‘Multi-Million Dollar Free Life Insurance’ Has Underwriters Ongoing For Exits – Forbes Advisor

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Gary Marenzi is a very accomplished man. He advises television production companies and is a multimillionaire. But in a Los Angeles courtroom trial he filed in July 2021, he says he and his family were taken on a ride by two life insurance agents and the companies they represent when he signed up for $ 40 million in life insurance ” free ”.

Marenzi agreed to an insurance plan known as “premium-funded indexed universal life insurance”. It’s as complicated as the name suggests. It is designed for millionaires like him who want to help their heirs avoid paying taxes after his death. Since a death benefit from a life insurance policy is paid to beneficiaries tax-free, the estate can be passed on through a life insurance payment.

Unlike other life insurance policies, the cash value of an indexed universal life (UI) policy is tied to one or more indexes, often such as Standard & Poor’s 500, Nasdaq-100, or Russell 2000. When the index associated with your LII increases, you should see cash value gains within your life insurance policy.

As the stock market continues to soar, IUL policies have become one of the most profitable products in the life insurance industry. This is in particular due to the ongoing Covid pandemic, which has increased the need for insurance for nearly a third of consumers, according to Elaine Tumicki, corporate vice president at LIMRA, who conducts financial research on the sector. life insurance. Tumicki says indexed universal life insurance sales rose 20% from April to June compared to last year, and that at least 33 companies are selling IULs.

Hang on to assets

The premium-funded IUL is a way to help high net worth individuals maintain their substantial holdings in real estate and other investments that they do not wish to sell. Instead, they buy multi-million dollar life insurance policies without spending the large cash payments needed to fund them.

Here’s how it works: A life insurance agent locates a bank or lender willing to give a large loan to the person purchasing the policy. Theoretically, the loan will be repaid using the cash value that builds up in this great insurance policy, and the policy owner won’t have to fork out a dime.

When insurance agents sell these policies, they often use a set of life insurance “policy illustrations” to show clients that they will make a lot of money in the future from cash value gains. . Supposedly, the gains will be so large that the person can simply take money from the cash value to pay the loan bill that is due each month. In other words: an essentially “free” multi-million dollar life insurance policy.

And, as the cash value of the policy increases in this scheme, the policy owner even expects to recoup the collateral he used in order to secure the massive loan he took to pay off the loan. police.

But then, if the plan goes wrong, the bottom falls: the cash value fails to realize the expected gains, and giant policy payments and loan bills fall due. The “illustrations” that have been used for the rosy outlook are often imperfect with “features opaque and inexplicable by agents who have no obligation to work in the best interests of the client”, and are sold as “an indirect means of playing in the options market, ”says consumer advocate Birny Birnbaum, director of the Center for Economic Justice.

While LIMRA does not track the number of LUIs funded by sold or in force premiums, insurance industry experts say they have grown exponentially over the past decade. “Insurers have seen a flood of premiums funded by these loans,” says Steven Roth, president of Wealth Management International.

The reason for this growth is probably simple: larger insurance policies generate higher commissions for agents. Lawrence Rybka, Chairman of Valmark Financial Group, said he saw agents boast of sales “each of which generated hundreds of thousands of dollars in commissions.” All were telling clients to borrow $ 2 million to $ 3.5 million from banks in order to fund their large premium payments on IUL policies. These policies often provide death benefits of $ 5 million to $ 20 million each. Rybka estimates that over 60% of all IUL awards are probably funded.

Insurers take a step back

But recently, some major insurance companies have temporarily put an end to the gold rush. “We have made the decision to immediately suspend all new premium-funded business for the remainder of 2021,” insurer Penn Mutual said in a notice to agents. As well:

  • Allianz says it “plans to limit its premium fundraising business as a percentage of its total business” due to “additional risks.”
  • Securian Financial is putting new cases involving premium financing “on hold” until 2022.

So what are insurers running for outings? First, there are lingering fears that this complicated and highly touted product is being oversold by agents who don’t know what they are doing and are working with flawed data.

AIG, once the world’s largest insurance company, is now announcing that it will place additional restrictions on agents who sell these policies. AIG’s notice states that it will not allow agents with no experience in premium financing to have or use its illustrations.

AIG’s opinion also highlights the “interest rate risk” inherent in premium financing. Many of these loans have a variable interest rate based on the market, and many experts predict a federal funds rate hike next year, which could dramatically increase the cost to the client who took out the million dollar loan.

Then there is the time element. Although the life insurance policy may be in force until the death of the insured, which could be 20 to 30 years, banks can change the interest rates on loans when they are renewed, usually every three to five years.

And, finally, there is the danger of reputational lawsuits by clients like Marenzi who have the resources to at least embarrass insurers and possibly win million dollar settlements.

Stress, loss of sleep and humiliation

The bottom line for Gary Marenzi was that it didn’t take long for his “free” life insurance policy to be “free”. According to his trial, he was told a few months later that he needed to find more money for this police force “which was not supposed to cost him anything”. And then came the surprise request for additional collateral for the loan.

“In the end, he would lose money on the policy that was supposed to give him and his family $ 40 million in free money,” the lawsuit claims. Not to mention the “stress, lack of sleep and humiliation” he suffered. The outcome of the trial has not yet been decided.

For some people knowledgeable about life insurance, under certain conditions, these contracts can benefit the wealthiest, provided they know their advisers, trust them and, above all, follow the performance of the contract as closely as possible to the stock market. day-to-day. Loan payments owed to the bank and interest gains on the cash value of the policy don’t always match each other, which can also mean unexpected payments for the policy or loan. And customers should also be careful of taxable gains whenever they withdraw cash value.

Premium-funded indexed universal life insurance is not a “castle in the clouds,” says Rybka.

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IUL for ordinary people

While you might not be one of those offering a premium funding program, you might receive an argument from an agent about indexed universal life insurance. Be aware that sales pitches are often based on the unsecured parts of the IUL policy illustration. Be sure to check out the guaranteed sections to get a feel for what the real world might be. And don’t buy life insurance that you don’t understand.

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