Alert: MN Life Suspends EIUL Sales

Before I get started, if you didn’t get a chance to attend last week’s webinar on why every advisor should obtain a Series 65 license, you can now watch it on recording by clicking on the following link: www.pomplanning.net/why-get-a-65-license.

I also wanted to remind everyone of this week’s webinar on Thursday the 23rd at 1:00 pm Eastern. The webinar is a VERY IMPORTANT one where we will be explaining in plain English the new/restrictive EIUL illustration regulations that are set to take effect in September.  If you sell or are thinking of selling EIUL policies, you really need to attend this webinar.

To sign up for this webinar, click on the following link: http://eiultraining.com/new-regs-webinar

Minnesota Life Suspends EIUL sales–I raised an eyebrow this week when I saw the following announcement:

Suspending Captive Insurance Sales Practices

As of Today, Friday April 17th, Minnesota Life and Securian Life are suspending the sale of life insurance policies where the sale involves the use of Captive Insurance Companies. The suspension of business will remain in effect while we review the practice.”

Why did this announcement raise an eyebrow? Because most agents/IMOs that peddle what I consider unsuitable IRA rescue sales (if you don’t know what these are, go to www.stopirarescue.com) use MN Life when making such sales. I’ve been asking MN Life to put a stop to these sales; but my requests, to date, seem to have fallen on deaf ears.

This recent announcement was a pleasant surprise. It’s nice to see MN Life (or any insurance company for that matter) turn away large life insurance sales. Usually this happens when lawsuits have been filed on a sales concept and/or when the IRS turns its eyes to what it sees as an abusive life insurance sales concept that revolves around a “tax-deductible” way to buy life insurance (remember the old days of 419 Plans?).

Captive Insurance Companies (CICs)

Many advisors are not familiar with CICs.  I’ve been writing about them for well over a decade, and I recommend their use when appropriate. They are actually one of my favorite “advanced” planning tools for affluent business owners to mitigate risk and grow wealth in a tax-favorable manner.

If you would like to sign up for an educational webinar on CICs, click on the following link: http://ows.strategicmp.net/page/life/affordablecics

In a nutshell, CICs are real insurance companies formed to receive premiums typically from closely held businesses. A CIC is typically owned by the business owner(s) or a trust for the benefit of the heirs of the owners.

With a good claims history, money accumulated in a CIC can come out at the long-term capital gains tax rate which makes it an attractive tool for profitable business owners (their companies get a deduction when paying the premium).

CIC Abuses

What I’ve seen in the market and what I hear the IRS is now focusing on are CIC that use life insurance as an investment (some put as much as 90% of the CIC premium into an EIUL policy).

Technically, the use of Cash Value Life (CVL) insurance in a CIC is not prohibited. Actually, the investments of assets inside a CIC really are none of the IRS’s business. The IRS should be focusing on whether the insurance issued was real (was it underwritten correctly or was bogus underwriting used to inflate the deduction).

As was the case with 419 plans and other insurance sales topics, some CIC administrators are promoting the use of CVL inside CICs and allowing what industry experts think is excessive when it comes to the use of CVL as an investment for the reserves.

Again, because there are no industry guidelines for CICs, administrators are free to allow what they think is best when it comes to using life insurance as an investment inside a CIC.

The following is the restriction of the CIC administrator I work with:

Today, any funds placed into a life insurance contract, of any sort, is not considered part of the solvency tests run by the actuaries (meaning those funds are not available to pay claims) and thus, if too much is used, the IRS potentially could consider it a sham transaction and go back and apply taxes, penalties and potential fraud. Yes, there are captive companies that do this and the IRS is currently investigating a number of them! Point is we do not want to create unintended consequences. Now with this said, we do allow a portion of the reserve funds to be used for life insurance subject to approval by the actuaries but definitely not the first year; when and how much are predicated by certain “facts”. We will take whatever amount you or the client might propose in subsequent years as the premium and submit this to the actuaries and they will tell us the amount that would be allowable at that time; typically this comes from what is considered “surplus” within the reserve account.

I don’t fully agree with the above because, if you use a high cash value policy in a CIC (one that is 90% liquid from day one), it is available to be used to pay claims; but this administrator is trying to be over- the-top conservative considering they know the IRS is looking at this as a reason to disallow the deductibility of the business owner’s deduction of the CIC premium.

Summary

The saying ….“pigs get fat and hogs slaughtered” is certainly applicable when dealing with CICs and CVL insurance.

There are too many hogs out there right now putting far too much money in CICs into CVL insurance. They have brought unwanted/unneeded attention to the CIC industry, and that may have negative effects on the industry as a whole. Only time will tell. If you are working with a CIC administrator who allows more then 30-40% of the reserves to go into CVL and if this is allowed within the first 15 months of paying the first year’s premium into a CIC, then, in my opinion, you are not working with a CIC administrator who understands the current environment and issues with the IRS (in other words, you need to find a new administrator).

Did you see my newsletter from a few weeks ago? IL Court Holds that FIAs ARE Securities and NAFA is Freaking out! To read, click on the following link: www.pomplanning.net/il-deems-fias-securities

The content of this newsletter is NOT for public use and should not be used without prior written consent of The Wealth Preservation Institute.

Roccy DeFrancesco, JD, CWPP™, CAPP™, CMP™
Founder, The Wealth Preservation Institute
269-216-9978
www.thewpi.org
www.cmpboard.org

Author of: The Doctor’s Wealth Preservation Guide; The Home Equity Management Guidebook; The Home Equity Acceleration Plan; Retiring Without Risk; Bad Advisors: How to Identify Them; How to Avoid Them; and Peace of Mind Planning: Losing Money is No Longer an Option.