Will Your Life Insurance Hit A Wall? | Ted Oakley Interviews Todd S. Healy

TED:
Hello everyone, I’m Ted Oakley, managing partner at Oxbow Advisors.  We have an interesting subject today that we’ve never discussed.  But I know all the viewers – who have high net worth – obviously have some life insurance, or maybe a lot of life insurance.  One of the things I’ve noticed that my guest today, Todd Healy, has brought to my attention is that there are a lot of changes in this business, especially with lower interest rates and other factors.  I’m glad to have a person I’ve known for a long time join me.

TODD:
How long?

TED:
For four decades actually – out of Dallas, Texas.  Todd Healy is the founding partner of C3 Financial Partners and someone I know to be knowledgeable about the business.  What I asked Todd to do is talk a little bit about some of the subjects that Oxbow Advisors has had come up with clients – not for us since we are not in the insurance business, but for clients that have told us that they had problems dealing with insurance.  Todd, welcome. 

TODD:
Thank you Ted, glad to be here.  I appreciate the opportunity.

TED:
Let me kick it off with, there’s been some changes in the industry that people probably would never think about, but you might give us an idea of some of those. 

TODD:
Yes, there have been a tremendous number of changes.

To begin with, there are probably only a third of the companies doing business today than when I started in the business in the late 70s.  In addition, a lot of those carriers are getting out of the individual life insurance business.  They are “folding up the tent,” so to speak.

And they’re not writing new coverage.  We received a memo yesterday from another company that’s going out of the individual business in the corporate owned life insurance arena.  Carriers are changing their product provisions.  MetLife, for example, used to have a tremendous number of policies on the permanent side of their company that you could convert to or buy.  About two years ago, they announced they’re getting rid of all those policies that are “death benefit driven” and focusing on policies, or cash value, to supplement retirement.  Our business is not driven on cash accumulation, that’s your business; our business is driven on death benefit protection.  So, those are some of the changes.

In addition, products have changed dramatically.  When I came into the business, there were two types of products: there was permanent insurance and there was term insurance.  That was basically it.  There were individual coverages, no joint policies.  Now, we have several different types of policies and each one has probably 30 variables that can be attached to it, different riders and whatnot.  We have “second to die insurance” where people buy for estate taxes because taxes are typically deferred.  And, we also have second to die policies that are being used for buy-sell arrangements.  So, a tremendous number of changes.

At one point in the business, we had fixed premiums.  You bought a whole life policy, the premium was fixed, it was established.  Now the policies are determined by variable interest rates, basically by the market, so they can fluctuate; and they certainly have over time.

TED:
Let me ask you this – you know a lot of people who have high net worth and have policies that have been around a long time – they just haven’t taken a look at them.  But a question for you, in your experience, how long do you think people have had, on average, large life insurance policies that they probably just put back and they just haven’t looked at in like five years, ten years, some longer?

TODD:
At least five years.  Most people think in terms of the premium they pay.  They think in terms of the cash value.  They don’t think in terms of the death benefit.  So that’s one of the reasons we call it the largest unmanaged asset in a client’s portfolio.  They just don’t look at it.  Recently, I did a video entitled “My mother-in-law is 99, that’s the good news.  The bad news is her policy ‘died’ when she was 95.”  Because when she bought her policy from me, insurance companies figured nobody lived beyond 95.  So that’s another reason to go back and visit them.  You can now buy policies out to 120 and even beyond, but a lot of people don’t realize they have policies that are going to expire probably before they do.

TED:
You might answer this for me: now I know what this means, “in-force ledger,” but you might explain to the audience that if they haven’t had that done, or some sort of review, it may be something that they need to keep in mind, particularly with all the changes. 

TODD:
Yeah we’ve got a slide we’ll show in a second that shows the impact of the lower interest rates.  But clearly, for anyone who has a policy more than five years old, interest rates have dropped dramatically.  An in-force ledger shows them what the impact of those lower rates would be if they went in funding it at five and a half percent or four percent, and now it’s three percent.  An in-force ledger just shows them the impact of that lower interest rate.  It also can show them how they can adjust the premium back to account for those lower rates.  This slide shows the overall critical errors of policy holders.

TED:
Because it seems to us, at least, that most people will very seldom do a review and take a look at it.  I’m not sure they know.

TODD:
No, we think most people are satisfied.  They bought the insurance policy.  They don’t realize the impact of lower interest rates.  We talked about one-third of the companies are still around, probably one-third of the original agents that sold those policies are around – if that many.  So, there’s no agent calling on them asking them to review.  The insurance companies aren’t reaching out and saying “hey you really need to review this policy because rates have dropped.”  That is why we refer to it as one of the largest unmanaged assets.

TED:
Do you find that the businesses are aware, or that they have forgotten, they had policies on various key people?  What’s going on in that arena?

TODD:
That’s a huge issue because unless it’s a permanent policy, it’s not showing up on the company books anywhere.  It’s not on the balance sheet.  They’re not reflecting it.  We had a situation where a banker referred us to a customer of theirs that had gone bankrupt, and the owners of the bankrupt business had purchased the business.  Part of that purchase included two policies on prior owners.  And nobody had thought to look at those.  Those turned out to be the only significant asset the company had left.  But for mergers, acquisitions, and sales, that life insurance is typically not taken into consideration.  And it could be a very, very valuable asset, particularly if the owner, or the original insured, lost health or had a change in their health status or underwriting status.  It could be a very valuable policy to someone.

TED:
And I think a lot of businesses, when you’ve been in business 20 or 30 years, you’ve basically forgotten what you did 20 years ago, in this respect, especially if it’s not on the balance sheet as you say.  Something that all of you business owners out there ought to keep in mind at this point, particularly now.

Todd, in this next slide, I think this is one of the most important things that people need to think about today, and they are probably not thinking about it.  But this change in interest rate, which has affected us in the bond markets, affected investors in the stock market, is really affecting insurance policies.  You might talk about this slide.

TODD:
This is an actual client who was 33 when he bought the policy in 2012 (about nine years ago).  He bought a 10-million dollar policy.  The interest rate at that point was 5.2 percent.  That required a premium of $55,000 per year.  The interest rate dropped four years later to 4.6 percent.  In order to keep the policy going at that interest rate, he would have to increase his premium to $62,000, which he did not do.  One year later, it dropped almost 100 basis points to 4.35 and required a premium of $69,000 to keep it going.  In 2020, the premium interest rate dropped to 3.4 percent, which would have required a premium of $93,000, almost doubling what the premium was when he started out.  And there were in-force ledgers that we went back and reviewed.  We ran them every year, and he still opted to keep the original premium.  So now, in order to make the policy do what he originally planned for it to do, the premium is going to have to more than double what he anticipated.

TED:
Todd, one of things – as you know – we work primarily with business owners that haven’t sold their company; they may sell it at some point in time, but most of their money is in the company.  They have some money on the outside, and we find that what they should have done is purchase insurance for a liquidity event in case something happens to those owners.  Are you seeing that most of those people actually understand what they’re doing?  Are they doing the right things?

TODD:
No, honestly a lot of times, they’re buying insurance in the business because the bank’s requiring it for collateralizing a loan.  They’ve got key man insurance, maybe, if there’s more than one owner of the company.

But again, they tend to forget about it.  They tend to ignore it.  They have very little liquidity inside the business or outside of the business.  When they die, if the policy is owned by the business and they’re still active in the business, the value of the policy will be includable in their estate for estate tax purposes.  So, it really could be a double whammy.  On the other side of things, their health could change and they forget about the policy and the policy lapses.  It could be something they could have taken with them during the sale or merger of the company.

TED:
Let’s talk about that.  You have a slide here about if you get in a position where you sold the company or the coverage is not needed.  Talk about those things.

TODD:
There’s really about three areas where insurance may no longer be needed.  Number one, if they sold the business, that policy is not needed for buy-sell or key man purposes.  The second thing would be that estate tax exemption has gone up so much.  When you and I got started, the exemption was about $120,000 per individual.  Now it’s $11.7 million per individual.  So, a lot of people who bought insurance when the estate tax exemption of the amount they could pass tax-free was much lower don’t need the coverage.

The other thing we find is some people can’t afford it anymore.  We had an oil gas family in west Texas and a substantial amount of insurance they’d purchased from us over the past 25 to 30 years.  The insured had gotten in poor health, yet they couldn’t pay the premiums with the oil and gas prices last year.  We were able to sell a couple of the policies to maintain the premiums on the third policy – that turned out to be very significant for them.

The other situation that happens is a key man policy for an individual who is no longer a key man.  The business may not want to keep the policy.  We had a client call who asked us about a key man policy that he was going to let go.  It was a 10-year term policy and the insured was no longer a key employee.  They were just going to let the term policy expire.  We were able to go to the market, and we sold that policy to the independent market for about 10 times the annual premium.  They got all their premiums back, plus enough to start a new policy on the new key man. 

TED:
That’s interesting, even though it was a term policy.

TODD:
Yes, absolutely.  People don’t think term policies have value.  They have a tremendous amount of value if there’s been a change in health, for sure.

TED:
That’s interesting.  So if I understand you correctly, there are a lot of businesses that probably have more value than they think they have, and they just haven’t taken a look at it.

TODD:
Yes.  Individuals as well, Ted.  A business may have a policy that’s a permanent policy they’re carrying on the books for the cash surrender value.  So their options are to let the policy lapse — you know my father-in-law had a contract that was similar to that.  He developed terminal lung cancer, as you know, and we just said there’s no reason to pay any more premiums.  There was enough value in the policy to keep it going with no more premiums going in.  Because if he had continued to pay premiums, it would not have increased his death benefit.  So we let the policy just kind of pay its own way.  The second thing that can be done if the policy is no longer needed or they can’t afford it, is just to basically sell it back to the insurance company.  When you surrender a policy for its cash value, that’s all you’re doing.  You’re basically selling it back to the carrier.  We prefer the third option, which is to go to the open market, get bids for the contract, and see what it’s actually worth in the open market.  Typically it’s been two to three times what the cash value is.

TED:
Because a lot of times a lot of our business owners have had two or three huge liquidity events, so the insurance from a liquidity standpoint is not that much.  I don’t think that a lot of them are aware that they can take that back to the market and just go ahead and sell it. 

TODD:
Ninety percent of the people that have policies have no idea that option exists.  The business owner that had the term policy had no idea this market existed.  We have worked with major law firms who had no idea this market even existed.  We had a law firm call us about a client who was in his 90s and had an approximately five million dollar policy.  He was not going to pay any more premiums.  It wasn’t an economic decision; it was an emotional decision.  He was going to let the policy go.  It literally had $18,000 of value in it and we sold it for over $1.2M in the open market.

TED:
That’s interesting.  I hope that people listening can think about that if/when they start taking a look at things.  Let me ask you, on your next slide, we’ve talked about before.

There’s been a tremendous amount of mergers, and people getting out of the life insurance business.  When interest rates get so low and the cap rates get so low on real estate, companies have a hard time making money.  So I see what they’re doing.  They’re merging, or they’re getting out of the life business.  What does somebody do?  They get something that says “hey we’re out of the business,” what is next?

TODD:
Well, they’re not out of existing business; they’re out of writing new policies.  That’s the first thing to keep in mind.  They can’t shirk their responsibility to the existing policyholders.  But if these existing policyholders are insurable, if they’ve got good health, it’s at least worth taking a look at moving them to another carrier, that is more substantial and more committed to the marketplace.  If they’re not healthy, then they just need to find out what their options are with the existing carrier.  Again, going back to the idea of maybe minimizing premium instead of continuing to fund it at the original level.

TED:
So let me ask you one last thing, on the last slide that you’ve given us here.  We couldn’t let this one get past us: everybody obviously has an interest in this, but let’s talk about the new tax law changes or what you think is coming from that?

TODD:
Well, if congress doesn’t do anything at the end of 2025, the exemption basically cuts in half.  The amount you can pass tax free will drop from $11.7M down to about $5M, which is still very substantial.  And it only impacts about one one-hundredth of the population, so it’s not a tax that impacts a lot of people, which is one reason it’s difficult to fight it.  What they’re proposing is: number one, reducing the amount you could pass tax-free and just as importantly – and maybe more importantly to your viewers – is that the brackets are going up.  Right now, the top bracket is 40 percent.  When you and I came in the business, the top bracket was 60 percent with that exemption of $120,000.  We could see that going back up.  There are so many things they can do.  Probably one of the most significant impacts would be if they eliminate step-up in basis.  If they say the stock they bought in 1990 does not take a step-up basis to when they die in the year 2030, then it’s really a double taxation.  They’re going to pay taxes on their estate based on the fair market value of the stock.  In addition, they’re going to pay capital gains tax.  The bill that’s currently being proposed states they pay that tax when they die, not when the stock is sold.  So that’s why I say it’s effectively a double tax.

TED:
That’s interesting.  I think we’ll have to see what comes out of that.  For everyone out there watching, you’ve seen a few of the flyers at the bottom of our interview and there’s another one here now.  At C3 Financial Partners, they have many people there that can look at various things.  Oxford Advisors has had a number of clients across the country that we’ve had C3 review,  just to see where they were, and they’ve done such a great job.

Todd, I want to thank you for being with us today. I hope that anyone who has a question, or has something of interest, will get in touch. We appreciate you being with me today, and until we see you next time, thanks a lot.

TODD:
Thank you, Ted. My pleasure. Stay safe 

TED:
All right.