Ed Slott’s IRA Advisor: “The New Ways to Advise Clients About Life Insurance”

Ed Slott’s IRA Advisor: “The New Ways to Advise Clients About Life Insurance”

Author: David Buckwald

The SECURE Act, with its 10-year limit on tax deferral by most non-spouse beneficiaries, has impacted the relationship between life insurance and IRAs.

Some clients have even considered withdrawing IRA dollars at the seemingly low tax rates today and using the proceeds to fund a life insurance policy. The payoff can be tax-free death benefits to children
or even grandchildren. This can be a creative strategy to turn potentially higher-taxed assets in the future into tax-free inheritance passed to heirs in the future.

Rising in the East

While the SECURE Act has generated upheaval in estate planning for IRAs, a similar transformation is taking place in the life insurance industry. A year ago — February 2020 —New York State’s Regulation 187 went into effect with regard to life insurance. (Annuities were covered by this regulation in 2019.)
Now, advisors must act solely in the “best interest” of their clients when it comes to life insurance
transactions. This rule applies to modifications of in-force policies as well as to new policy sales.

Moreover, New York’s best interest rule applies to life insurance policies delivered or issued for delivery in the state. Besides sales or policy modifications involving current residents of New York, it could involve former residents of New York with a life insurance trust created there, those with a New
York trustee of such a trust, those with a New York advisor, or others with a tangential connection to the
state.

In addition, New York has been a bellwether when it comes to insurance regulation. Already, several other states are in various stages of adopting similar rules. The SEC’s Regulation Best Interest, which also took effect last year, may impact certain advisors involved in helping clients with life insurance decisions.

The bottom line is that acting in a client’s best interest when advising about life insurance is a powerful
trend that is upending traditional methods of recommending certain policies.

Dark Times for Illustrations

In particular, best interest rules frown on relying solely on life insurance policy illustrations for advising on purchases. Commonly, side-by-side comparisons are used to decide between two supposedly similar policies. The policy that shows the desired death benefit or cash value with the lower premiums would most likely be chosen.

Acting in a client’s best interest when advising about life insurance is a powerful trend that is upending traditional methods of recommending certain policies.

However, some observers contend that over 80% of all permanent life insurance policies have underperformed their original illustrations, which were presented at the time of sale.

Questionable projections of future results within the policy might have led buyers to false hopes. Instead of building up a substantial cash value and having the policy stay in force for the insured individual’s lifetime, some policies now may be in danger of lapsing.

Consequently, policyholders now might be called upon to make significant premium payments to keep the policy in force, when they can least afford to do so.