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Old 07-13-2017, 03:15 PM
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elleminopee elleminopee is offline
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Default Calling all guideline experts (or intermediates or novices)

I’ve run across what I think is an interesting situation regarding guideline premiums. Seems like it could be common to many carriers and I’m curious what other’s think.

Assume you have a UL plan code that was sold primarily in the 80s/90s (i.e. when credited rates were much higher) and that that credited rates on that plan code have since been lowered to the minimum guarantee.

Many of these were sold when illustrated credited rates were north of 6% - some as high as 7.5%. Therefore many people were illustrated and paid a premium that (in hindsight) significantly underfunded the policy as credited rates declined. And since most people don’t keep with this, they never increased their premium.

Now they want to “catch up” and start paying a new, higher level premium from here forward that will carry them to maturity on the new basis (credited rates at the guarantee). Slight problem. They can’t because doing that would violate guidelines. Not a first, but the new solved for premium would be significantly higher than guidelines so after paying it a few years, you can’t anymore.

The reason I think this is interesting is because if a customer does his homework, figures out he’s behind, and requests the new level pay amount to take him to maturity, HE CAN’T PAY IT. So we have a regulation that is literally preventing customers from funding their policy – not OVER funding like guidelines was supposed to prevent, but simply funding it to carry to the end. I think if I were a customer I’d be pretty furious at this.

I’ve found that guidelines leave VERY little room for catching up in scenarios like this. Particularly, when there isn’t a lot of distance between current and guaranteed policy elements. This particular (hypothetical) product is not complex: only ultimate COIs and the only expense load is a policy fee. Current COIs are a bit lower than guarantees but not significantly so. The main driver of “cushion” between guidelines and illustrated current premiums would have been the higher credited rates. Now that interest rates have been lowered to the minimum, there wouldn’t be a ton of distance between a newly illustrated current premium and a GLP.

Since guidelines are calculated using a solve to endow using mostly guaranteed charges, the COIs in the later years make it nearly impossible to “catch up”. Those COIs don’t play nearly as big of a part in the guideline solve (because the net amount at risk in a policy that endows is pretty low toward the end) as they do in an underfunded “catch up” illustration (where the NAR can be most of the face amount).

I know that you are allowed to violate guidelines if that’s required to keep the policy from lapsing, but at that point your fund value has dipped to zero and you are just paying ART which is REALLY expensive.

Curious, if others have run across this or have thoughts. Should the IRS give more leeway in this situation? Any chance they actually will? I wonder if this has even been brought to their attention. Hey, IRS, the regulation you designed when interest rates were really high is now virtually forcing people to lapse their policies that were purchased in the 80s/90s because they can't put enough money in.
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Old 07-18-2017, 01:58 AM
george24 george24 is offline
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there are newly sold plans which will not guarantee to maturity when using the GPT
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  #3  
Old 07-18-2017, 04:00 PM
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Originally Posted by elleminopee View Post
Should the IRS give more leeway in this situation? Any chance they actually will? I wonder if this has even been brought to their attention. Hey, IRS, the regulation you designed when interest rates were really high is now virtually forcing people to lapse their policies that were purchased in the 80s/90s because they can't put enough money in.

A brief history of 7702/7702A, as it has been explained to me over the years (I did not live through it):


IRS: Hey guys, there are some really abusive products out there taking advantage of the tax code. Can you help us fix it.

Insurance industry: *snicker* uh, sure we can, boss. Here's our proposal

IRS: Ummm, thanks guys, but this seems doesn't really help and it gives you even more ways to exploit the code. Seriously guys, we know you know a lot more about this than we do. Can you give us something reasonable?

Insurance industry: Try this one, it's fantastic! (whispers to self: For us!)

IRS: OK, fine. We'll scrap the plans for something nuanced and reasonable. Instead we'll go with something that's prescriptive and doesn't leave a lot of wiggle-room for your bullshit loopholes.

Insurance: Oh shit, didn't see that coming. Buuut, we're clever and we can work with this.

Insurance industry, VERY blatant public advertisements: BUY SPWL, THE LAST GREAT TAX SHELTER!!

IRS: Oh, **** you guys. We'll patch that up with 7702A. It's still life insurance if you die, but touch the money while you're alive and you'll pay for it.

Insurance industry: Hmmmm, we'd like to go talk about some of those nuanced options if we could, sir.

IRS: What's that, you'd like us to reconsider income tax-exempt death benefits?

Insurance industry: never mind, sir.
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Old 07-18-2017, 09:15 PM
JoJo JoJo is offline
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You're getting dangerously close to that can of worms.
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Old 07-26-2017, 04:25 PM
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You're getting dangerously close to that can of worms.
Thanks, urysohn, for an entertaining and probably amazingly accurate reply.

In response to Jojo (I'm assuming your comment was directed to my OP), I'd point out that the OP wasn't trying to find a new loophole for insurance companies. It's identifying a genuine problem that POLICY HOLDERS now have. A PH could easily call up and say "Help me find a way to fund this to maturity." Insurance companies will just have to respond "Sorry, can't help you. Guidelines." I feel sorry for PHs in this situation.
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Old 07-26-2017, 06:26 PM
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Quote:
Originally Posted by elleminopee View Post
Thanks, urysohn, for an entertaining and probably amazingly accurate reply.

In response to Jojo (I'm assuming your comment was directed to my OP), I'd point out that the OP wasn't trying to find a new loophole for insurance companies. It's identifying a genuine problem that POLICY HOLDERS now have. A PH could easily call up and say "Help me find a way to fund this to maturity." Insurance companies will just have to respond "Sorry, can't help you. Guidelines." I feel sorry for PHs in this situation.
If they really are going to hold it until they die, does the guideline premium really matter all that much? Let it be a MEC, they can't get at the cash value, but otherwise is there a difference in taxes?
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Old 07-27-2017, 10:32 AM
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If they really are going to hold it until they die, does the guideline premium really matter all that much?
Holding it until they die is the problem. For the policy to last until they die, they need to increase the premium. Because of underfunding in prior years, the increased "catch-up premium" will violate guidelines preventing the policy from actually lasting until maturity. So, yes, guideline matters.
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Old 07-27-2017, 12:11 PM
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Originally Posted by elleminopee View Post
Holding it until they die is the problem. For the policy to last until they die, they need to increase the premium. Because of underfunding in prior years, the increased "catch-up premium" will violate guidelines preventing the policy from actually lasting until maturity. So, yes, guideline matters.
No, I meant if they really do hold til maturity, do they care if they go over the guideline?
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Old 07-27-2017, 03:32 PM
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If they were only violating 7-pay (7702a) you would be correct. They would also be violating guidelines (7702) which means the policy is no longer deemed to be life insurance. There are lots of tax implications of this. It's a very undesirable outcome even if you hold to maturity.
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  #10  
Old 07-27-2017, 04:01 PM
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Funding the policy to maturity has nothing to do with its tax status. That's all she's trying to say.
Reread the last post from yesterday. Carefully.
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