Ohio National and Constellation

[Allen Trent]

Everything we do is above board, compliance, and in full disclosure. When a group is responsible for about 10% of a company's total business... it gets noticed.

I honestly have zero doubt in you about full disclosure, etc and I believe you will be fine in this.

However, in as respectful way as I can ask, are you telling me that a compliance dept approved the use of a home-made spreadsheet used to compare an equity based qualified retirement account to a life policy? And that spreadsheet utilized average expenses of 1.75% & 30-40% tax rates. I would be shocked if a spreadsheet like that would be compliant with a carrier or with the model illustration regulations in many states. That would be my only contention is that if the basis of the sale is that the applied for life insurance policy is the equivalent of 11.5%, the compliance area would send a cease & desist letter to no longer utilize that item until it can be made into a document compliant with marketing, sales & illustration rules & regulations in the specific state.

I am sure it feels like we are piling on & I apologize for that

 

[DHK]

@Allen Trent I appreciate your candor.

I didn't submit my spreadsheet to the company. It's not their business. That's for my files. Of course, the transaction and purpose was disclosed and we got the policy approved.

Now, the only criticisms I've received on it was the 1.75%. And yes, it really does depend on how you're allocating and managing the funds. My justification: If the account was less than $1 million (to keep it apples-to-apples), and managed by a 3rd party asset manager, the fees would be about 1.75%. We can verify that with many firm's ADV Part 2 brochures. Even a Morgan Stanley advisor in our group mentioned that he'd lower that to 1.5 or 1.25%. So fair enough.

Now, for the taxes... in this example, I used 12% combined tax rate adjusted for the standard deduction. I was as accurate as I can without being their actual tax preparer. And yes, the capital equivalent value was still $1.7 million compared to $460,000 contributed over 10 years.

I suppose one could assume a present value rate of return and discount the $1.7 million over 10 years to have a net present value... but really? If you needed $1.2 million to grow to $1.7 million... and you have $650,000 for income today and capital for tomorrow... does the rate of return really matter on the equivalent value? I had a 3.7x value for retirement income purposes. You can't beat this strategy with rate of return.

Plus, with qualified plans... when taxes increase, the value of those plans go down. Not necessarily the asset, but the net income after taxes. With max-funded life insurance, these plans value go up because of their immunity to the tax code. (Tax exempt cash flow against the policy.)

So, as far as my documentation: bring it on. If someone tried to sue me for Elder Abuse (hey, I'm in California)... I trust my documentation. And no, it was not using unrealistic expectations or numbers (aside from maybe the 1.75%).

 

[Tahoe Ray]

I am sure it feels like we are piling on & I apologize for that

Same. I don't agree with the approach/strategy but I definitely am not trying to kick someone when they're down.

 

[DHK]

Btw, if the tax rates were higher - based on their income - then the capital equivalent value rate of return can be as high as 27.58% per year after fees.

So my 11.6% equivalent ROR after fees... is small, because of their net income cash flow.

 

[DHK]

That would be my only contention is that if the basis of the sale is that the applied for life insurance policy is the equivalent of 11.5%, the compliance area would send a cease & desist letter to no longer utilize that item until it can be made into a document compliant with marketing, sales & illustration rules & regulations in the specific state.

Capital equivalent value is not the same thing as Internal Rate of Return. We're quite clear to say that the policy doesn't GROW 11.6% per year... but you can SPEND against it as though it did.

We're very clear on the distinctions.

In fact, what you don't know... is that beneath the $460,000 on my spreadsheet... I put the ending cash values of the policy: $315,000 (something like that) to SHOW and DISCLOSE that the policy itself won't have the $460,000!

In my first couple of pages, I put down a couple of "downsides" to this plan. One of the downsides is the fact that you'll have "less money" in the plan, but you'll be able to spend against it as though it as far more.

So yes, I have fully documented and covered everything.

One of our power bombs:

 

[DHK]

Also, just a side note, as far as I can tell, I'm the only one who has created this kind of plan or worksheet for a client.

I don't believe anybody else does that in TBL. I'm working on a couple of cases with a joint-work mentor, and I'm looking forward to seeing how he works... but if there isn't a written strategy, I'll create one.

I'd rather have documentation than not.

 

[Lloyds of Lubbock]

I dont mean to pile on but i believe if you are using a spreadsheet with a company illustration it is their business.

 

[DHK]

Supplemental to the illustration, referencing the illustration, but never in place of it.

 

[DHK]

However, if it was ever in question, I'm happy to submit my entire case file and let them sort through it. Whether it's to my GA or company compliance directly - I'd have no problem doing that.

But all I submit is the life insurance application, signed company illustrations, etc.

 

[Allen Trent]

However, if it was ever in question, I'm happy to submit my entire case file and let them sort through it. Whether it's to my GA or company compliance directly - I'd have no problem doing that.

But all I submit is the life insurance application, signed company illustrations, etc.

Again, not trying to pile on, but every time you sign the OHN life app & complete the certification section on the bottom of page 8; https://onnet.ohionational.com/webapps/static/Web/SystemUseOnly/Files/6420-OH.pdf

it is pretty clear that you need approval from the insurer of all materials used in the solicitation & sale. I also believe it has a statement about DOL best interest if using qualified fund (this part likely doesn’t apply or has been removed.

You really might want to check the wording on the application & agents report.