Read The Transcript Below:

Steven (00:50):

Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals edition. I’m your host, Steven Jarvis, CPA, and joining me today on the show is Tony Steuer, who is someone passionate about helping people learn about money and specifically how to get ready with money. And we’re going to have a great conversation today around insurance, which is not something I’m personally an expert in. I certainly have some and know lots of clients who do as well. So Tony, welcome to the show. I’m excited for our conversation.

Tony (01:21):

Hey, glad to be here, Steven. Thanks for having me on.

Steven (01:23):

Yeah, so Tony, before we dive in because I’ve got a couple of really specific questions, tell us a little bit about your background so that the audience gets a feel for what it is you do and what puts you in this place of expertise.

Tony (01:33):

Well, I’ve been in the life insurance business for quite a few years. I started out as an agent and I quickly discovered that people didn’t really understand their life insurance policy and I was working with advisors pretty early on in my career and I found that the advisors also didn’t really understand the policies and I ran across somebody who was a life and disability insurance analyst and I’d never heard of that term before. So I found out what it was and it was somebody who could charge a fee for doing life insurance consulting work. And what she did was she would review life insurance policies for a fee and help people understand the insurance that they’ve already bought. And since I saw that was definitely an issue and something I was very interested in, I started doing that and essentially over the course of 30 years, I consulted for financial planners, consumers, litigation attorneys, trust officers, a whole range of people saying, okay, what is this insurance policy? Is it any good? What do I do with it and what are my options?

Steven (02:36):

Tony, that’s really fascinating because from a headline standpoint, from a social media, even a podcast standpoint, there’s plenty of discussion around the topic of life insurance, but a lot of times it really centers around this almost combative. Should someone have a commission, should they not? Should someone use whole life? Should they not? But it is really more focused on the initial decision point of should I go buy this product? But really what you spend your time on is helping people understand the products they already have to make sure they know what the heck it even is that they own.

Tony (03:05):

And to make sure the policies can continue as they think it will is life insurance policies. Term life insurance of course, is relatively simple and whole life insurance can be simple until you get into policy loans and other things. But some of these other products, equity index, universal life, variable life, universal life can get incredibly complex and the policies can terminate before people can expect them to, they can underperform because some of them, the equity index life is based on equity indexes. So you have a whole range of things that can happen. And so you need to be able to keep the policies running and you’re talking about contracts that sometimes are enforced for 40 or 50 years. So things can happen and if you’re not paying attention to it usually it’s not good things for the policy owner.

Steven (03:56):

That’s really interesting. So, Tony, I’ll plead ignorance here and I’ll admit that before you and I started talking, I didn’t really realize that this was a service that was out there. That was part of the reason I was excited to have you on the podcast. So talk me through what an insurance policy consultation looks like. I would have to imagine that some of these documents are voluminous, to say the least. If someone hires a policy consultant, what do they look at? What are they looking for? What’s the deliverable at the end?

Tony (04:23):

Well, really, when I worked for advisors or consumers, the question always is, is this policy any good? Is it going to do what I expect it to do? I mean, most people want the bottom line. They really don’t want to understand how the life insurance policy works, and I’m sure it’s the same for you with the tax return. Nobody’s really interested in every little facet of how the sausage is made. So that’s essentially the bottom line. Now what goes into it is reviewing the actual policy so you understand what the policy is supposed to do and what the actual terms of the policy are because those are not always what people think they are and it’s reviewing something. The most important thing is what’s called an enforce illustration that you order from the insurance company. Now when you buy an insurance policy, everybody’s used to the sales illustration, which most people don’t understand, but it’s a projection of values that the company thinks is going to happen.

(05:21):

Now, an enforce illustration is a snapshot you use in correct values at the time that enforce illustration is run using current projections for the interest rates, current cost of insurance, and all the other expense charges that go into a policy. So it’s a better look at how the policies actually performing and it never looks the same as the sales illustration because interest rates are not constant. Dividend scales are not constant. These equity indexes are not constant. I mean, especially when you get into variable life policies and equity index, when you’re tracking an index, you have good years and bad years, and so that variability is not reflected on the original sales illustration. So you’re trying to gauge how the policy act you’re doing and if the premium is sufficient to keep the policy going to maturity, which is the maximum age of the policy. 

Steven (06:15):

You made a comment in there about how people really just want to know, hey, is it going to do what I think it’s going to do? I’d be curious, how often does the way a client or policyholder explain what they think is going to happen actually line up with what the policy is? Because it seems like an area ripe for misunderstandings.

Tony (06:34):

Most clients really don’t know what they’ve purchased, and the problem is the policies are being created by insurance companies who don’t really understand what they’re creating. They’re being sold by people who don’t really understand what they’re selling to people who don’t really understand what they’re buying, regulated by regulators who don’t really fully understand what they’re regulating because the policies have just, Steve, have you ever actually looked at an insurance policy like a universal I for equity index policy?

Steven (07:05):

I mean, I’ve seen the documents. I’ve not studied them by any means.

Tony (07:09):

Yeah, I figured you had a sense because you said the voluminous nature of the documents, like sales illustrations can run 20 pages, enforce illustrations can run 15 or 20 pages, and of course insurance policies, they’re legal documents. And so consumers are expected to be able to sort their way through this and there’s all these permutations and all these calculations that go into it, and the more variables that enter into something, the more likely something different is going to happen than what is expected. So that’s what goes into the analysis and the evaluation.

Steven (07:44):

So Tony, you get a policy, you have your checklist or your process for going through evaluating these different things. Maybe in kind of broad categories, what types of recommendations come out of this? What is it the policyholders expected to do once your evaluation’s done?

Tony (07:59):

So it depends always on the policy owner’s goals is sometimes the goals change and we don’t talk enough about goals and financial services. We focus too much on the actual product itself. So that’s first thing is as I match the product to the goal, is a product going to meet the goal because that’s really the important thing. If the client’s goals have changed, well then we may need to reshape the policy, reconfigure the policy to meet the client’s new goals. That’s always, I think, super important and it’s oftentimes overlooked. But then the other things are is the policy underfunded? That means that the current premium may not be sufficient to carry the policy to maturity, and that could because of decreased earnings rates then we’re originally projected. It could be because of increased cost of insurance and originally projected or some other factors like the client missed a couple premiums or they took out a really large premium load.

(08:56):

So something different happened than was originally planned on a sales illustration. So showing like, okay, is there action that you need to take? Do you need to put in more money? Like for example, upwards of 80 to 90% of the universal life policies sold in the 1980s and 1990s are underfunded and are going to terminate before their projected maturity again, their maximum age. And so there’s a lot of unpleasant surprises coming down the road for policy owners and for financial advisors and their clients. And then with these other policies, you just have other issues that are wrapped up in with them.

Steven (09:33):

So Tony, let’s make this a little bit more actionable for people listening. So if there’s an advisor who’s working with clients who have policies that are from the eighties and nineties, how do you even start to narrow that down? Do I need to take my entire client list and send ’em all out for evaluation, or are there things I can be looking for to say, Hey, here’s policies maybe we need to take a deeper dive on?

Tony (09:51):

Well, that’s a great question. Now, okay, I’ll put in a plug for my book if that’s okay. My book questions and answers life insurance. I have what are called enforcing illustration request letters in there so advisors can use those to send to the insurance companies or send them to their clients to have the clients send them to their insurance companies to get these enforce illustrations. Some of the companies are really good and they send really clear enforce illustrations that they might even have a summary saying, Hey, the policy is going to continue to HX based on the current premiums, and that’s pretty easy to interpret, and I go through that in my book.

(10:31):

I don’t currently have stuff up on my website, but any advisor contacts me. There’s some free stuff I can send you and some presentations I’ve given on how to analyze the life insurance policy. So I do go through that, but that’s a simple thing is to make sure your clients are requesting enforce illustrations and then have them take a look at it and see if the policies are performing as expected. You don’t need my letter just as a helpful tool. You can ask for the enforce illustrations from the companies. The other thing I would tell advisors is don’t be surprised if you have to ask two or three times to get ’em from the companies. As I said, some companies are really good about sending them, others aren’t for a whole variety of reasons.

Steven (11:13):

Say the name of the book one more time, tell people where they can find it.

Tony (11:15):

It’s called Questions and Answers on Life Insurance, and you can find it on Amazon or bookshop.org, any of the major online book retailers.

Steven (11:24):

Well, thanks for sharing that, Tony, and thanks for taking the time to write a book. I know a lot of effort goes into that. You’re highlighting why I think this is a valuable conversation to be having because this is really completely separate from any discussion of, Hey, who thinks people should be selling life insurance or not? Because we’re also, I know I run across advisors who have clients all the time who came to the advisor already having policies in place. So these things already existing, and it’s not as simple as, well, I don’t like variable universal life, so you just cancel your policies and move on. We can’t just make snap decisions. We’ve got to make sure we’re evaluating the client situation and what our options actually are for dealing with it.

Tony (12:03):

Yeah, and I would say one of the huge situations for advisors should always be a warning sign or large policy loans is large policy loans can impact the long-term performance of the policy, especially if the client’s borrowing the loan interest, which is really common on older whole life policies, is to see people borrowing the loan interest. Or if you have a client who found somebody on, well, probably a lot of our clients aren’t on TikTok, but there’s a pretty big movement now for this be your own banker concept, and people buy those policies and like you said is there’s surrender charges for the first 15 or 16 years, so you can’t get out of the contract. So you have to be able to figure out, okay, well how do you reconfigure this policy so my client can actually afford it to continue it and get the insurance that they need and keep it in enforced. But yeah, policy loans are one of the big warning signs out of policy.

Steven (12:58):

Tony, you’re absolutely right. That makes for great headlines for great social media posts of Hey, be your own banker, infinite banking, all these different things. When you are evaluating a policy that already has a big loan against it, how do you help somebody navigate what their options are at that point?

Tony (13:15):

Well, then, I mean to get back to the enforce illustrations, and that’s where you do need somebody with some expertise with the larger policy loans is because you don’t want to let the policy lapse. First of all, and Steve, this is your area, is you can get into a phantom income tax gain because you’re taxed on the amount of the loan plus any value received, less the cost basis. And on these older policies is let’s say your cost basis, which is the sum of premiums paid in most cases, $50,000. You have a loan of a hundred thousand dollars when the policy lapses, guess what? You have a $50,000 phantom income tax that’s due. So you need to make sure that you do something with that. So depending on the type of policy, you have choices of can you, sometimes you can roll the policy over to another company and have the policy loan forgiven and the IRS will accept that.

(14:08):

So you have to work with an agent who knows what they’re doing or a fee-based consultant to make sure that’s done correctly. If it’s not done correctly, the IRS is going to say, Hey, guess what? You didn’t do this correctly. You have phantom income tax bill, or you can try to restructure it, maybe start paying off the loan in small increments. Maybe you can reduce the benefit, the death benefit of the policy, so to reduce the cost of insurance so you can have more money going back to the policy loan. But it’s really important because if you let that policy loan ride for 30 or 40 years, it can accumulate a lot of interest that’s not taxed and will be taxable if the policy terminates before maturity, which means, or it’s not paid out as a benefit. Now of course, if it’s paid out as a death benefit, the loan is deducted from the death benefits, so there’s no taxes due there, but nobody wants to die to make sure they don’t have to pay a tax bill.

Steven (15:03):

Yeah, no kidding. There’s a lot of good reminders in there. Tony. I definitely want to highlight what you said about making sure that any of those transitions, any of that administrative stuff happens correctly, that can get glossed over on the details of how the money gets routed, how the paperwork gets done, all those things. But anytime we’re dealing with tax advantage situations, whether that’s tax-deferred dollars and qualified accounts or dealing with insurance policies that have potential tax implications, we’ve got to make sure that we’re dotting our i’s and crossing our T’s so we don’t inadvertently create tax situations that we weren’t planning on where we’re going to have an episode coming up here in the next several weeks talking specifically about a different side of insurance, which is advisors E&O insurance and what they will and won’t cover around tax planning. Because I get this question a lot from advisors of, oh, I’d rather just stay out of it because compliance and taxes, and it’s like, well, the issue isn’t really where you think it is.

(15:57):

And as I talk to different attorneys and different insurance people on the E&O side, you’re actually more at risk by not being proactive about tax planning. And what made me think of is you talking about not doing that paperwork correctly, I’ve had multiple attorneys and E&O people tell me that some of the claims they’ve had to pay out or some of the claims they’ve had to litigate are when advisors get this kind of stuff wrong, they unintentionally create a tax event that could have been avoided if they would’ve done the paperwork correctly. So this isn’t let’s just DIY it and wing it and hope for the best. There are potentially serious ramifications if you get this wrong.

Tony (16:34):

Yeah, a hundred percent. And that’s why I point out the phantom income tax gain because there’s a very common fallacy out there. The policy loans are okay, and there’s no harm in taking out the maximum policy loan, and that can really come back to bite you if you’re not careful about managing policy loans and withdrawals because of phantom income tax gains.

Steven (16:56):

Yeah, it’s a good reminder that the plan we put in place today is probably out of date tomorrow that these are, I mean, you can absolutely have an insurance policy that you take a loan against and creating this, I guess we’ll call it tax-free income. That’s what social media likes to call it, but that’s only if the rest of the plan goes according to plan. We have to understand what the risks are. If something changes, whether that’s something in our life or our goals or whatever it might be, that if we need to approach this differently than originally intended, we have to make sure we really understand what the potential tax implications are.

Tony (17:29):

Yeah, a hundred percent. And on the performance issue for advisors to get back to is things change. The companies are going to be able to do exactly what they project to do, and so that sales illustration is pretty much useless a day after the policy is issued because the insurance companies can’t predict what’s going to happen any better than anyone else. And so I mean, I think for advisors, you have to help your clients review their life insurance policies, or at least give them a nudge, especially if your clients are paying five or $10,000 a year of premiums or more because their families are counting on that 1 million death benefit or 5 million death benefit. So you need to make sure the policies are going to be in place, otherwise you’re going to have a very unhappy widow or widower who says, you know what? You messed up the policy, they’re not going to be a happy client.

Steven (18:25):

Yeah, absolutely. Tony, I know you spent a lot of time educating people around these topics, advisors and consumers, both. What’s something that you wish everyone understood about insurance that you don’t commonly see understood?

Tony (18:35):

Well, I think that it is insurance is like we talked about with the BRL banker, is that it is always an insurance policy. It’s not an investment. It’s not an asset class. It’s not a Swiss Army knife of financial planning. It’s an insurance policy. Life insurance is the only type of insurance where people expect it to have some kind of cash value, either if they walk away from it, if they want to cash it in. We don’t think about that with our homeowner’s insurance. We’re perfectly happy if our house doesn’t burn down over the 10 years we had a homeowner’s insurance policy and we terminate the homeowners. So we need to think that life insurance is a risk protection first. And actually, I’m going to throw in two things they’re incredibly complex financial vehicles, and I think that gets overlooked by not only consumers, but within the whole financial services industry, how complex and potentially dangerous these products can be.

Steven (19:34):

Yeah, understanding of risk is definitely a big piece of it. I recently, and this might’ve actually been why we originally connected Tony, I recently had a post on LinkedIn. Basically, I was asking some questions around insurance, and the one that was most interesting to me to see the responses to was I had the question in there of how do insurance companies make money? And the answers were wildly inconsistent, sometimes contradictory of what it is the insurance companies are doing with a consumer’s money to go and make a profit, which I am all for companies being profitable. I want insurance companies to make money and be profitable so they can pay out these claims. But it is just one area that illustrates that these are incredibly complex business models are incredibly complex products, and we can’t take this casual blase approach to, oh, well, it works on TikTok, so it’s going to work for me.

Tony (20:23):

Yeah, a hundred percent. And that may have been one of the discussions where we met is, but yeah, how insurance companies make money as a whole complex issue, as you point out, is they’re big companies is when you go to a major metropolitan area and you look at the big buildings they have insurance company names usually on the side, Prudential, MetLife, whatever, Travelers, we all know the good hands people, we know who they are. State Farm, those companies didn’t get to be big by not knowing how to run a business. But they are complexes you point out, and you do want your insurance company to make a reasonable profit because otherwise they can’t stay in business. They have to pay to administer the claim. For instance, they have to pay to issue the policy. They have to provide reports, they have to answer the phone.

(21:20):

Well, maybe not answer the phone anymore, but provide customer service. So you want your insurance companies to be able to do it, but for example is with the risk. So if we talk about the larger life insurance policy, so if you’re a financial planner and you have a client with $10 million with Prudential, they’re also using what’s called a reinsurance company to insure some of that risk. So Prudential won’t carry all that risk. Now, I know this isn’t the purpose of our conversation, but people are concerned about climate risk and homeowner’s insurance policy, and they’re thinking about, well, why don’t the insurance companies, why won’t they write the policy? Well, the reason is because they’re finding reinsurance companies to spread out their own risk because if, let’s say company A is carrying $50 million of risk in a certain metropolitan area and something happens to that, it’s going to be really hard for the insurance company to pay off that claim. So they’re using these reinsurance companies. So insurance companies have their own profile for carrying the risk, and it’s a very heavily regulated industry. Every state has its own insurance department, which takes a look at all these things and tries to monitor all these things. So I know I’m a little bit off-topic there, but I hope that’s useful for the audience.

Steven (22:37):

It brings up a good point, Tony, because as much as I’m enjoying this conversation, I think it’s really helpful and informative. We’re not going to cover all of the nuance and complexity of insurance in a 30 minute podcast. What do you recommend to advisors as far as resources, ways they can expand their knowledge and understanding of this complicated insurance world? Where should people go?

Tony (22:56):

To my website, follow me, ping me. I talk about life insurance every so often. I give presentations on it every so often. I just share some of my old presentations and resources with anybody who’s a trusted on how to do this. This is my topic of choice is how to reveal life insurance policy. But the one advice I would give to an advisor is it’s intimidating or it may be intimidating, but take the time. You’re really going to help clients out by doing it and reviewing your own life insurance policies at the same time. 

Steven (23:25):

Well, I can get on board with that recommendation all day long. It’s the same thing we talk about on taxes. You have to get the actual documents, and I love that you tagged on there, go through your own policy, and maybe time block this at different times of the year for tax returns versus insurance policies. And the great news is, even though clients get a new tax return every year, most clients at least aren’t getting a brand new insurance policy every year. And so this is something that’s absolutely doable, but you’re not really going to know what’s going on until we look at, we pop the hood and look under and see what’s actually there. I’m a huge fan of getting the reps in with the real-world experience.

Tony (24:00):

A hundred percent. That’s wonderful advice, Steven.

Steven (24:03):

We’re already into action items, which is how we love to wrap up every podcast episode, so we make sure we’re taking information and turning it into value. So if you haven’t before or you haven’t recently, I mean Tony’s already given us our first action item of review your own insurance policy, make sure that you are taking that step as an advisor, even if it’s not going to be your new area of expertise. This is something that’s good information for anyone, just like even if you’re not going to become a CPA, it’s good to review tax returns. The next step from there would be making sure you have copies of policies for the insurance that your clients have outstanding, and I would take it a step further from there. And you need to make sure that whether it’s in your client intake or somehow in your regular client meetings, you are making sure that you really understand what policies the clients have in force because some of them might predate your work with them. And Tony, I would love your thoughts on this as well. I know on the tax side, sometimes we have to get creative about how we ask about these things because clients might have products out there that they’re not thinking of as, Hey, this is my life insurance policy. And so if all I ever say is, Hey, tell me about your life insurance. Nope, I have the one term policy with you. That’s it. How are these things coming up? How are advisors making sure that they can identify anything a client has in force?

Tony (25:21):

Well, that’s a tougher question is, I mean, you do start off, do you have any life insurance policies, but then you go through the different names because it might not click. Do you have any whole life insurance policies? Oh, yeah. My grandfather bought me a whole-life policy when I was born, and I forgot about that. So you have to be a little diligent with the names because insurance companies have all these different names for the products, but usually financial planners are doing good. If they’re doing a good intake and they’re getting an inventory of all the client’s assets, they’ll be able to tell if the client thinks they have a retirement plan. But it’s really an insurance policy because that’s something I’ve seen clients say is, Hey, this is a retirement plan. No, it’s an insurance policy. And that’s also something I tell people is you can tell it’s an insurance policy because when you open up, the very first thing every insurance policy says is, this is an insurance contract. It doesn’t say, this is an investment contract. Doesn’t say, this is an asset class. It says This is an insurance policy. The other thing is that can’t stress enough. Get an enforce illustration agency only way to tell if a policy is performing as intended.

Steven (26:34):

Tony, I appreciate all those recommendations. I tell people often that taxes are just one piece of the puzzle. Insurance is certainly another piece of that puzzle. As I, with advisors who are really taking a comprehensive approach, which I know that word is very overused, but when I look at advisors who are providing a broad range of value-ad services for their clients, insurance is always one of them. And it’s from a risk management standpoint, it’s what’s evaluate, what are your goals, what are the risks involved in that, and how do we manage that? There’s a variety of ways to do great planning. This isn’t to say that there’s one right or wrong answer for everyone, but it’s certainly the wrong answer to not take an intentional approach. So make sure that you’re spending time on these things. It is a huge value add to clients. Tony, thanks so much for taking the time to be here. One more time before we go, what’s the best way for people to follow up and learn more about what you’re doing?

Tony (27:27):

You can get in touch with me on LinkedIn, Tony Steuer, or you can go to my website tonysteuer.com, and find me there.

Steven (27:33):

Awesome. Tony, thanks again so much for being here. And to everyone listening, good luck out there. And remember to tip your server, not the IRS!