Harrison Group

In light of the pandemic and historically low interest rates, here are some planning ideas to consider now –

1.   Roth IRA conversions – the cost of transitioning from taxable to non-taxable distributions and no RMD requirement is paying income tax now on your account value. That value may have been reduced by stock market declines and tax rates are as low as they’re likely to get, making this a timely idea.

2.   Annuities – for most people, retirement is not about assets – it’s about income. Might it be a good idea to take advantage of the opportunity to accumulate dollars on a tax-free basis and then guarantee an income you can’t outlive to address much extended longevity? A good way to reduce your exposure to stock market volatility at a time in your life when your runway is not as long as it was and you may not have the time to recover from a stock market crack. This is a safe money solution using products, some of which offer upside potential and downside protection.

3.   Review estate planning documents – with some time on your hands and maybe feeling vulnerable, this is a good opportunity to work with your attorney to create or update documents – will, health care power of attorney, durable power of attorney, trusts, beneficiary designations, provision for digital assets and letter of intent. This can largely be done remotely and will go a long way toward accomplishing the goal of estate planning – getting the right assets to the right people at the right time at the least tax cost.

4.   Life insurance – it has been widely and appropriately used by people of means to pay estate taxes using discounted dollars. If you don’t have an estate tax problem, you may have an estate size problem. Life insurance lets you pay a little and leave a lot to those you care about. Many use it to replace lost stock values and clean up messes and others use it to increase their legacy – what they leave behind – how they want to be remembered.  For the sophisticated buyer, premium financing can be an attractive way to acquire life insurance in this environment of extraordinarily low interest rates.

5.   Savings – if there is one thing our run-in with the virus has taught us, it’s the absolute need for a rainy day fund. Whether you are a business or individual, you need a reserve fund to help withstand unforeseen events. It may be a hurricane, virus, recession or illness, but there will always be disasters we can’t predict. How you accumulate such a fund is less important than having it.

6.   Sale of no longer needed life insurance – When policies are no longer needed, wanted or affordable – and especially when money is tight, perhaps due to ripple effects from the virus – policyowners have the right to sell a policy the same way they sell their home.  Both are assets.  Many people don’t realize their policy has secondary market value and can provide a lump sum cash payment while they are still alive.  You wouldn’t abandon your home without selling it after years of making mortgage payments.  Don’t abandon a life insurance policy after years of making premium payments.  A potentially great way to cover costs of retirement, healthcare and long-term care.

Nothing would please me more than to write about business and estate planning, but the virus is still governing our lives. It has changed how we do everything – work, exercise, travel, entertain ourselves, shop, eat, see family, visit doctors – everything. So, are we doomed? Is this “On The Beach” – my reference in the March newsletter to a 1957 novel about the end of civilization caused by a nuclear detonation? The answer was no then and it’s still no. The problem for us today isn’t personal, pervasive or permanent. But the problem is still with us, with many questioning whether we reopened the country too soon in light of increasing infection rates. 

• Health perspective – although people are still getting sick and tragically dying and our lives have been turned upside down, this will end. As we speak, there are reports of several vaccines with sufficiently positive results that there is already talk of large scale testing, fast-track approvals, mass production and distribution. The timing is the unknown – current projections saying late 2020 or early 2021. In the meantime, most medical offices have reopened (with appropriate safeguards) and for those who prefer to be even more careful, telemedicine can be a good solution and is here to stay.

• Financial perspective – as we continue to digest the multi-trillion dollar economic stimulus package, yet another one is being debated and will soon be introduced. The first one made some mistakes, but the benefits far outweighed the negatives. It was enacted, by necessity, so quickly that the government can be excused for lack of perfection. Even though there have been great strides in reopening businesses and people getting back to work, much remains to be done. There is bipartisan support for blanket foregiveness of PPP loans of less than $150,000. Current legislative proposals include lawsuit protection, extended unemployment benefits, payroll tax cut (just withdrawn), aid for struggling small businesses, additional funding for testing, tracing and vaccine distribution, aid to states and cities, and funding for schools and universities to cover the cost of reopening. There is and will be the usual bickering and shameless jockeying for political gain – putting politics ahead of public wellbeing, but eventually there will be a new bill. 

What is the impact of COVID-19 on life insurance?

I was recently on a call with the CEOs of two large, brand name carriers and here are some very important takeaways –

• One carrier reported mortality at only 91% of expected.
• The carriers are very well capitalized – much better than 2008-09.
• The number of new life insurance applications is up significantly – a response to insecurity and fear and the desire to protect loved ones.
• Tailwinds are greater than headwinds for the industry.
• One carrier reported the average age of COVID death claims was 44 – surprisingly low.
• Most deaths from COVID are unfortunately uninsured lives.
• Carrier technology investments are paying off. There is an irreversible move to digital processing – no going back to the old way of doing business. One of the carriers reported that 75% of new business cases are being processed electronically end to end. A huge change for what was a stodgy industry.
• Carriers making life insurance more fun and easier to get – premium reductions for good health steps and better access for diabetics (half of Americans are diabetic or pre-diabetic). The idea is to encourage people to live healthier.

What should you be thinking about in light of COVID-19?

• Financial and estate planning – don’t put it off, do it now and when you start, finish. Bad things happen and it’s smart to have documents in place to be sure your wishes are realized.
• Gifting – whether outright or to fund a life insurance trust – very attractive in light of the current high exemption level, which might soon be reduced.
• Life insurance – to relieve fear and insecurity. A great lifeboat for those who worry for loved ones, carry debt or want to secure their legacy. No market risk. No interest rate risk.
• Long-term care – this is the elephant in the room. The need for care is increasingly likely, the cost enormous and it’s the one thing that can erase retirement dreams and evaporate assets. We have several clients going on claim as I write this and the insurance is a lifesaver in each case.
• Fixed annuities – for those feeling nauseous from stock market volatility and unhappy with bank instruments at a barely positive yield, consider this option for your safe, quiet money. We have clients now earning 3% guaranteed for 5 years, no sales charges and no income tax unless or until you withdraw the money.

More than 30 million Americans live with diabetes – the seventh leading cause of death in the U.S. Broadly, Type 1 is early onset and challenging to insure. Type 2 is adult onset and much easier to insure. In all cases, insurability level depends on things like height and weight, blood chemistry readings, exercise level and treatment compliance. John Hancock, which has become a real industry innovator, now offers diabetics life insurance paired with a technology-enabled program that provides coaching, clinical support, education, incentives, and rewards designed to help manage and improve their health – with the potential to save up to 25% on their premiums. These same customers will also have access to Vitality, another John Hancock program, which is designed to reward customers who take steps toward living longer, healthier lives, like exercise and buying nutritious food, and reducing their premium cost in the process. This is not a commercial for John Hancock, but a pat on their back for innovation and rewarding wellness.

This is a subject that won’t and shouldn’t go away. Here are the basics – 101. People are living longer – much longer – than ever before, but not healthier. Senior care facilities are full and new ones are rapidly being built, seemingly on every piece of available real estate. When someone requires care due to accident, illness or cognitive issues, the cost must be paid. The only question is who pays. Will the expense be paid from existing assets (that were put in place for other purposes) or will that risk be transferred to a third party? Those who are super wealthy can afford to self-insure (although we have such clients who have chosen to insure). Those who are poor will be cared for by Medicaid. Those who fear rate increases (inevitable) should know there are ways to guarantee premiums. Those who don’t like “use it or lose it” need to know that there are products available that guarantee your dollars will come back via some combination of long-term care claim, policy surrender and death. Those who think this is covered by Medicare or are expecting a new government entitlement program are just wrong. You will either pay for care from your assets, insurance or some combination of the two. 

What doesn’t get enough attention in this discussion is – who’s caring for these folks? A study pointed out there were 43.5 million caregivers providing unpaid care in the last 12 months. Family dynamics are changing, forcing more adult children to provide financial and practical care for aging parents who are living longer – a nightmare for the parents and a huge strain on the grown children. But the burdens are not being shared equally by family members, because of either geography, financial limitations or occupational requirements. Talk about a situation that can tear a family apart.

There is one new development that is worth watching. Washington state enacted legislation that allows workers to save money through their jobs to help pay for long-term health care. Several other states are considering similar legislation. This alone won’t get the job done, but it does help and sends a message that someone understands the magnitude of the problem.

Described as a bad idea whose time probably hasn’t come. Among many other tax initiatives, there is now a proposal to tax the sale of stocks, bonds and derivatives at a rate of 10 cents per $100 of transactions. That two New Yorkers are among the co-sponsors is surprising, considering the harm this would bring to financial markets and the negative impact it would have on local employment. It is draped in objectives like “reducing speculative trading”, “addressing economic inequality”, “reducing high risk and volatility” and “redirecting investment that has flooded into transactions without economic value into more productive areas of the economy” (emphasis added). I position this as yet another revenue source for new spending, income redistribution and to fuel anti-Wall Street sentiment. While this is more a political message than a plan likely to become law, it’s a sign of the times. It is a sales tax on investors and another drag on investing and saving. A .1% tax on a relatively modest $10,000 ETF purchase, for example, would cost $10 – more than double the commission charged by leading online brokers. Other major economies that have adopted such a tax have had overwhelmingly negative results. 

On a similar note, and coming from the other side of the political aisle, is a proposal to increase the tax on corporations that buy back their stock. The 2017 tax cut law didn’t do anything to encourage companies to spend their new found cash on investment or wages, many choosing instead to buy back their own stock. Here again, there is not a lot of support for this and it’s not likely to become law.

It will be a long time before this subject goes away. Back again – this time in the form of a New Jersey Supreme Court case, filled with hypocrisy and fraud – lots of bad stuff. A woman buys a life insurance policy in 2007, premiums are paid by unrelated investors and the policy is sold to a life settlement company in 2009 (when the contestable period expires). It gets worse. When the insured died in 2014, the carrier concluded that the policy had been obtained through fraud and declined to pay the death benefit (I’m betting they welcomed the business at inception and knew exactly what it was). The carrier claimed that, under New Jersey law, buying a life insurance policy for the sole purpose of selling it to a party having no insurable interest in the life of the insured is illegal wagering, that such a policy is void from the beginning, they should get to keep all the premiums paid and not have to pay the death benefit! The buyer/owner/beneficiary argued that a life insurance policy is a contract, not a wager, and that the death benefit should be paid. The stakes here are higher than they might appear. To require payment of the death benefit is to allow what was clearly a wagering transaction. If the court supports the carrier’s wagering position, are honorable life settlements illegal wagers? This is another example of how an abusive transaction has ripple effects into the proper uses of life insurance and life settlements.

Multiple private equity firms are looking at the long-term care business.  They wouldn’t do this unless they saw a profit opportunity for their investors.  A transaction could take several forms.  The private equity firm could buy a block of long-term care policies outright and take over responsibility for servicing the acquired policies.  Or, assume payment of claims while the insurer continues to service the policies.

Several carriers, both of which have stopped selling new LTC policies, have acknowledged exploring these options.  John Hancock, which is owned by Manulife, was among the largest players in this sector, covering about 1 million individuals.  Similarly, Prudential, which has more than 200,000 policies, said they consistently evaluate these opportunities.  Maintaining this business has gotten expensive for the carriers, requiring large cash infusions to shore up long-term care reserves.   Prudential, for example, took a $1.5 billion pre-tax charge on its LTC business this year on top of $700 million it added to  reserves in 2012.  The combination of deteriorating claim experience and no new LTC business seems like it will produce opportunities for bargain sale prices that look good to private equity firms.  This is a business that many insurers would like to exit completely. 

But what about the policyholder?  It’s bad enough that your carrier no longer sells new policies.  How will you feel when your policy is owned by a private equity firm, whose goal is to maximize profit for its investors and they’re managing your claim?  Can you expect the same quality of care in claim servicing?  What about rate increases?    Private equity will still be accountable to the state  regulators, but it’s likely you should expect more frequent and severe increases. 

Private equity is not a new visitor to the insurance business.  Within the past year, VOYA sold off more than $50 billion of annuities to three firms and Hartford Financial sold $48 billion of annuities to six investors.

Net — this is a new and dramatic development that adds to the instability of the LTC market.  My outlook continues to be pessimistic — poor claim experience as longevity continues to increase, shrinking marketplace and higher prices — not pretty.  My advice to those thinking about long-term care insurance is to consider all the alternatives. 

Can a life insurance policy beneficiary designation be automatically changed by law upon divorce without anyone’s consent?  There are two recent court cases on this subject.  The first involved a husband     purchasing a policy, naming his new wife  primary beneficiary and children from a prior  marriage as contingent beneficiaries.  They later divorced, but neither the insured nor the divorce judgment addressed the policy.  The insured died and, needless to say, there was  litigation over who gets the insurance benefits.  The case reached the Supreme Court, which decided against the ex-wife, using the theory of presumed and probable intent.  The Court held that the Minnesota revocation-on-divorce statute did not violate the laws of contracts.

The second case has a similar fact pattern, except that the policy was owned by the former spouse when the insured died.  The Court decided (correctly, in my view) the state’s revocation-on-divorce statute was not applicable to policies not owned by the decedent at death.  The message is that the professionals advising the parties in a divorce need to react to a dramatic change in circumstances to avoid messes and understand intent. Otherwise, state laws will presume  intent.