Some time ago, I suggested a rule of thumb for advisors reviewing a proposal for premium financing. The rule’s simple: If you don’t see a stress-tested, clear-cut exit strategy that would allow the client, during their lifetime, to terminate involvement in the transaction without losing the coverage or their tax and economic shirt, then disregard the proposal. This rule of thumb applies equally to split-dollar or any other arrangement the client might want to terminate during their lifetime for whatever reason. The rule is especially impactful when the plan involves an irrevocable life insurance trust.
I posted that rule of thumb item after seeing the umpteenth posting about the wonderment of advanced case designs that purported to reduce the economic and/or tax cost of buying large policies, but didn’t mention what could go wrong and what the client could do if it did. After all, mentioning the need for a lifetime exit strategy would introduce an element of caveat emptor over the proposed design.
A New Urgency
That posting was a modest effort to help advisors protect their clients and themselves from giving the green light to plans that offer a world of promise but could deliver a world of economic and tax hurt if the plan design didn’t incorporate an off-ramp. Today, I’m trying to give a new sense of urgency to following that rule of thumb, because if there were ever a time to be sure that the introduction (and presentation) of an advanced design addresses the what-ifs, it’s now. Clients are planning, advisors are advising, and agents are selling at a time of heightened uncertainty about everything that underpins the rationale for doing a given plan in a given way. That uncertainty, in turn, increases the likelihood of a change of circumstances on the part of the client, a change in tax law or some unsettling development with respect to the product that calls for the complete termination of the plan or at least a meaningful midcourse correction.
What’s more, in light of whatever rules there are about suitability and best interest in the recommendation of life products and their packaging, even a discussion of the exit strategy probably isn’t adequate these days. The discussion should first cover how the agent has anticipated and mitigated the potential downsides of the plan through artful selection and design of the plan, along with artful selection, design and funding of the product.
There’s no question that advanced designs can enhance the tax economics of clients’ planning. But in times like these, adding a couple of pages to the slide deck to address the what-ifs can protect clients and advisors while burnishing the agents’ credentials as professionals and underscoring the value of the specialists who support the agents in this sophisticated area of practice.