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IUL as a Roth Alternative

IUL as a Roth Alternative–Webinar Feb. 25th

                Join us Thursday, February 25 at 1 p.m. Est. for a WEBINAR where we will break down the math of using IUL vs. Roth 401(k) plans and help attendees learn how to properly illustrate the comparison between the two.

https://attendee.gotowebinar.com/register/79940365079113218?source=email2

                We are sure many of you have been watching the markets absolutely tank thus far in 2016. We know many Americans have watched with horror how the values in their 401ks/IRAs have taken a hit.

Those advisors who have used Indexed Universal Life (IUL) insurance as a wealth-building tool have done well by their clients and have helped them avoid not only the recent turbulent times, but also those to come.

Math Doesn’t Lie

Market pullbacks are the perfect time to have a discussion about using IUL as a tax-favorable wealth-building tool. Why? The math doesn’t lie.

Unfortunately, many planners and money managers (and by extension, their clients) don’t understand the math around market pullbacks and rebounds. It all centers around the difference between the geometric mean and the arithmetic mean. The arithmetic mean is easy to understand. It is what most are accustomed to when thinking about averages. You add up numbers and then divide them by the amount of numbers you added up. You come up with one number that represents that average of those added. Helpful if you were trying to determine your grade in school. Not helpful if you are trying to figure out your average rate of return on your portfolio.

Once you introduce money into the equation the arithmetic mean doesn’t work. Let’s explore that.

Plus 10% year 1, followed by a 20% loss in year 2, and then followed by a 30% return in year 3. 20% /3 = 6.667%, right?

If you had a $500k account that means you would end up with $606,820 after 3 years with 6.67% growth. But is that how it really works??

$500,000 * 1.1 (10% return) = $550,000

$550,000 * .8 (20% loss) = $440,000

$440,000 * 1.3 (30% return) = $572,000

Over 3 years that is a 4.59% return. And THAT is the geometric mean…

If you could boil down the geometric mean to a single idea that every client should understand, it would be this: losing your money hurts you far more that gaining money helps you.

People love the idea of unlimited upside. Maybe it reminds them of playing the lottery. There is a chance they could absolutely strike it rich! But they don’t understand the basic principle we outlined above. What if you could absolutely eliminate losses? There would be a cost, or course. What if that cost took the form of limiting your upside to say 50% of the market performance? Our example above would look like this:

$500,000 * 1.05 (5% return) = $525,000

$550,000 * 1 (you eliminate the loss) = $525,000

$525,000 * 1.15 (15% return) = $603,750

By simply eliminating your losses in exchange for HALF the market upside your 3-year return soars to 6.49%.

A two percentage point increase over just a 3-year span for taking LESS RISK!

When properly explained, clients flock to this concept. You just need to know how to talk about it. So what do you call this concept?

IUL as a Roth Alternative

Again, the math doesn’t lie. When you look at the historic returns of the stock market, assume those returns are in a Roth IRA or Roth 401(k) and compare the after-tax income that can be taken from the Roth vs. what could be removed tax-free from an IUL, the IUL wins.

There is no mathematical debate about this if you use “real world” numbers.

There can be a debate as to whether a client wants to forego funding a Roth IRA or 401(k) to fund an IUL, but that debate can only take place after the advisor and the client understand the math.

That’s what we will be discussing on our webinar.

                Annual Reset! don’t forget the concept of an annual rest (annual policy gains being credited to the IUL and then ‘locked in’ never to be lost due to a market downturn). The annual reset is both simple and powerful. It’s what makes IUL unique in the market and why many clients choose to use them for tax-favorable/risk-resistant wealth-building tools.

An IUL is not an end all be all product. It isn’t for everyone. But for many clients, allocating X amount of dollars to an IUL will be a prudent thing to do.

The goal with our webinar will be to help advisors understand the math of comparing IUL to Roth IRAs/401(k)s so they can have a full disclosure discussion with clients about the best tools to use when planning for retirement.

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Pac Life Suspends Sales of 79 Plans

Did you read last week’s newsletter titled: DOL Regs. Make Insurance Agents and Series 7 Licensed Advisors Fiduciaries? If not, click on the following link: http://www.pomplanning.net/dol-regs.

Pac Life Suspends Sales of Section 79 Plans

I just confirmed that Pacific Life Insurance suspended all sales of their “Section 79 Plan.”

Why are sales being suspended? I don’t have a definitive or “on the record” reason, but I’ve been told that the reason is IRS related.

Section 79 Plans are not worth Implementing regardless of any current IRS issues.

I’ve been warning about Section 79 Plans for several years. From a pure financial standpoint, I do not believe these plans are worth implementing. In fact, I was so disgusted with how these plans are sold that I created a consumer protection web-site (see www.section79plans.net which discusses in detail why I don’t like these plans). Keep in mind there is more than one company that sells Section 79 Plans.

Too much greed-even though I’ve been warning about these plans for years, hundreds of agents continue to sell them. Why? Greed. Section 79 Plans pay some of the biggest commissions in the industry.

Clients are the losers–as is typically the case, if clients who have these plans get audited and if the IRS wins the audits or if most clients give in to avoid the costs and consequences of what could be a failed defense, they will lose.

Section 79 Plan EIUL policies are traditionally designed to not be very good from a cash accumulation standpoint. They are designed that way in order to “maximize the deduction.” I can’t imagine anyone buying a Section 79 EIUL policy unless they were getting a 30-40% deduction when buying it.

The consequence of negative audits is that clients are going to be stuck with not very good EIUL polices that essentially will have been funded with non-deductible dollars.

The moral of the story? Don’t sell programs that sound too good to be true. Don’t sell programs that are not in a client’s best interest. Finally, when I say I’ve researched a topic and that it is one I don’t recommend, consider taking my recommendation no matter how much money you could make.

Growing your sales–one reason advisors sell Section 79 Plans is because they sound unique and beneficial. It’s an attention grabber and can help them get new clients.

The one question I’ve been getting asked more lately is what’s the “best” marketing platform? I hate to say that it’s not any of the unique marketing tools I offer through www.strategicmp.net.

The best marketing platform in the industry can be found at www.pomplanning.net. The POM Planning platform will not only help you grow your business, but it will help keep you out of compliance troubles.

If you can’t pick up millions in AUM using a platform with the following metrics, you can’t sell.

Why POM Planning? It is a low drawdown risk/tactically managed platform made up of 13 terrific managers.

-The top three “conservative” strategies have an average Beta of .24* (the S&P has a Beta of 1.00). The average annual return for their top three “low-risk” managers going back seven years is 9.19%* net of fees (truly incredibly for “low-risk” strategies).

-The top three “moderate-risk” strategies have a Beta of .296.* The average annual return for their top three “moderate-risk” managers going back seven years is 15.29%* net of fees* (again truly incredible for “moderate-risk” strategies).

*Click on the following link to download a summary of the annual returns and risk metrics (like Beta) of POM Planning’s 13 tactically managed strategies: www.pomplanning.net/annual.numbers. Past performance is no guarantee of future results. Investing is risky and investors can and do lose money.

Copyright 2015

Webinar Thursday, May 21st  1 pm EST ”
College Funding-How to Utilize IUL as a College Savings Vehicle

https://attendee.gotowebinar.com/register/2480091776668644610?source=email2 

                For several years uneducated advisors have been listening to IMOs tout the virtue of using cash value life (IUL) as a college funding vehicle.  In the majority of fact patterns, using IUL to fund for college is a sure fire loser. In this webinar the speakers will explain why that is the case.

The webinar will also cover and explain the fact patterns where IUL can work as a legitimate college funding/retirement vehicle for clients. If you’ve been pitched the idea of using IUL as a college funding vehicle (or if you are actively selling IUL as a college funding vehicle), this is a webinar you’ll want to attend.

Why Become a Certified Medicaid Planner™ (CMP™)Webinar May 18th at 2:00 pm EST.

                There are only 10,000 people turning 65 every day in America. It would make only too much sense to learn a topic that can be used to help many of these potential clients. The CMP™ is the ONLY indepenantly accredited designation of its kind. To learn more, click on the following link to sign up for our informational webinar: https://attendee.gotowebinar.com/register/7292182483320660994.

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
144 Grand Blvd
Benton Harbor, MI 49022
269-216-9978
www.thewpi.org

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DOL Regs. Make Advisors Fiduciaries

Did you read last week’s article titled: NY Times Hammer Athene but A.M. Best Gives Upgrade? If not, click on the following link: http://eiultraining.com/ny-times-hammers-athene.

DOL Regs. Make Insurance Agents and Series 7 Licensed Advisors Fiduciaries

                Recently the DOL (Department of Labor) put out a set of new proposed regulations that cover advice given to clients who have money in qualified plans and IRAs. To read a summary of the new regs. (which include some stunning fee/commission disclosure language), click on the following link: http://www.pomplanning.net/new-dol-regs.

Best interest of the client—I find the fact that many advisors are all up in arms about these new regs somewhat comical. Who would argue that “ALL” advisors should “ALWAYS” be giving advice that’s in their client’s best interest? Apparently B/Ds and Series 7 licensed advisors would make such an argument and that argument will now fail.

ALL advisors are now “fiduciaries” (including insurance agents and Series 7 licensed advisors)

Under DOL’s proposed definition, ANY individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary.

The fiduciary can be a broker, registered investment advisor, insurance agent, or other type of advisor.

A game changer?—for three years now the writing has been on the wall when it comes to insurance agents having to obtain some kind of a securities license in order to avoid regulatory issues with the “source of funds” rule.

There are many in the industry who have advised insurance agents NOT to get a series 65 license because doing so would make them a “fiduciary” and would increase their liability. I’ve strongly stated that I think this opinion is dangerous, but now with the DOL regs. pertaining to assets in IRAs, my position that EVERY insurance agent should get a Series 65 license has been greatly strengthened.

Since the DOL’s new regs. state that ANY advisor giving advice to clients about money in their IRA is a “fiduciary,” insurance agents might as well become fiduciaries by obtaining their 65 licenses.

Best interest of the client

The new DOL regs. are trying to force advisors to truly give advice that’s in their client’s best interest. It’s a novel idea in an industry that rarely puts the client’s interest ahead of the B/D, IMO, or advisor’s interests. I can’t wait for the lawsuits against advisors who violate this rule. They hopefully will run many out of the business.

The “best” way to comply with these new regs. is to get a 65 license and incorporate the use of the www.pomplanning.net platform.

Think about it; if there was an AUM platform with the following statistics, arguably, wouldn’t such a platform have to be offered to clients in order to comply with the best interests of the client rule?

-The top three “conservative” strategies have an average Beta of .24* (the S&P has a Beta of 1.00). The average annual return for their top three “low-risk” managers going back seven years is 9.19%* net of fees (truly incredibly for “low-risk” strategies).

-The top three “moderate-risk” strategies have a Beta of .296.* The average annual return for their top five “moderate-risk” managers going back seven years is 15.29%* net of fees* (again truly incredible for “moderate-risk” strategies).

*Click on the following link to download a summary of the annual returns and risk metrics (like Beta) of POM Planning’s 13 tactically managed strategies: www.pomplanning.net/annual.numbers. Past performance is no guarantee of future results. Investing is risky and investors can and do lose money.

Summary

It’s a new day and Series 7 licensed advisors who are used to selling loaded mutual funds or insurance only licensed agents who are used to selling massive amounts of FIAs in IRAs is coming to a close.

One trick ponies (advisors who offer a limited amount of options to clients looking to protect and grow wealth in qualified plans/IRAs) are looking at lawsuits for violating the new DOL fiduciary standard regs.  Advisors who plan on continuing to go after the IRA market better wake up or the DOL may be coming to visit you.

For insurance agents, you better think seriously about getting a 65 license.

For Series 7 licensed, advisors, this is the excuse you need to go independent and get away from your B/D (I know the majority of Series 7 licensed would like to leave their B/D and go “independent).

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.

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NY Times Hammers Athene

Did you read last week’s newsletter titled: Alert: Minnesota Life Suspends EIUL Sales? If not, click on the following link to read: http://eiultraining.com/alert-mn-life-suspends-eiul-sales.

Recently an advisor forwarded me an article in the NY Times that really blew me away. To read the entire article (which I highly recommend), click on the following link: http://eiultraining.com/ny-times-article. The article outlined how Athene (formerly Aviva which was formerly Amerus Life) ended up investing in Caesar’s casino at a time when everyone thought the casino would go bankrupt (see Debt-ridden Caesar’s Buried in Financial Woes).

Why would an insurance company who has policy holders to take care of invest in a casino that might be going bankrupt? That’s a question for Athene’s parent company Apollo to answer.

In addition to the Caesar’s investment, the NY Times article outlined a complicated shell game Athene has apparently been playing with reinsurance carriers in order to meet certain reserve requirements with the state. The article will send shivers up your spine if you’ve been selling Athene.

Then last week I got the announcement that A.M. Best upgraded Athene from B+ to A-.  If what the NY Times article says is accurate (and I’m sure if there were issues with the story there would already have been a lawsuit filed), it would seem to defy logic that Athene received an upgrade.

Most IMOs Have an Agenda

What’s somewhat pathetic in our industry is that instead of others in the industry (like IMOs) making insurance agents aware of the NY Times article, all I received were two e-newsletters from IMOs touting the fact that Athene received the upgrade.

Why? A logical guess would be that the IMOs touting the upgrade, but not making agents aware of the NY Times article, is because Athene is one of, if not, “the” major carrier the IMO pushes. That means the IMO’s year-end bonuses, etc. are determined by how much premium goes into Athene products. Because the A.M. Best upgrade will help agents feel better about selling Athene, it will then help the IMO be in the best position to reach its bonus levels.

This is the EXACT thing that’s wrong with our industry.  And you wonder why it was so easy for me to write my book Bad Advisors: How to Identify Them; How to Avoid Them (www.badadvisors.com).

Risky Moves in the Game of Life Insurance

The above is the title of the NY Times article (which is quite long and somewhat complicated). As I stated, in addition to the risky investment in Caesar’s casino, the article mostly focused on the use of “captive reinsurance” as a way to increase reserves on paper but apparently not in reality.

The article gives the history of Aviva (now Athene) and how it was doing very well financially back in 2006. However, in 2012 Aviva’s international owner decided to sell to Apollo for $1.5 billion. The article states that Apollo actually paid $2.2 billion for Aviva but that it only paid $400 million of its own funds for the sale (the remainder came from an “extraordinary dividend” paid by the target company).

Then things get really complicated. I’ll simply quote from the NY Times article which does a great job explaining the shell game:

Apollo wanted only Aviva USA’s annuities business, which it could reinsure through an affiliate in Bermuda. A spokesman said Athene provided $2 billion to the affiliate “to support the new risks it assumed.” In addition, Apollo brought a second company into the acquisition, Accordia Life and Annuity. Accordia was a new insurer created by Global Atlantic, a Bermuda company controlled by Goldman Sachs. As soon as the acquisition closed, in October 2013, Apollo transferred the life insurance business to Accordia.

If Accordia followed the N.A.I.C. rule book, it would need about $7 billion in high-grade assets to secure the obligations. But it didn’t have that much.

So instead, Accordia set up six subsidiaries to reinsure part of the business for less. Iowa granted a “permitted practice” exception, allowing i.o.u.s to back the obligations instead of the solid assets, like bonds, that the N.A.I.C. requires.

Public financial documents in Iowa show that Accordia followed a pattern set by Aviva. The company and its parent declined to confirm the details in those records or comment on the record.

Four subsidiaries, in Iowa and Vermont, were to serve as Accordia’s reinsurers. Accordia sent them some bonds, but nowhere near enough to secure the $3.3 billion worth of obligations that they were to reinsure.

There is much more in the NY Times article and I’m not going to take up more space in this newsletter to try and tell you what the NY Times does such a great job of explaining in their article (again, I recommend everyone read the NY Times article).

My Point

My point with this newsletter is trust is something that needs to be earned, not given out blindly in our industry.

The NY Times article coupled with the lack of disclosure by IMOs pushing Athene products proves again that you can’t trust our own industry.

I certainly wouldn’t trust IMOs that push Athene if they didn’t also disclose the NY Times article. Don’t you think potential buyers of Athene products should be aware of these issues before deciding to buy? Of course they should.

I’ll leave it up to readers to determine if they should be selling Athene.  For me, my answer is no thanks.  If Athene ended up having the “best” product mathematically for a particular client, I would recommend disclosing that to the client, but then telling the client of the issue in the NY Times article. If the client still wants to buy the product, that’s their choice, but at least it then becomes a fully informed purchase that can’t come back on the agent if Athene can’t meet their financial obligations to the client.

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.

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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.

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NY Times Article

NY Times Article

This is a long but well worth reading newsletter.  Much of the detail on the problems with Athene is towards the bottom of the article.

Risky Moves in the Game of Life Insurance
Copyright: NY Time
By: Mary Williams Walsh, April 11, 2015


In July 2013, the smart money was saying the company that runs the Caesars and Harrah’s casinos would go bankrupt, when a big investor, Apollo Global Management, offered a lifeline: It was willing to pump millions of dollars into the parent of the struggling casino company.

And where would Apollo get the money?

Not a problem. Apollo, which already had a big stake in Caesars, also had been building a life insurance division called Athene. That division was bursting with cash from the premiums paid by life insurance policyholders.

“Athene Life Insurance and Annuity Company has tens of billions of dollars under management,” said Steve Pesner, a lawyer who took Apollo’s proposal to the Nevada Gaming Control Board for approval. It could spare some to help Caesars, in exchange for a promissory note and some nonvoting stock.

“This is essentially an investment by Athene, indirectly, in Caesars,” another lawyer for Apollo, David Arrajj, told the board.

State insurance commissioners are supposed to watch the premium dollars that policyholders send their insurers, making sure the money is invested safely so that policies can be paid out when the holders die. Investment-grade bonds are fine. But money for a troubled casino company? Controlled by the same giant investment firm as the insurer? That could be a problem.

But the Nevada Gaming Control Board polices casinos, not insurers. It unanimously approved the transfer. This January, the operating company that runs much of Caesars went bankrupt. That does not mean that Athene will stop paying its claims tomorrow, but it suggests that something bigger is afoot — something that affects all American taxpayers, whether or not they buy life insurance.

Changing the Rules

The life insurance business is supposed to be dull — sell policies; collect premiums; salt the money away in the safest sorts of investments, mostly bonds; pay out benefits; and make money along the way by investing surplus assets prudently. No wild bets, no siphoning of assets, no off-the-books maneuvers.

This, at any rate, has been the idea since a crusading reformer named Elizur Wright set the standard 150 years ago and became America’s first state insurance regulator, in Massachusetts.

Wright grew up helping his family shelter fugitive slaves; he went to school with John Brown, ran an abolitionist newspaper, and at age 40, visited the Royal Exchange on a trip to London. There, he saw feeble, penniless old men auctioning off their life insurance policies to speculators. After faithfully paying premiums all their lives, they were too old to work, but they could not withdraw their accumulated savings because, alas, they were not yet dead. Their best hope for survival was to parade their decrepitude and hope speculators would bet on their imminent demise.

To Wright, it was little better than a slave auction. Upon his return to America, he began campaigning for a cleanup of the life insurance business, setting a strict, even moralistic tone that persists to this day. He required insurers to pay “surrender values” to policyholders on request and to hold adequate reserves to do so. Seeing how easy it was to cheat, he devised formulas for calculating the reserves. He even invented a device called the “arithmeter” — a 30-foot slide rule, more or less, wrapped around a spinning drum — that crunched the numbers when the user turned a crank.

The companies bought in. Reform fostered trust, and trust spurred sales. Under the gimlet eyes of Wright and his successors, life insurance has blossomed into an $18 trillion business, with millions of policyholders who can sleep soundly on solvency laws as immutable as Newton’s laws of motion: For every liability, there has to be an asset.

Or at least that’s the way it may seem.

Over the years, life insurance has gone global and created products of dazzling complexity; many companies have gone public, too, creating shareholders who think they should have priority over all those pesky policyholders whose money built the business.

With these changes, a belief has taken hold in some quarters: Wright’s principles may still guide us, but they are too old-fashioned. They force life insurers to hold more money than they need to — the way Athene Life Insurance was expected to sit on its millions when there were needy casinos to help.

You hear a lot about “redundant reserves” in the industry these days. Many companies would prefer to hold fewer of the stable, low-yielding assets required by law and use the extra money to pay shareholder dividends. Some also want to build more risk into their investment portfolios, in hopes of receiving the higher returns that Wall Street expects.

Policyholders may not perceive any of this. But regulators, perhaps paradoxically, are not only aware, but sometimes even eager to allow insurers to add leverage and satisfy their growing appetites for risk. The National Association of Insurance Commissioners, a 144-year-old support group for state regulators, still issues special reporting standards, called “statutory accounting,” to help states enforce the law. But the states are also free to administer the rules as they see fit, and in recent years, this has often meant waiving certain rules. The waivers, called “permitted practices,” can be worth a lot of money.

“Any state can deviate from statutory accounting,” said Nick Gerhart, Iowa’s insurance commissioner. “And states do deviate.”

Inside the ‘Black Box’

This might not be an issue, except that in recent years, more and more deviations have been granted. One maneuver known as “captive reinsurance” grew to $364 billion in 2012 from $11 billion in 2002, according to a Treasury Department report issued in 2014. The report said captive reinsurance exemplified one of the three most important types of risk to financial stability that emerged last year.

Here is how captive reinsurance works: A life insurer sells policies, creating long-term obligations. Then it packages the obligations and puts them into a wholly owned subsidiary, called a captive. The captive is said to have reinsured the obligations, meaning that it now has the duty to pay the future claims. The parent is no longer responsible for payment and no longer has to keep all those low-yielding bonds on hand to satisfy the liabilities.

You’ve heard of reinsurance; it helps companies spread out risk, which promotes stability. Reinsurance companies tend to be large, independent firms with abundant capital, able to evaluate the risks they take on. A captive reinsurer, by contrast, is just an appendage of its parent, taking over the parent’s risks on the parent’s terms. And the risks don’t really change hands. Putting obligations into a captive and saying they are reinsured is a little like putting dirty laundry into a closet and saying it’s being cleaned.

So why is this going on?

In its report, Treasury said the trend took off in the early 2000s, after the insurance commissioners association tightened certain reserve requirements. By law, life insurers must hold more than enough money to pay all future claims, and must calculate the amount needed the association’s way. But captives can hold less — sometimes a lot less. Thus the deals free cash for other purposes, like paying dividends to shareholders.

As more and more money has flowed away from policyholder reserves and into the hands of investors, some state regulators have challenged captive reinsurance. New York State’s superintendent of financial services, Benjamin M. Lawsky, has called the transactions “financial alchemy,” because they can make money seem to pop out of thin air for insurance companies to grab.

Other states disagree. In an emailed response to questions, Mr. Gerhart of Iowa called captive reinsurance “a pragmatic approach to address the nationally recognized problem of redundant reserves.”

The insurance commissioners association has been trying to put the genie back in the bottle, toiling over new rules that would limit captive reinsurance in the future. At a meeting in Phoenix last weekend, it formed a new working group, overseen by Mr. Gerhart, to study why captive reinsurance has now spilled over from life insurance into annuities, a popular retirement-planning tool. “Single-state solutions do not promote the uniformity that we have worked so hard to achieve in our financial solvency regime,” said Joseph Torti III, the Rhode Island insurance commissioner, who led the discussion. The 2014 Treasury report said that the multitude of “black box” deals was making it hard for policyholders, and investors, to find out an insurer’s true financial condition. In fact, it was sometimes even hard for state regulators to find out, the Treasury said.

But that’s not the case in Iowa. Not only does Iowa encourage the transactions, but in 2010 it enacted unusually open disclosure rules. In many states, and certainly in offshore havens like Bermuda, captive reinsurance is conducted under strict secrecy. But in Iowa, with a little sleuthing, it’s now possible to open the lid of the black box and peek inside.

Dealing in I.O.U.s

For years, Iowa has been working to make its capital, Des Moines, an insurance hub, with considerable success. Insurance now accounts for more than 24,000 jobs in and around the city, and for more dollars in the state economy than agriculture.

In 2006, a huge British insurer, Aviva, arrived in Des Moines, acquired an insurer based in Iowa and changed its name to Aviva USA.

ny time

Things seemed to go swimmingly at first. Aviva USA doubled the size of its local work force and spilled over into a handsome new office campus in the suburbs.

But then, in 2012, the British parent said it was leaving the United States. Aviva USA was put up for sale. Apollo beat out rival bidders by offering $1.5 billion. But it actually paid the British seller more than that, using about $2.2 billion of the target company’s own money in the form of an “extraordinary dividend.” By the time all the money changed hands, Apollo had paid only $400 million of its own funds for the prize.

Sending $2.2 billion to the British seller meant less money to backstop policies in the United States, of course. When asked about this in an administrative hearing on the acquisition, led by Mr. Gerhart, a representative of Athene testified that there was still enough money to keep the insurer well within the regulatory safety zone.

But that was with the help of captive reinsurance.

The details are complicated but can be pieced together from an outside auditor’s report and regulatory filings that Iowa is making public for the first time. Here is the nutshell version: Apollo wanted only Aviva USA’s annuities business, which it could reinsure through an affiliate in Bermuda. A spokesman said Athene provided $2 billion to the affiliate “to support the new risks it assumed.” In addition, Apollo brought a second company into the acquisition, Accordia Life and Annuity. Accordia was a new insurer created by Global Atlantic, a Bermuda company controlled by Goldman Sachs. As soon as the acquisition closed, in October 2013, Apollo transferred the life insurance business to Accordia.

If Accordia followed the N.A.I.C. rule book, it would need about $7 billion in high-grade assets to secure the obligations. But it didn’t have that much.

So instead, Accordia set up six subsidiaries to reinsure part of the business for less. Iowa granted a “permitted practice” exception, allowing i.o.u.s to back the obligations instead of the solid assets, like bonds, that the N.A.I.C. requires.

Public financial documents in Iowa show that Accordia followed a pattern set by Aviva. The company and its parent declined to confirm the details in those records or comment on the record.

Four subsidiaries, in Iowa and Vermont, were to serve as Accordia’s reinsurers. Accordia sent them some bonds, but nowhere near enough to secure the $3.3 billion worth of obligations that they were to reinsure.

Two Delaware subsidiaries then issued the first four subsidiaries contingent notes to fill the gap. Such notes are unsecured promises that Accordia, the parent company, would not be permitted to use. For example, one of the Delaware subsidiaries, named Tapioca View, issued a $499 million note to Cape Verity I, an Iowa subsidiary, which made it look as if Cape Verity I were flush. But if anyone looked closely, they would see that Tapioca View was just a shell, with no business operations, no revenue and no means to make good on a $499 million promise.

“Hollow assets” is the term New York’s Mr. Lawsky uses for deals like this. But there is little a New York regulator can do when the transaction is in another state.

To bolster the credibility of Tapioca View’s i.o.u., footnotes on financial filings show, Cape Verity I then issued a $499 million note of its own, and gave it to Tapioca View. Now, if people glanced at Tapioca View, they would see that it had some sort of asset to back up its promise of $499 million to Cape Verity I — except it was nothing more than a note from Cape Verity I.

To put it more bluntly than the footnotes do, the two subsidiaries were propping up each other’s balance sheets with i.o.u.s.

“They’re enhancing their capital and making themselves look good by using these exotic techniques,” said Joseph M. Belth, a professor emeritus of insurance at Indiana University. “The whole thing is just a classic shell game.”

To take it one step further, Cape Verity I called its note a “surplus note,” a unique instrument that does not have to be recorded anywhere as a debt. Thus, without so much of a penny as real cash changing hands, Cape Verity I could claim nearly $1 billion: a $499 million note and $499 million of “surplus.” All six subsidiaries passed notes back and forth in this way, making themselves look fit to reinsure $3.3 billion of Accordia’s obligations. A footnote on each of the three Iowa subsidiaries’ financial statements said that without the permitted practice allowing the notes, they would be insolvent.

But that information did not flow through to the parent company’s consolidated financial statements. Accordia’s statements showed it as financially sound.

In his written responses to questions about captive reinsurance, Mr. Gerhart, Iowa’s insurance commissioner, declined to discuss individual companies or transactions, but he said that his staff monitored all deals in Iowa carefully and would intervene if a problem arose. He also said that by opening up certain details of Iowa-based transactions to public scrutiny, Iowa had made it possible for interested parties to assess the risks.

“We wanted to bring transparency to these transactions,” he said.

So, before you blame Iowa for playing fast and loose with the legacy of Elizur Wright, remember: Most states now allow captive reinsurance. So do the traditional offshore insurance havens like Bermuda. And most keep it secret. But Iowa has decided to stick its neck out and let people look at the deals, knowing full well that they might not like what they see.

The Tax Bill

Those of you who have never bought life insurance or an annuity may, at this point, be thinking: All these perplexing transactions, these assets that may or may not be real — aren’t they all somebody else’s problem?

Not entirely. You could still be liable if the N.A.I.C.’s old-fashioned formulas turn out to be right and insurers come up short at some point because they bestowed so much money on their shareholders. Mr. Lawsky keeps saying that captive structures remind him of the deals that proliferated in the run-up to the financial crisis of 2008. That ended in a giant taxpayer bailout.

“I really think what’s going on now is bigger than anything I know of in the past,” Mr. Belth said. He should know. As the author of the article “More Than a Century of Efforts to Weaken Life Insurance Reserves,” he can compare today’s captive-reinsurance phenomenon with other skirt-the-rules tactics dating all the way back to 1863.

American taxpayers are paying for captive reinsurance already, even without another cataclysmic bailout. Life insurance reserves are a business expense for the companies; as such, they are deductible from the insurers’ federal income taxes. And the boom in captive reinsurance deals has led to billions of dollars of unpaid federal taxes.

The Internal Revenue Code says companies must use the National Association of Insurance Commissioners formulas to calculate their reserves, and deduct that amount. Then companies do a second calculation of their reserves, which is smaller than the N.A.I.C. method. Accordia, for example, sent $3.3 billion of obligations to its family of subsidiaries, but secured only $1.7 billion worth with admissible assets. The tax code tells Accordia to deduct the entire $3.3 billion, even though the backstop it built cost just $1.7 billion. So its tax deduction was inflated by $1.6 billion.

At the top federal tax rate of 35 percent, this suggests about $560 million of taxes avoided.

Remember, Accordia is far from the only company using these techniques. Indirectly, invisibly, the taxpayers are shouldering the cost of these activities, through their taxes.

If the insurance commissioners association ever finds consensus, it may reduce some of the gamesmanship in the future. But it’s unlikely to require life insurers to unwind their existing reinsurance captives. Some analysts say that if the N.A.I.C. really does rein in captive reinsurance, the industry will just invent some new transaction, and the show will go on.

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