Reportable Transactions and 419 Plans Litigation - Welfare benefit, Medical, Retirement plan benefit and design, Pension specialists, 412i Lawsuits, 419 lawsuits, IRS Audits, 412i Problems, Expert Witness Lance Wallach
Showing posts with label Expert Witness. Show all posts
Showing posts with label Expert Witness. Show all posts
Bad Broker or Bad Luck?
Legal.com July 2011
By Lance Wallach
You’ve lost money in the market—maybe a substantial amount. Money you thought could be used to plan your future or maybe put your kids through school is now gone. You’re hurt, you’re angry, and we understand. Can you sue your broker, fund manager, or financial advisor? It depends.
The Big Question: Were You a Victim of Fraud or the Market? The big question is whether your broker did anything illegal. You can only sue if what your broker did was beyond just “bad” in the sense of “unfortunate” or even “awful.” Instead, there must have been actual wrongdoing.
Losing money in today’s bad market does not in and of itself give you the right to sue. Sometimes it is just bad luck. After all, investing — even in blue chip investments – carries risks, and the main risk is that the value of your investment could decline. What if your broker gave you bad advice? Again, it will depend on “how bad” the advice was. If your broker recommended investments that were in line with your investor profile and those recommendations were reasonable based on everything your broker knew or should have known, then no – you cannot sue. Well, what kind of bad behavior does leave them liable, you ask? Basically, there are four kinds of bad behavior that may give you the right to sue:
1. Lying or misrepresenting claims;
2. Your broker acting in his interests, not yours, by means of, among others, misrepresentation, churning, unsuitability, and lack of diversification;
3. Not following instructions including claims of unsuitability, lack of diversification, and breach of contract; and,
4. Unreasonable carelessness, like claims of breach of duty and negligence.
Call our office today for a free 3-5 minute consultation with Lance Wallach, the nation’s foremost expert on financial advising, or visit www.financeexperts.org.
There are a number of different claims that can come out of these types of bad behavior, but fundamentally, if your broker didn’t do one or more of these things, there is no claim. To put it another way: if your broker followed your instructions, was always honest with you, and was reasonably careful, then you cannot sue him – even if his advice or your investments went horribly wrong.
So before suing or filing the paperwork for arbitration, take a deep breath and ask yourself if your broker lied, ignored instructions, or was unreasonably careless by putting his own needs and interests instead of yours. If you find yourself answering no to more than a few of these questions, then, sadly, your broker probably acted with the best intentions, and based on what he reasonably knew at the time, there is no liability.
You will notice that we did not answer the question, “What if my broker stole or embezzled money from my account?” That is because the answer is simple – sue them and report them to law enforcement. Theft is theft, whether it’s by your broker, a guy on a street corner with a gun, or that cousin you never really trusted. For example, two common criminal schemes involving investments and securities are the Ponzi scheme and the pyrimad scheme, though these tend to be complex and hidden. Sometimes theft is simpler. But the short answer is that theft is always actionable. For help with this or if you are still not sure, contact our offices today. As an expert witness, my side has never lost a case. I work with attorneys who will usually take these cases on a contingent basis, and who, more importantly, often obtain great results.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Unsettled Times Call For a Little Magic
Lance Wallach
What does the future look like for those of us in the
Employee Benefit industry? Some wonder if there will even be a group health
insurance market in a few years. Until the US Supreme Court makes their
decision(s) regarding Patient Protection and Affordable Care Act (PPACA) later
this year, that is a question which seems to hold credence with many when it
really shouldn’t.
Don’t read this as a statement of affirmation of PPACA by
any stretch of the imagination. I’m merely suggesting that whether PPACA is
overturned or upheld…. There are viable solutions on both sides of the outcome
and we should consider them.
PPACA is overturned, what then?
One might think business as usual would be the prevailing
thought. I would like to think we are better than that. The United States
is in the midst of an economically stressful time, our customers, and their
employees need our help. The days of a low enough deductible to be considered
useful by the insured does not need to be over. The days of employee
benefits consuming fully 30% Plus of our customer’s bottom line needs to go….
And go quickly.
As to the “Great” plans that are out there; How many plans
have what would be considered “great” benefits yet are cost prohibitive for
family members to participate in due to cost?
Those types of benefits can still be delivered to your
customers and their employees but not traditionally. (And why would you want to
after considering the previous statement?) The best way to accomplish our
customer’s wishes is to help fund their plan by taking back a portion of the
insurance carrier’s profits and keeping those monies within the plan itself.
One method we can use to accomplish this is the Benefit
Houdini Strategy. That strategy most simply stated is the use of a Fully
Insured High Deductible Health Plan (HDHP) and a Health Reimbursement
Arrangement (HRA) administered by a quality Third Party Administrator (TPA) and
self insuring the gap with monies saved.
With Congress’s Medical Loss Ratio (MLR) mandate of 80% on
small group. We can (and should) take full advantage. Put another way, as long
as insurance carriers are still active and the 80% MLR mandate is in place; It
is difficult to justify the risk of self insuring with the use of traditional
stop loss coverage that is more expensive and has the ability to laser
individual employees or their family members due to health conditions and
probable claims costs.
The numbers with this strategy are striking and pose a
strong argument for it’s use in most cases when the individual deductible is
less than $3500.
PPACA is upheld, what then?
As long as there are things like: employees, and industry,
there will always be a call for a method to incent and entice good employees
for recruitment and behavior. In this scenario we are to assume PPACA is upheld
in its entirety. Exchanges will be replacing group carriers in their current
form shortly….. Or will they? It is pretty likely some will go away, but the
American Spirit has never been one of rolling over and “Taking it” and there is
a fight to be waged that will transform the landscape of employee benefits and
health care in general in such a manner we can no more predict the next five
years anymore than the average newlywed couple can appreciate the
transformation their lives are about to go thru.
Wasn’t the quote “A little revolution every now and again
is a good thing” attributed to one of our founding fathers Thomas Jefferson?
Competition and the will to survive is going to drive
carriers to hold providers accountable like never before. They (the carriers)
will do this by the way far better than any bunch of bureaucrats could ever
dream, and possibly…. Just possibly with the help of some rules from the top.
True reform like true competition and pricing transparency might actually
happen. Imagine shopping your hip replacement surgery with knowledge of actual
costs and outcome statistics. That doesn’t’ sound like doomsday really. A shame
it will probably take something that big to make this happen…. But this is a
likely outcome if PPACA is upheld.
Unsettled times do indeed call for a little magic.
What does the future look like for those of us in the
Employee Benefit industry? Until the US Supreme Court makes their decision(s)
we won’t know for sure, but regardless of that outcome I believe optimism
should prevail.
Lance Wallach, National Society of
Accountants Speaker of the Year and member of the American Institute of CPAs
faculty of teaching professionals, is a frequent speaker on retirement plans,
financial and estate planning, and abusive tax shelters. He speaks at more than ten conventions
annually and writes for over fifty publications. Lance has written numerous
books including Protecting Clients from Fraud, Incompetence and Scams
published by John Wiley and Sons, Bisk Education's CPA's Guide to Life
Insurance and Federal Estate and Gift Taxation, as well as AICPA
best-selling books, including Avoiding Circular 230 Malpractice Traps and
Common Abusive Small Business Hot Spots. He does expert witness testimony
and has never lost a case. Mr. Wallach may be reached at 516/938.5007,
wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.com.
The information provided herein is not intended as legal,
accounting, financial or any type of advice for any specific individual or
other entity. You should contact an appropriate professional for any such
advice.
Reduce Costs, Plan Your Estate, and More with a Captive
National Society of Accountants
Member Link
July 2008
By LANCE WALLACH, CLU , ChFC
Your clients who are business owners are likely to be approached with information concerning a relatively new financial instrument called captive insurance. The term captive insurance is generic and refers to a broad spectrum of alternative insurance structures with the purpose of providing greater benefits than traditional insurance.
Specifically, captive insurance can help your business clients potentially greatly lower their insurance costs, have more control in managing their insurance, and obtain coverage that might otherwise be unavailable or unaffordable. Some forms of captive insurance allow an insured or its assign to maintain an ownership interest in the underlying insurance company. As with any successful business, an owner of a captive can work with his or her advisors to best manage their insurance company. Another potential benefit is that of business and estate planning.
This author stresses that a captive should never be formed unless the primary reason is business purpose. Captives should never be marketed by advisors as “wealth management” or “estate planning” tools. In fact, improper marketing of an otherwise compliant captive can lead to the loss of the captive’s tax status as an insurance company, resulting in taxation and penalties of nearly one hundred percent of premiums.
Yet it is a fact that a successful captive may be useful in business and estate planning. Ownership of a captive may be facilitated by a partnership or trust which is owned, controlled, or benefits a business owners’ descendants.
As an example, suppose that a business owner (Senior) wants to establish a captive insurance company in order to lower his insurance costs. The insurance company could be owned by a generation skipping trust currently controlled by Senior’s children. The captive’s premiums must be actuarially verifiable and the coverage must be wholly justifiable. The insurance sold by the captive needs to comport with all relevant statutes from both a regulatory and an IRS standpoint. If the captive’s claims are less than actuarially anticipated, it may have retained earnings or profits. Depending on the type of captive insurance company, the tax rate levied on underwriting profits can be as little as zero percent. Over time, the insurance company’s profits may be distributed as capital gains, dividends, or even loans to the beneficiaries of the insurance trust. The captive could even provide a funding source for future business opportunities.
The ultimate effect of a compliant and successful captive could be to transfer a portion of the pre-tax premiums from Senior’s business over to Senior's children, grandchildren, etc., without income, gift, or estate tax. The bottom line for any accountant or wealth advisor is that captives should be looked at as a way to garner significant insurance cost savings with a possibility of secondary benefits.
Again, the author cannot overemphasize the importance that the captive must be designed to and operate as a compliant insurance company. The company must have real losses, real exposure to third party risk, and cannot be in any way an alter ego of or a savings account for the business owner.
Captives can be a tremendous tool in helping businesses lower their insurance costs. This author has seen an example of businesses saving millions of dollars in a few short years by properly using captives. Equally stunning , however, are the adverse tax consequences of an improperly marketed or managed captive. The advisory team chosen for this type of work should have many years of captive insurance experience and, ideally, should be supported by a large regional or national law firm.
Lance Wallach speaks and writes about benefit plans,estate planning, insurance and more. He has authored numerous books, including The CPA's Guide to Life Insurance, published by Bisk CPEasy.He was the National Society of Accountants Speaker of the Year. He can be reached at 516 9385007 or lawallach@aol.com. For more articles visit WWW.VEBAPLAN.COM.
The information contained in this article is not intended as legal, accounting, financial, or any other type of advice for any specific individual or entity. You should seek such advice from an appropriate professional.
Member Link
July 2008
By LANCE WALLACH, CLU , ChFC
Your clients who are business owners are likely to be approached with information concerning a relatively new financial instrument called captive insurance. The term captive insurance is generic and refers to a broad spectrum of alternative insurance structures with the purpose of providing greater benefits than traditional insurance.
Specifically, captive insurance can help your business clients potentially greatly lower their insurance costs, have more control in managing their insurance, and obtain coverage that might otherwise be unavailable or unaffordable. Some forms of captive insurance allow an insured or its assign to maintain an ownership interest in the underlying insurance company. As with any successful business, an owner of a captive can work with his or her advisors to best manage their insurance company. Another potential benefit is that of business and estate planning.
This author stresses that a captive should never be formed unless the primary reason is business purpose. Captives should never be marketed by advisors as “wealth management” or “estate planning” tools. In fact, improper marketing of an otherwise compliant captive can lead to the loss of the captive’s tax status as an insurance company, resulting in taxation and penalties of nearly one hundred percent of premiums.
Yet it is a fact that a successful captive may be useful in business and estate planning. Ownership of a captive may be facilitated by a partnership or trust which is owned, controlled, or benefits a business owners’ descendants.
As an example, suppose that a business owner (Senior) wants to establish a captive insurance company in order to lower his insurance costs. The insurance company could be owned by a generation skipping trust currently controlled by Senior’s children. The captive’s premiums must be actuarially verifiable and the coverage must be wholly justifiable. The insurance sold by the captive needs to comport with all relevant statutes from both a regulatory and an IRS standpoint. If the captive’s claims are less than actuarially anticipated, it may have retained earnings or profits. Depending on the type of captive insurance company, the tax rate levied on underwriting profits can be as little as zero percent. Over time, the insurance company’s profits may be distributed as capital gains, dividends, or even loans to the beneficiaries of the insurance trust. The captive could even provide a funding source for future business opportunities.
The ultimate effect of a compliant and successful captive could be to transfer a portion of the pre-tax premiums from Senior’s business over to Senior's children, grandchildren, etc., without income, gift, or estate tax. The bottom line for any accountant or wealth advisor is that captives should be looked at as a way to garner significant insurance cost savings with a possibility of secondary benefits.
Again, the author cannot overemphasize the importance that the captive must be designed to and operate as a compliant insurance company. The company must have real losses, real exposure to third party risk, and cannot be in any way an alter ego of or a savings account for the business owner.
Captives can be a tremendous tool in helping businesses lower their insurance costs. This author has seen an example of businesses saving millions of dollars in a few short years by properly using captives. Equally stunning , however, are the adverse tax consequences of an improperly marketed or managed captive. The advisory team chosen for this type of work should have many years of captive insurance experience and, ideally, should be supported by a large regional or national law firm.
Lance Wallach speaks and writes about benefit plans,estate planning, insurance and more. He has authored numerous books, including The CPA's Guide to Life Insurance, published by Bisk CPEasy.He was the National Society of Accountants Speaker of the Year. He can be reached at 516 9385007 or lawallach@aol.com. For more articles visit WWW.VEBAPLAN.COM.
The information contained in this article is not intended as legal, accounting, financial, or any other type of advice for any specific individual or entity. You should seek such advice from an appropriate professional.
Life settlement underwriting - the flip side of the coin
Calfornia Broker Magazine
August 2008
By LANCE WALLACH, CLU, ChFC
Life settlements are fast growing into a staple of the insurance and financial planning world. Most financial professionals have heard of life settlements, which is the sale of a life insurance policy of a senior (age 65 and over) for a lump sum which is greater than the policy’s cash surrender value but less than its death benefit. Policies which are viable for a life settlement are generally those beyond the contestability period wherein the insured has a life expectancy of between 2 and 15 years. Today life settlements are dominated by institutional funders and pension funds.
Despite the continued growth in the life settlements market, the number of insurance or financial professionals that have actually completed a life settlement is surprisingly low. This can be attributed mainly to a lack of in-depth knowledge of life settlements on the part of these professionals. Considering that life settlements are a relatively new option for policy owners, many financial professionals, although having heard of life settlements, have still not had the opportunity to delve into the subject on a deeper level.
Many policy holders come to a juncture wherein they continue to pay life insurance premiums on an unwanted policy in hopes of a gain at maturation, or to recoup some of the investment by trading the policy for its cash surrender value. Corporate policyholders often face additional dilemmas when dealing with departing executives with key-man or split-dollar policies, or insurance purchased as part of a buy-sell agreement.
With a life settlement, the policyholder realizes an amount much greater than the cash surrender value in exchange for the policy’s ownership. Term life insurance policies are also applicable when converted into permanent insurance. Life settlement transactions involving key-man or buy-sell policies can provide businesses with increased cash flow to solve immediate financial problems, while transactions concerning split-dollar policies typically involve retirement planning and charitable giving issues.
In short, life settlements offer policyholders of all kinds an array of options previously unavailable to them.
In a recent advisor survey, nearly half of the respondents had clients who had surrendered a life insurance policy, many of whom might have qualified for a life settlement transaction and subsequent lump sum cash payment.
This article will discuss in depth the underwriting process related to life settlements, which is of paramount importance in the process, just as it is in life insurance itself , although there is a great deal of difference in the process for each respectively.
Settlement amounts are determined by a multitude of factors that arrive at a Net Present Value, which is the present value of future benefits from the death benefit minus the present value of future payments associated with sustaining the policy until maturation. These expenses include premium payments, cost of capital and administrative costs. This calculation enables the purchaser to factor in the desired profit from the investment and propose an offer to the seller of the policy. Due to the fact that the investor will be sustaining the policy premiums until maturation, the life expectancy of the insured becomes critical in assessing the value or sale price of the policy. If the assessment of an insured’s life expectancy is too short, the purchaser will have paid too much and risks a financial loss. By contrast, should the assessment of an insured’s life expectancy be longer than his or her actual life span, the offer to the seller would have been less than it could have been, thus resulting in an undervalued sale for the policy owner. Institutional investors in life settlements generally obtain life expectancy reports from two or more independent LE (life expectancy) providers. Many of the larger institutions investing in life settlements have proprietary underwriting personnel on staff. LE reports can vary significantly based on interpretations, medical data on the insured, and/or the actuarial tables used.
Differences in underwriting methodology
Companies which provide LE reports use actuarial and medical experts who apply probability theory, actuarial methodology and medical analysis in calculating the probable mortality of an insured. Many LE providers employ the services of experienced life insurance underwriters who work in tandem with the actuarial and medical experts. There are a number of companies which provide LE reports. Among those most commonly accepted by institutional investors are: AVS, Fasano, 21st Services, ISC Services and EMSI. These companies specialize in underwriting the senior segment (insureds above the age of 65) and have developed specified methods, underwriting manuals, and mortality tables. The insurance industry customarily employs Reinsurance underwriting manuals as the basis of its ratings for insurability. However, Reinsurance manuals are gauged primarily for insurance applicants up to the age of 65 with insurable impairments up to 500%. These standards reflect the traditional demographic for life insurance. Conversely, life settlement underwriting is geared toward those above the age of 65 and can have impairment ratings much higher than 500%.
In order to cater to this market segment, adaptations were made to these underwriting manuals based on extensive research of current senior mortality data and scrutinized against recent medical advances and the treatment of diseases or disorders often associated with the elderly. In addition to this, companies that provide LE reports also draw from, and factor in, proprietary data accumulated from previous assessments. Generally, a traditional debit and credit methodology is used by the underwriter in determining the overall rating of an insured, resulting in either standard or substandard. Of course, this is an approximation due to the fact that few impairments cause a uniform percentage increase in mortality. Results using the standard debit and credit method produce reasonable and quantifiable results; however, for conditions such as many forms of cancer, the debit and credit methodology does not generate reliable results. This is mainly due to the fact that the impaired mortality curve is significantly different than the standard curve used in the absence of these impairments. Companies that provide LE reports employ different approaches in order to calculate these impairments. Some utilize the debit and credit approach, others apply extra deaths for a limited time span, and still others will use a combination of the two and apply them to the actuarial calculations. For a policy with a high impairment and a short life expectancy, clinical judgment may supersede the actuarial calculation. Life expectancy calculations utilize the underwriting assessment in tandem with the appropriate mortality table; however each life expectancy provider uses its own proprietary mortality tables based on sex, smoker or non-smoker status, impairment and preferred class. The general understanding is that most life expectancy providers use the 2001 VBT (Valuation Basic Table), but it seems that most use a heavily modified version of the 2001 VBT or their own table altogether.
Individuals with medical conditions such as Alzheimer’s disease, congestive heart failure and other serious ailments would most likely be declined for a life insurance policy. However, for the purposes of a life settlement, it is possible to estimate the life expectancy of an insured with these medical ailments. For insureds with serious medical conditions, life expectancy assessments often take into account factors that contribute to healthy aging, such as regular physical exercise, social activities, the mental attitude of the insured, and his or her commitment to living a healthy lifestyle. Access to care givers and a support network, are also variables that are taken into consideration. All of these factors can sometimes add a level of complexity to the underwriting process that will affect the final mortality calculation.
Differences in underwriting requirements
When submitting an application for a large life insurance policy on an older individual the application needs to be accompanied by medical data as outlined in the insurance company’s requirement guidelines. This medical data would usually include a physical examination, blood profile, EKG and an Attending Physician’s Statement (APS). Many insurance companies also require functional assessments of an applicant, which include ability to carry out the activities of daily living. Often, financial underwriting is a part of this assessment of insurability. By contrast, life settlement underwriting is based on existing medical data and rarely requires any medical examination, EKGs or blood work. A life settlement application should be accompanied by HIPAA and release of medical information forms. The application is then followed by Attending Physician’s Statements ordered from selected physicians by the company transacting the life settlement, usually a broker or provider. This information is then forwarded to the company or companies providing life expectancy reports on the insured. After review of the attending physician’s statements and medical history, a life expectancy provider will provide a detailed LE report on the insured. Based on the information in the LE report and the profile of the life insurance policy, an institutional investor will prepare an offer on the policy. Occasionally, the company or companies providing the life expectancy report will indicate that additional information from an attending physician may give them further insight into the insured’s life expectancy, which would possibly affect the offers from institutional investors. In such a case, the life settlement broker or provider will order additional information from the appropriate physician(s). In cases where the insured has not seen a physician in two or three years, which would seemingly be a good thing, indicating that the individual is not suffering from any chronic ailments, the company providing a life expectancy report is afforded little current data on which it can effectively base a life expectancy assessment.
The principal difference in underwriting for life insurance and life settlements is that in traditional underwriting as low a mortality rating as possible on any medically impaired risk would be preferred in order to obtain a lower cost of insurance. By contrast, for life settlements a higher impairment rating would result in a shorter life expectancy. Thus, the insured would receive a larger settlement for his or her policy.
Seller beware
With life settlements growing at an astounding rate, there are more and more companies seeking to enter this market. Many states have some form of regulation regarding life settlements, while others are unregulated or pending regulation. Some life settlements, such as those on a variable policy, are considered securities transactions. With all of these different regulatory variables, it is important for insurance and financial professionals to make sure they work with a reputable company to facilitate a life settlement. When considering which life settlement company to work with, most of us look for the obvious: to wit, a company that will facilitate and expedite the policy with professionalism as well as acquire competitive bids from a number of institutional investors. However, perhaps of even greater importance to the professional, is a company that has an infrastructure that enables the record keeping necessary to fulfill regulatory standards, as well as a compliance department that will keep abreast with changing regulatory requirements and reporting. Most importantly, the company should hold the applicable licenses in the states were it conducts life settlement transactions.
Not surprisingly, these various attributes and characteristics tend to coincide with each other. A reputable company will hold all of the applicable licenses needed, or will refrain from activities in states in which it is not licensed. If they have the proper reporting and record keeping capabilities, this is usually overseen by a compliance department that is also responsible for licensing and regulation. Organizations such as these generally have built an infrastructure that has the manpower to process settlements with fastidious precision. Processing large numbers of settlements according to a high standard will give a company a preferred status and leverage with institutional investors, which might even result in higher offers on a given policy.
Be sure to ask the life settlement company if it is licensed and in what states. If they do settlements for variables, ask if these are cleared through a broker dealer and what their relationship to that broker- dealer is. Use the Internet and other tools to research the company you plan on using for a life settlement. The issues may seem trivial today, but fast-forward three years after a life settlement with an unlicensed company that has fallen off the face of the planet and guess who’s left holding the bag.
Lance Wallach, speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for more than 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516-938-5007 or visit http://www.vebaplan.com/
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
August 2008
By LANCE WALLACH, CLU, ChFC
Life settlements are fast growing into a staple of the insurance and financial planning world. Most financial professionals have heard of life settlements, which is the sale of a life insurance policy of a senior (age 65 and over) for a lump sum which is greater than the policy’s cash surrender value but less than its death benefit. Policies which are viable for a life settlement are generally those beyond the contestability period wherein the insured has a life expectancy of between 2 and 15 years. Today life settlements are dominated by institutional funders and pension funds.
Despite the continued growth in the life settlements market, the number of insurance or financial professionals that have actually completed a life settlement is surprisingly low. This can be attributed mainly to a lack of in-depth knowledge of life settlements on the part of these professionals. Considering that life settlements are a relatively new option for policy owners, many financial professionals, although having heard of life settlements, have still not had the opportunity to delve into the subject on a deeper level.
Many policy holders come to a juncture wherein they continue to pay life insurance premiums on an unwanted policy in hopes of a gain at maturation, or to recoup some of the investment by trading the policy for its cash surrender value. Corporate policyholders often face additional dilemmas when dealing with departing executives with key-man or split-dollar policies, or insurance purchased as part of a buy-sell agreement.
With a life settlement, the policyholder realizes an amount much greater than the cash surrender value in exchange for the policy’s ownership. Term life insurance policies are also applicable when converted into permanent insurance. Life settlement transactions involving key-man or buy-sell policies can provide businesses with increased cash flow to solve immediate financial problems, while transactions concerning split-dollar policies typically involve retirement planning and charitable giving issues.
In short, life settlements offer policyholders of all kinds an array of options previously unavailable to them.
In a recent advisor survey, nearly half of the respondents had clients who had surrendered a life insurance policy, many of whom might have qualified for a life settlement transaction and subsequent lump sum cash payment.
This article will discuss in depth the underwriting process related to life settlements, which is of paramount importance in the process, just as it is in life insurance itself , although there is a great deal of difference in the process for each respectively.
Settlement amounts are determined by a multitude of factors that arrive at a Net Present Value, which is the present value of future benefits from the death benefit minus the present value of future payments associated with sustaining the policy until maturation. These expenses include premium payments, cost of capital and administrative costs. This calculation enables the purchaser to factor in the desired profit from the investment and propose an offer to the seller of the policy. Due to the fact that the investor will be sustaining the policy premiums until maturation, the life expectancy of the insured becomes critical in assessing the value or sale price of the policy. If the assessment of an insured’s life expectancy is too short, the purchaser will have paid too much and risks a financial loss. By contrast, should the assessment of an insured’s life expectancy be longer than his or her actual life span, the offer to the seller would have been less than it could have been, thus resulting in an undervalued sale for the policy owner. Institutional investors in life settlements generally obtain life expectancy reports from two or more independent LE (life expectancy) providers. Many of the larger institutions investing in life settlements have proprietary underwriting personnel on staff. LE reports can vary significantly based on interpretations, medical data on the insured, and/or the actuarial tables used.
Differences in underwriting methodology
Companies which provide LE reports use actuarial and medical experts who apply probability theory, actuarial methodology and medical analysis in calculating the probable mortality of an insured. Many LE providers employ the services of experienced life insurance underwriters who work in tandem with the actuarial and medical experts. There are a number of companies which provide LE reports. Among those most commonly accepted by institutional investors are: AVS, Fasano, 21st Services, ISC Services and EMSI. These companies specialize in underwriting the senior segment (insureds above the age of 65) and have developed specified methods, underwriting manuals, and mortality tables. The insurance industry customarily employs Reinsurance underwriting manuals as the basis of its ratings for insurability. However, Reinsurance manuals are gauged primarily for insurance applicants up to the age of 65 with insurable impairments up to 500%. These standards reflect the traditional demographic for life insurance. Conversely, life settlement underwriting is geared toward those above the age of 65 and can have impairment ratings much higher than 500%.
In order to cater to this market segment, adaptations were made to these underwriting manuals based on extensive research of current senior mortality data and scrutinized against recent medical advances and the treatment of diseases or disorders often associated with the elderly. In addition to this, companies that provide LE reports also draw from, and factor in, proprietary data accumulated from previous assessments. Generally, a traditional debit and credit methodology is used by the underwriter in determining the overall rating of an insured, resulting in either standard or substandard. Of course, this is an approximation due to the fact that few impairments cause a uniform percentage increase in mortality. Results using the standard debit and credit method produce reasonable and quantifiable results; however, for conditions such as many forms of cancer, the debit and credit methodology does not generate reliable results. This is mainly due to the fact that the impaired mortality curve is significantly different than the standard curve used in the absence of these impairments. Companies that provide LE reports employ different approaches in order to calculate these impairments. Some utilize the debit and credit approach, others apply extra deaths for a limited time span, and still others will use a combination of the two and apply them to the actuarial calculations. For a policy with a high impairment and a short life expectancy, clinical judgment may supersede the actuarial calculation. Life expectancy calculations utilize the underwriting assessment in tandem with the appropriate mortality table; however each life expectancy provider uses its own proprietary mortality tables based on sex, smoker or non-smoker status, impairment and preferred class. The general understanding is that most life expectancy providers use the 2001 VBT (Valuation Basic Table), but it seems that most use a heavily modified version of the 2001 VBT or their own table altogether.
Individuals with medical conditions such as Alzheimer’s disease, congestive heart failure and other serious ailments would most likely be declined for a life insurance policy. However, for the purposes of a life settlement, it is possible to estimate the life expectancy of an insured with these medical ailments. For insureds with serious medical conditions, life expectancy assessments often take into account factors that contribute to healthy aging, such as regular physical exercise, social activities, the mental attitude of the insured, and his or her commitment to living a healthy lifestyle. Access to care givers and a support network, are also variables that are taken into consideration. All of these factors can sometimes add a level of complexity to the underwriting process that will affect the final mortality calculation.
Differences in underwriting requirements
When submitting an application for a large life insurance policy on an older individual the application needs to be accompanied by medical data as outlined in the insurance company’s requirement guidelines. This medical data would usually include a physical examination, blood profile, EKG and an Attending Physician’s Statement (APS). Many insurance companies also require functional assessments of an applicant, which include ability to carry out the activities of daily living. Often, financial underwriting is a part of this assessment of insurability. By contrast, life settlement underwriting is based on existing medical data and rarely requires any medical examination, EKGs or blood work. A life settlement application should be accompanied by HIPAA and release of medical information forms. The application is then followed by Attending Physician’s Statements ordered from selected physicians by the company transacting the life settlement, usually a broker or provider. This information is then forwarded to the company or companies providing life expectancy reports on the insured. After review of the attending physician’s statements and medical history, a life expectancy provider will provide a detailed LE report on the insured. Based on the information in the LE report and the profile of the life insurance policy, an institutional investor will prepare an offer on the policy. Occasionally, the company or companies providing the life expectancy report will indicate that additional information from an attending physician may give them further insight into the insured’s life expectancy, which would possibly affect the offers from institutional investors. In such a case, the life settlement broker or provider will order additional information from the appropriate physician(s). In cases where the insured has not seen a physician in two or three years, which would seemingly be a good thing, indicating that the individual is not suffering from any chronic ailments, the company providing a life expectancy report is afforded little current data on which it can effectively base a life expectancy assessment.
The principal difference in underwriting for life insurance and life settlements is that in traditional underwriting as low a mortality rating as possible on any medically impaired risk would be preferred in order to obtain a lower cost of insurance. By contrast, for life settlements a higher impairment rating would result in a shorter life expectancy. Thus, the insured would receive a larger settlement for his or her policy.
Seller beware
With life settlements growing at an astounding rate, there are more and more companies seeking to enter this market. Many states have some form of regulation regarding life settlements, while others are unregulated or pending regulation. Some life settlements, such as those on a variable policy, are considered securities transactions. With all of these different regulatory variables, it is important for insurance and financial professionals to make sure they work with a reputable company to facilitate a life settlement. When considering which life settlement company to work with, most of us look for the obvious: to wit, a company that will facilitate and expedite the policy with professionalism as well as acquire competitive bids from a number of institutional investors. However, perhaps of even greater importance to the professional, is a company that has an infrastructure that enables the record keeping necessary to fulfill regulatory standards, as well as a compliance department that will keep abreast with changing regulatory requirements and reporting. Most importantly, the company should hold the applicable licenses in the states were it conducts life settlement transactions.
Not surprisingly, these various attributes and characteristics tend to coincide with each other. A reputable company will hold all of the applicable licenses needed, or will refrain from activities in states in which it is not licensed. If they have the proper reporting and record keeping capabilities, this is usually overseen by a compliance department that is also responsible for licensing and regulation. Organizations such as these generally have built an infrastructure that has the manpower to process settlements with fastidious precision. Processing large numbers of settlements according to a high standard will give a company a preferred status and leverage with institutional investors, which might even result in higher offers on a given policy.
Be sure to ask the life settlement company if it is licensed and in what states. If they do settlements for variables, ask if these are cleared through a broker dealer and what their relationship to that broker- dealer is. Use the Internet and other tools to research the company you plan on using for a life settlement. The issues may seem trivial today, but fast-forward three years after a life settlement with an unlicensed company that has fallen off the face of the planet and guess who’s left holding the bag.
Lance Wallach, speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for more than 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516-938-5007 or visit http://www.vebaplan.com/
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Protecting Clients from Fraud, Incompetence and Scams
Lance Wallach
Nov 12
Parts of this article are from the book published by John Wiley and Sons, Protecting Clients from Fraud, Incompetence and Scams, authored by Lance Wallach.
Every financial expert out there knows that bad faith and bad planning can take down even the biggest firms, wiping out millions of dollars of value in an instant. Whether it's internal fraud, a scammer, or an incompetent planner that takes your client's cash, the bottom line is: The money is gone and the loss should have been prevented.
Filled with authoritative advice from financial expert Lance Wallach, Protecting Clients from Fraud, Incompetence, and Scams equips you as an accountant, attorney, or financial planner with the weaponry you need to detect bad investments before they happen and protect your clients' wealth - as well as your own.
Sharp and savvy in its frank, often humorous, and authoritative examination of financial fraud and mismanagement, you'll learn about the dysfunctional sectors in the financial industry and:
- Protecting your retirement assets
- Asset protection basics
- Shifting the risk equation: insurance maneuvers
- Reevaluating existing insurance
- What financial advisors and insurance agents "forget" to tell their clients
- The truth about variable annuities
- What you must know about life settlements
- The smart way to approach college funding
A pragmatic blueprint for identifying trouble spots you can expect and immediately useful solutions, Protecting Clients from Fraud, Incompetence, and Scams equips you with the resources, strategies, and tools you need to effectively protect your clients from frauds and financial scammers.
Herewith is an excerpt from Lance Wallach's book, Protecting Clients from Fraud, Incompetence and Scams:
The IRS has been cracking down on what it considers to be abusive tax shelters. Many of them are being marketed to small business owners by insurance professionals, financial planners, and even accountants and attorneys. I speak at numerous conventions, for both business owners and accountants. And after I speak, many people who have questions about tax reduction plans that they have heard about always approach me.
I have been an expert witness in many of these 419 and 412(i) lawsuits and I have not lost one of them. If you sold one or more of these plans, get someone who really knows what they are doing to help you immediately. Many advisors will take your money and claim to be able to help you. Make sure they have experience helping agents that have sold these types of plans. Make sure they have experience helping accountants who signed the tax returns. IRS calls them material advisors and fines them $200,000 if they are incorporated or $100,000 if not. Do not let them learn on the job, with your career and money at stake.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visit www.taxadvisorexpert.com or www.taxaudit419.com.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.Using Captive Insurance Companies for Savings
Financial Planning
By Lance Wallach
Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.
Often, they are starting what is called a “captive insurance company” – an insurer founded to write coverage for the company, companies or founders.
Here’s how captive insurers work.
The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays reinsures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.
In the event of a loss, the business pays claims from its captive, or the reinsurer pays the captive.
Captives are overseen by corporate boards and, to keep costs low, are often based in places where there is favorable tax treatment and less onerous regulation – such as Bermuda and the Cayman Islands, or U.S states like Vermont and South Carolina.
Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the additional possibility of adding several types of employee benefits is of further strategic value to the owners of captives.
While the employee benefit aspects have not emerged as quickly as had been predicted, there is little doubt that widespread use of captives for employee benefits is just a matter of time. While coverages like long term disability and term life insurance typically require Department of Labor approval, other benefit-related coverages such as medical stop loss can utilize a captive without the department’s approval. Additionally, some midsized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.
A captive insurance company would be an insurance subsidiary that is owned by its parent business (es). There are now nearly 5,000 captive insurers worldwide. Over 80 percent of Fortune 500 Companies take advantage of some sort of captive insurance company arrangement. Now small companies can also.
By sharing a large captive, participants are insured under group policies, which provide for insurance coverage that recognizes superior claims experience in the form of experience-rated refunds of premiums, and other profit-sharing options made available to the insured.
A true captive insurance arrangement is where a parent company or some companies in the same economic family (related parties), pay a subsidiary or another member of the family, established as a licensed type of insurance company, premiums that cover the parent company.
In theory, underwriting profits from the subsidiary are retained by the parent. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the U.S. and in certain parts of the world have adopted a series of laws and regulations that allow small non-life companies, taxed under IRC Section 831(b), or as 831(b) companies.
Try Sharing
There are a number of significant advantages that may be obtained through sharing a large captive with other companies. The most important is that you can significantly decrease the cost of insurance through this arrangement.
The second advantage is that sharing a captive does not require any capital commitment and has very low policy fees. The policy application process is similar to that of any commercial insurance company, is relatively straightforward, and aside from an independent actuarial and underwriting review, bears no additional charges.
By sharing a captive, you only pay a pro rata fee to cover all general and administrative expenses. The cost for administration is very low per insured (historically under 60 basis points annually). By sharing a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires little or no maintenance by the insured and can be implemented in a fraction of the time required for stand alone captives.
If done correctly, sharing a large captive can yield a small company significant tax and cost savings.
If done incorrectly, the results can be disastrous.
Buyer Beware
Stand alone captives are also likely to draw IRS attention. Another advantage of sharing a captive is that IRS problems are less likely if that path is followed, and they can be entirely eliminated as even a possibility by following the technique of renting a captive, which would involve no ownership interest in the captive on the part of the insured. (your company).
Lance Wallach speaks and writes extensively about retirement plans, estate planning and tax reduction strategies. Reach him at (516) 938-5007 or www.vebaplan.com.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Get a Large Deduction With a 412(e)(3) Retirement Plan
California Broker Magazine
June 2008
by Lance Wallach
Successful business owners need big deductions and benefits, which can only be accomplished through a defined benefit plan. Any business can use a 412(e)(3) plan to provide benefits and reduce taxes substantially. The 412(e)(3) plan allows the owner to get the largest legal deduction. At 45, an owner could deduct more than $200,000 per year for himself and more than $300,000 per year at age 55.
Most accountants have never heard of these types of plans, which were defined by the Pension Protection Act of 2006 and are regulated by the IRS and the Dept. of Labor.
The best fit is with companies that have highly taxed owners, but few employees, such as doctors, commercial real estate salespeople, consultants, and other small business owners. A larger business would be better off with a cash balance plan, which also allows owners and key employees to make large contributions. A 412(e)(3) is easy to administer and simple to explain. Other benefits can include asset protection and the ability to deduct life insurance.
Care must be taken with respect to who administers the plan. There have been abuses with the operation of some of these plans and the IRS has disallowed deductions for some abuses. It is important to know whom you are dealing with and that the administrator has the experience and integrity to run the plan correctly. Just because an insurance company may be involved does not make the operation of the plan legitimate.
There are many benefits of using a 412(e)(3) plan. In addition to the large tax deduction, the plan can even be combined with a 401k. This may be the ideal tax deduction for the profitable small business owner or professional.
Lance Wallach, speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for more than 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516-938-5007 or visit http://www.vebaplan.com/
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
June 2008
by Lance Wallach
Successful business owners need big deductions and benefits, which can only be accomplished through a defined benefit plan. Any business can use a 412(e)(3) plan to provide benefits and reduce taxes substantially. The 412(e)(3) plan allows the owner to get the largest legal deduction. At 45, an owner could deduct more than $200,000 per year for himself and more than $300,000 per year at age 55.
Most accountants have never heard of these types of plans, which were defined by the Pension Protection Act of 2006 and are regulated by the IRS and the Dept. of Labor.
The best fit is with companies that have highly taxed owners, but few employees, such as doctors, commercial real estate salespeople, consultants, and other small business owners. A larger business would be better off with a cash balance plan, which also allows owners and key employees to make large contributions. A 412(e)(3) is easy to administer and simple to explain. Other benefits can include asset protection and the ability to deduct life insurance.
Care must be taken with respect to who administers the plan. There have been abuses with the operation of some of these plans and the IRS has disallowed deductions for some abuses. It is important to know whom you are dealing with and that the administrator has the experience and integrity to run the plan correctly. Just because an insurance company may be involved does not make the operation of the plan legitimate.
There are many benefits of using a 412(e)(3) plan. In addition to the large tax deduction, the plan can even be combined with a 401k. This may be the ideal tax deduction for the profitable small business owner or professional.
Lance Wallach, speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for more than 50 publications, and was the National Society of Accountants Speaker of the Year. Contact him at 516-938-5007 or visit http://www.vebaplan.com/
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Class Action Challenges Propriety of 412(e)(3) Annuities for ERISA Defined Benefit Plans
Insurance Class Action Defense and ERISA Litigation
On August 1, 2012, a putative class action lawsuit was filed in the District of Connecticut challenging the propriety of certain insurance contracts used to fund defined benefit plans described in section 412(e)(3) of the Internal Revenue Code. U.S. Telemanagement, Inc. v. Fidelity Security Life Insurance Co. et al., No. 3:12-cv-1110 JBA (D. Conn.). Because we perceive that the complaint is attacking the appropriateness of the product, as well as the specifics of the product that the named defendant sold, it is a lawsuit that potentially could have industry-wide implications. In addition, as plaintiffs in some of the ERISA revenue-sharing lawsuits have attempted to do, the complaint alleges that the insurance company that sold the annuities acted as an ERISA fiduciary of the plans. This lawsuit thus extends the attack on insurance companies, as seen in the revenue-sharing class actions, that attempts to convert service providers into fiduciaries.
412(e)(3) Plans and Annuities
A 412(e)(3) plan is a tax-qualified, defined benefit pension plan that is funded with either annuities or a combination of annuities and life insurance. These sorts of plans are most often funded through annuities, and those annuities have come to be known as 412(e)(3) annuities, because of the section of the Internal Revenue Code that authorizes this sort of plan. Such 412(e)(3) plans are normally marketed to small businesses as vehicles that can provide large income tax deductions in connection with the establishment or continued funding of a pension plan. The annuities used to fund such a plan often are priced upon low assumed rates of return and other actuarial factors, which means that the employer is required to contribute a larger amount of money up front to fund the plan, and that in turn provides employers with larger tax deductions for their business.
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