A recent ThinkAdvisor Life/Health article raised this question: Can members of the life insurance community explain themselves to other players in the financial services sector?
(Related:¬†5 Questions About Life Insurance for 2019)
Here‚Äôs my response, with my comments focused on how members of the life insurance community¬†can explain themselves.
Whether life insurance community members have the ability to explain themselves to counterparts in other financial services sectors is a multi-faceted topic.
My comments here are strictly limited to whether it is mathematically possible to prepare hypothetical illustrations of today‚Äôs financial planning alternatives in a FINRA- and NAIC-consistent manner. I am not commenting on whether a broker dealer or FINRA rules would allow you to show these illustrations to a consumer.
In 2012, FINRA announced Rule 2210(d)(4)(C) (effective 2/2013) defining the calculation for comparing tax-deferred and taxable alternatives ‚Äď ‚ÄúHypothetical illustrations of mathematical principles.‚ÄĚ FINRA Notice 12-29 states ‚ÄúBy placing this rule language in FINRA Rule 2210, FINRA is clarifying that these standards apply to any illustration of tax-deferred versus taxable compounding, regardless of whether it appears in a communication promoting variable insurance products or some other communication, such as one discussing the benefits of investing through a 401(k) retirement plan or individual retirement account.‚ÄĚ
No more fuzzy math, but a prescribed calculation to be used across any tax structure offering fund investing. As an example, the ability to calculate the net result of an un-capped 401(k) vs 409A NQDC vs un-capped Roth IRA v. variable universal life (VUL) v. non-qualified variable annuities v. a taxable brokerage account with the only material illustration variable being the tax structure.
In 2015, the NAIC announced the Actuarial Guideline 49 calculation for setting the maximum permitted illustration rate for an indexed universal life (IUL) policy. That‚Äôs a calculation where the S&P 500 Total Return (dividends reinvested) can be applied to calculate the S&P 500 Total Return equivalent return.
The NAIC illustration rate calculations for IUL and indexed annuity products encompass every one-year ending return within a calendar year. By averaging all 250 plus ending returns along with reporting the minimum and maximum within that year you have a better understanding of how Indexed products could have performed compared the same calculation applied to fund alternatives where daily share prices for the same period is available.
Variable and indexed insurance products are planning complements.
Combining FINRA and NAIC math allows financial planners to demonstrate these alternatives based on the consumers market and tax assumptions ‚Ä¶ and health.
Medical science extending life expectancy, reducing insurance costs, has changed the old life insurance/investment tradeoff.
FINRA‚Äôs calculation, if applied to a VUL¬†policy and taxable fund investing, typically illustrates the performance of the VUL policy this way:
Today, non-qualified asset financial decisions are divided into those that are healthy, or not. ‚ÄúHow‚Äôs your health?‚ÄĚ has evolved from a life insurance question into a non-qualified asset suitability/qualification question.
Americans own $9.9 trillion of mutual funds in taxable structures outside retirement accounts, according to the Investment Company Institute 2018 Fact Book.
The need for this level of insurance‚Äďfinancial services collaboration/disclosure/dispute-defensible documentation is quickly evolving from a ‚Äúnice-to-have‚ÄĚ to a ‚Äúneed-to-have.‚ÄĚ
So, to sum up: Can the life insurance community support the financial services sector collaborate in the best interest of the client?
The math is available to prepare hypothetical illustrations using common market return assumptions.
Will medical advancements extending highly compensated white-collar life expectancy continue to reduce retail and institutional (VUL/IUL) life insurance costs and continue to increase the mathematical advantage of using the Internal Revenue Code Section 7702 pricing and tax structure as an investment, tax and risk management alternative over other taxable alternatives?
Yes. And that‚Äôs not a life insurance pitch, but the math behind the economics of longevity.
Mark Whitelaw is head of design at¬†Winged Foot Partners (WFP)¬†and is a registered representative of and offers securities through World Equity Group, Inc., member FINRA and SIPC, a registered investment adviser. WFP is not owned or controlled by World Equity Group Inc. WFP life insurance access, analytics and administrative services for accredited investors, the financial services sector and trustees. Whitelaw specializes in investment analytics for and administration of life-insurance-funded executive benefits, trust-owned life insurance (TOLI) and individually owned institutional life insurance