Insurance Underwriters, Inc., Needham, Mass. He can be reached at 800-444-8715 or agersten@faiu.com.

"Impaired Risk" are two words that can strike fear in the hearts of life insurance producers. They are cause for alarm. They mean trouble ahead, everything from underwriting issues to excessive delays and client distress. Advisors wonder if an impaired risk case will ever close and even if it does, will it be worth the pain.

That's not all. There is also a natural worry about "getting in over your head," of not being prepared to handle the task of managing the impaired risk case.

While these concerns are understandable, impaired risk cases have become far more common than they were in the past, particularly as the population ages and with continuous advances in medical diagnostics.

From the view of growing the producer's practice and meeting client needs, it is worthwhile to consider the opportunities that can come from recognizing the impaired risk prospect, both for the client and the advisor.

The challenge for the advisor is to learn how to manage an impaired risk case, something that requires both an open mind

The key to success in this process is managing client expectations. This is where being realistic comes in. Many advisors are somewhat uncomfortable asking detailed medical questions for fear that this might upset the relationship with the client. This must be put to rest if an advisor wants to work on impaired risk cases. A thorough job of fact-finding for medical and other risks is essential. There is also the need to prepare a clear description of the applicant's financial and personal objectives in applying for the life insurance, and how they will be met by the use of life insurance products.

To take this a step further, advisors must be skillful in overcoming clients' denial and lack of knowledge in regard to the details of their own risk factors.

Finally, having a working knowledge of impaired risk underwriting and life products, along with their flexibility and cost structure, is necessary to help a client secure the needed coverage. This means obtaining a HIPAA authorization and fact finder for securing pertinent information and to poll carriers.

The preliminary "shopping" can be accomplished in confidence, with the insurance companies considering the risk without divulging the client's identity until they make a formal application. The best method for shopping is to include all of the appropriate carriers and present written summaries for tentative quotes.

The "shopping" process results in a wide array of offers and the best (usually the lowest or lower price offer) is selected. Both the advisor and client benefit by knowing that they have secured an offer that best appreciates the client's unique risk factors. Further, there should be more flexibility for the advisor to craft the best program.

What does it take to obtain a proper hearing from underwriters on an impaired risk case? There's only one answer: obtaining complete and accurate information initially and presenting it to the insurance companies in a well-organized way. Impaired risk cases only become nightmares when underwriters are given inadequate, incomplete and inaccurate information. With the proper preparation, any advisor can take advantage of a number of opportunities that are readily available in working on impaired risk cases. Here are six concepts that work to the mutual benefit of client and producer:

Concept #1

Take advantage of table shaving programs or carriers' system of credits. The table shaving strategy is an advantage offered by a limited number of well-rated carriers to clients up to age 70. What happens is that three to four tables are simply reduced to standard non-smoker rates for permanent products offered by the particular insurance carrier. These programs sometimes offer a reduction from a table six down to table two.

Further, there may be additional credits available that can be used for particular clients to offer standard rates. For example, some life insurance companies offer "discounts" on their table rate cost structure so that when there is a rating the impact is less than their competitors.

When using a universal life product under one of these scenarios, the dollar outlay can be less than for a term policy, which would not have the risk cost reduction options available.

The shaving program creates an intrinsic value for the impaired risk purchaser since it is priced the same as for much healthier prospects. Pointing this out to the client can become a compelling argument to make the purchase from you.

Concept #2

Take advantage of survivorship with an uninsurable spouse or partner or highly rated impaired risk. This technique provides a number of benefits and meets a number of different needs.

This makes it possible for the healthy client to secure lower prices than would be possible with a single life policy. This type of policy is used when the need for the delivery of proceeds is greatest at the second death.

As you can see, there is a psychological benefit when the higher risk client is healthy enough to bring an advantage to the purchase. Many times an insurance company will consider one or both clients more favorably, given that it is a second to die policy. What may appear to be a somewhat marginal difference or underwriting benefit can make a big difference in cost.

Concept #3

Arbitrage, using a shaved or low-cost life policy in conjunction with an age-rated Single Premium Immediate Annuity. This particular concept accounts for the funding of a substantial number of large sales, particularly when the clients are in their 70s and 80s. It's in these age groups where margins and arbitrage can be significant.

However, it also applies to both healthy and impaired clients, but requires diligent "shopping" for both products.This strategy requires a knowledgeable client, on the one hand, and an advisor who understands both the leverage that can be gained and the use of Irrevocable Life Insurance Trusts and gifting on the other.

Concept #4

Revisit prospects and clients with medical impairments, prior rated applications and current in force rated policies. Asking medical questions is a must, even though producers can be reluctant to do so out of fear they will upset client relationships. Yet, there's another way to look at it: each client is unique and each medical impairment or risk has special circumstances that may allow a positive result. Pursuing all avenues diligently can often help in arriving at the best possible solution for the client.

It's also important to remember that situations change and not all change is negative. Improvements in medical technology can allow carriers to improve on their prior offers.

Finally, dealing with client denial should be handled in a particularly sensitive manner. The insurance company's pricing structure needs to be explained gently so as not to threaten the client's sense of well-being. While there may not be enough time to become proficient in the medical and high-risk scenarios, producers can be active and understanding listeners.

Concept #5

The cost of rated policies can be mitigated when used in a qualified plan. The premiums and extra risk component resulting from the higher risk would be tax deductible to the entity that is sponsoring the plan. Examples of plans that this can apply to include money purchase and defined benefit pension plans, Section 79 plans, as well as others.

Rated policies' costs don't need to be a drag or a hindrance The insurance can be purchased on a money purchase basis using the DEFRA (Deficit Reduction Act of 1984) minimum face amount and still secure the tax-free access, tax-free accumulation and a stepped up basis at death as allowed by life insurance contracts. The life insurance charges are minimized and do not need to affect accumulation.

Most business owners or executives prefer having the company pay for their personal life insurance benefits, and many businesses have tax-deductible benefit plans that make this possible.

Recent changes in the laws allow highly paid or key personnel to secure disproportionately large contributions toward their retirement. A significant percentage of these contributions can be applied to the purchase of permanent life insurance.

In some plans the benefits are maintained despite the plan including a rated-up life policy on a key person. This method of funding rated policies is much easier to digest and does not require payment using after tax-dollars from the executive's personal checkbook.

Concept #6

Finally, when faced with an uninsurable client and no real options appear, advisors need to be at their most creative and persuasive best. Here's an example: borrowing a healthy insured to substitute for an uninsurable has been used. However, we want to make it clear that this is not the same as a heart transplant.

Both the healthy and uninsurable individuals are alive. In this scenario, an insurable individual lends his/her insurability to the unhealthy person to the extent of the benefit needed by that person.

Most assuredly, both the carrier and parties involved should be in concert with the particular family or business need and there is usually a close relationship between the parties and the beneficiaries.

One benefit of working impaired risk cases is the opportunity to be creative and resourceful in helping to improve a client's family or business relationships.The impaired risk goes a long way in demonstrating the value and flexibility that life insurance offers.

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Give your clients financial security

by Sheryle Ohme

Sheryle Ohme is senior vice president of claim operations at Assurant Employee Benefits. She can be reached at sheryle.ohme@assurant.com.

At a time when many Americans have experienced losses in home values and savings and investments accounts as a result of the economy, it is important to note that life insurance remains a strong source of financial security. Unlike stock values and interest rates on savings accounts, life insurance benefits do not fluctuate. If someone died today, the benefit amount paid on a term life insurance policy would be the same paid last week, last month or even last year.

Life Insurance Awareness Month, celebrated each September, is the perfect time for every American adult to evaluate their personal financial plans and the certainty and stability life insurance can provide, particularly in uncertain economic times like these. And moving into open enrollment season, it's also an ideal time for you to talk with your employer clients about the importance of making life insurance a part of their benefits packages.

Life insurance can play a significant role in determining whether an individual's survivors will have a financially secure future or years of hardship ahead of them. It provides cash to beneficiaries after an insured's death. The cash, the death benefit, can help survivors meet important financial needs, including funeral costs, daily living expenses such as housing, food, transportation costs and healthcare, and current or future education costs. In addition, there is no federal income tax on life insurance benefits.

Who needs life insurance?

If someone will suffer financially as the result of an individual's death, that individual should consider life insurance coverage. Generally speaking, those who are married, have dependent children or who own a small business are often in need of the financial protection that life insurance can provide. However, some single people without children, such as those providing financial support for aging parents or carrying significant debt they wouldn't want to pass on to surviving family members, may need coverage as well.

While most Americans need some level of life insurance coverage, one third of American adults carry no coverage at all according to LIMRA International. Employers who make group term life insurance available in the workplace provide their employees with an easy, cost-effective solution to an important need.

To establish the need to offer coverage in the workplace, you can ask your clients how their employees will protect their families' futures in the event of an untimely death. Would there be enough assets to maintain the lifestyles they currently enjoy? To fund educations and other important expenses? Term insurance can be a particularly good choice for people in the process of building families as it allows them to buy high levels of coverage when the need for protection is often the greatest.

Many employers choose to provide a basic life insurance benefit (such as $10,000 or one times earnings) and give their employees the option of purchasing additional coverage on a voluntary, or employee-paid, basis. According to the Life and Health Insurance Foundation for Education (LIFE), insurance experts generally believe that most people need 10 to 20 times their net income and sometimes even more than that to properly protect their beneficiaries, so the opportunity to "buy up" life insurance in the workplace can be a valuable one.

Benefits of buying voluntary coverage in the workplace

An employer who is unable to fund group life insurance coverage can still make benefits available on an employee-paid basis. While employees pay the full cost of the coverage, there are many advantages to buying life insurance this way. Group coverage is generally easier to obtain than an individual policy purchased outside of the workplace, as it's offered on a guaranteed issue/non-medically underwritten basis for timely applicants. Premiums are typically paid through convenient payroll deduction and, according to LIFE, can be as much as 10 to 20 percent less than individual life insurance because of efficiencies in enrollment and billing procedures. In addition, employees may be eligible for more coverage under a voluntary plan than is offered by a traditional group plan.

Employers who add voluntary group life insurance to their benefits portfolio generally can choose between offering a multiple of earnings plan or a unit plan. With a multiple of earnings plan, employees purchase coverage in increments based on their annual salary, generally up to five times the amount of their annual earnings. With a unit plan, they purchase coverage in units of a specified dollar amount (often $10,000), which can provide maximum choice in meeting employee needs and protecting the lifestyles families enjoy.

Your employer clients also may choose whether or not to make accidental death and dismemberment (AD&D) and/or dependent life coverage available for purchase with basic life insurance. AD&D coverage can double or triple the death benefit if an insured dies accidentally. It can also pay a benefit in the event an insured loses a limb or eyesight as the result of an accident. Dependent coverage allows an insured to purchase life insurance coverage for a spouse or dependent children at more affordable group rates.

Not all group policies are the same

It's important that your clients understand that not all group term life insurance policies are the same. Some may include provisions such as AD&D coverage, an accelerated death benefit and disability waiver of premium as standard features, while others may require additional premium to obtain the provisions. That being the case, price is not the only factor an employer should consider when determining the coverage to be offered.

Additional features can significantly increase the value of a policy for insureds. An accelerated death benefit allows a terminally ill person to collect a significant percentage of a policy's death benefit while still alive. A disability waiver of premium waives life insurance premiums when an insured experiences a long-term disability, usually lasting six months or longer (subject to the terms and conditions of the policy). Another feature included with some group coverage that employees particularly appreciate is portability, which

allows insureds to keep their coverage in place if they terminate employment with the sponsoring business. The financial security that life insurance continues to provide, especially in a trying economy, is something employers should carefully consider when determining the benefits they will offer to their employees. Helping them understand the value of the coverage, for both their businesses and their employees, can be key to making it a part of employee benefits packages that can result in value for you as well.v

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