Midland Asset Management

Life insurance products basically have one of two goals: 1) provide a guaranteed death benefit with a fixed premium paid over a certain time period, or 2) provide a non-guaranteed death benefit with a flexible premium for a potentially higher death benefit.   The insurance industry has created lots of versions of products, such as: term insurance, whole life policies, variable universal life insurance, private placement variable annuities, variable annuities, life settlement polices, etc.

A life insurance policy has a few assumptions which need to be reviewed every few years.  The assumptions are simple:  1) assumed rates of return, and 2) the insurance company’s internal rate of return.  Both need to be measured against the timeline of the insurance policy.  The insurance agents are not compensated for due diligence reviews of policies after they have been sold, since many are captive to their own carrier.  Many of these policies can last up to 50 years, and the sales commission model does not place a monetary value on this ongoing due diligence process.

Litigators are going to start combing through insurance polices.   One of the main purchasers of the various debt derivatives and private equity debt products were insurance carriers.   Their internal rates of return are hemorrhaging downwards, fast.  Most life insurance products are in the general account of the life insurance company, which means the funds are available to creditors.   Hmmm, that’s not good. 

Bottom line:  Every few years you need to review the assumptions of all your life insurance policies by asking for an inforce illustration.  If you have a term policy, compare the old policies to new ones offered.   If you are purchasing a cash value policy, ask for a large commission discount.  I do this on behalf of clients and pass the savings on to them via higher death benefits for the same premium payment.

Always Asking, Never Assuming™

Christopher Holtby

When a privately held company (C-corp) or partnership (flow-through entity) is created, the shareholders and partners, respectively, are concerned about events affecting other shareholders and partners.     These triggering events are typically death or disability, the desire to sell to a third party, retirement, divorce or bankruptcy.

There are two types legal structures that can deal with these issues: redemption and cross-purchase arrangements.  Neither are perfect.  Each have their issues.  The core element of these solutions is to make the exiting partner monetize his/her closely-held interest in the company or partnership.  There are two ways to fund this answer: purchase a cash or term based life insurance, or self-fund.   Both of these solutions require that assumptions be made regarding the growth of the business.

Bottom line – In today’s environment, it makes sense for all business owners and their related advisors to ask the question:  Could we have too much insurance, based on our expected growth assumptions over different time periods?

Always Asking, Never Assuming™

Christopher Holtby

Every year my health insurance company sends me a long form-looking letter of changes to my health insurance policy.   Every year these changes are reviewed against the cost.  Periodically some of these changes and their implications are discussed with the health insurance company via a company lawyer.

This year there were material changes to the transplant organ coverage.  This being an expensive and delicate procedure, extra analysis was used.  My questions focused on the choosing of a transplant surgeon: in or out of network.  The answers indicated that the health insurance companies work for the doctors, not the medical premium payors.  

Insurance companies have a special investigation unit dealing with problem doctors of all sorts.  If you call the insurance company, they do not have to tell you if such-and-such doctor is being investigated.   Insurance companies do not represent us, the insured, they only act to negotiate lower fees for our medical procedures.

Bottom line – go to: http://www.ratedoctors.com/, http://www.ratemds.com/, http://www.doctorscorecard.com/, http://www.mdnationawide.org/, http://www.americanmedicalassociation.org/, and the Better Business Bureau.  Ask doctors who work in the same hospital about the whispers amoungst the professionals.  Go to the Mayo Clinic in Phoenix or Rochester.   Hire a medical consultant such as Pinnacle.

Always Asking, Never Assuming™

Christopher Holtby

A client’s worst nightmare is getting sick in a foreign country where their usual connections to the medical community are not functional.  There are solutions to this problem.  They are not cheap, but they are not always excessively expensive.   U.S. domestic private health care plans usually exclude paying for medical costs outside of the jurisdiction of the 50 states.   In some cases, places such as Puerto Rico, the U.S. Virgin Islands, and other Pacific Ocean territories falling under the U.S. government rules may also be excluded in the fine print of medical coverage.   

If you need and want to purchase global health care access that is insured and offers concierge services, here a few questions to consider: 1) does the 24/7/365 patient services line have staffed RN, doctors or just nurse practioners?, 2) are your medical records consolidated in an electronic format?, 3) does your international health care coverage provide medical evacuation to America or just the nearest large hospital?, and 4) does your concierge medical care offered in the U.S. have knowledge of on-the-ground available health resources anywhere in the world?

Bottom line – If you are generally healthy and get sick in a foreign country, this is not a big deal.  If you are healthy, and break a bone, this is most likely not a big deal.   If you are healthy and get into a car crash etc. that is a big deal.  If you are not healthy to begin with, cover your options or just stay in the U.S. – it’s safer and less trouble.

Always Asking, Never Assuming™

Christopher Holtby

A good friend of mine who is a financial planner (ex-E&Y) and I were talking about long-term care.   Our discussions have been held over a few weeks.  Nothing exact, but ambling.  I forgot who asked who first, but it started with:

Question: Why do we need long-term care? 

Answer:  Old people typically don’t have the family support system close by, and medical advances cost more than they did 50 years ago. 

Question: How do we pay for long-term care?  

Answer: Buy insurance or self-fund.

Question: At what level of wealth do you need to buy insurance?

Answer:  It depends on the timeframe and the dollar amount of the many long-term liabilities that a family needs to pay for, such as retirement, college, charity, consumption needs etc.  It also depends on the current age of mom and dad and their current level of net worth. 

Question: Are there any hard and fast rules?

Answer:  Nope, it all depends on the above.  However, a few general rules of thumb are: if mom and dad in their mid-30s, have a net worth around $5 million, a reasonable lifestyle (as in the 1950s, not the early 2000s) and reasonable retirement goals (based on long-term returns of around 7%), they can self-fund.   People way below this net worth level and in their late 40s to early 60s, unless some large liquidity event is looming in the future, should consider buying insurance (ahhh, I hate that stuff).

Question:  What are the variables that go into the calculation of the dollar amount of my long-term care liability, regardless of whether using insurance or self-funding?

Answer:  Assume the number of years L-T care will be needed (4 is average), assume current cost of such care today (assume $150 per day), health care inflation (assume 5% – don’ t use COLA because the number is too low), how many years until you might need L-T care, and presto kinda sorta you have an answer.   Remember, if you self-fund and need the long-term care insurance earlier than assumed, you have a funding problem.

Question: How should I invest the money if I self-fund?

Answer:  Zero-coupon bonds, long-term maturity bonds, and some stocks.  You have to think like an insurance company in terms of matching the maturity of the liability to the maturity of the asset that funds that liability.

Bottom line – Long-term care insurance is not always the answer.   However, the answer does begin with asking, “Why do I need to worry about long-term care costs?”.   This link from Medicare has additional resources.   

Always Asking, Never Assuming™

Christopher Holtby

This is a case involving $14 million in insurance contracts on Marietta Campbell. The fight began when Jefferson-Pilot Insurance Company rescinded the policy because of misrepresentations made during the application process. This case centered around the Stranger Originated Life Insurance scam. A group of people, family or otherwise, gather together, form some type of entity, and invest capital into that entity.  The only real assets are life insurance policies on one person, and the entity profits from the death of the life insured. Not good.

How did it happen? What where the facts?

It started out with a husband applying for a series of life insurance policies on his wife. The life insurance agent, a friend of the family, received blank but dated and signed applications.  His office filled them out. There were 6 applications. On the first two, the answers were correct; the life insured was applying for additional life insurance. The questions on the remaining 4 applications were not answered correctly regarding other life insurance applications, nor were the first two applications edited to reflect the additional life insurance applications.  Wait, it gets better. The life insured had an estate of $2 million and had applications for $14 million of life insurance.  Really, you can’t make this up.  All the policies were issued, with the understanding that the husband planned to contribute them into a company that was 100%owned by the wife, when in fact she owned less than 1%. Within a year, unfortunately, the life insured passed away. The husband and life insurance agent realized they had not contributed the policies into the company and sent a change of beneficiary form to the life insurance companies. The change request was too old and the companies requested some additional information. The parties involved filled in false information, signed the new document as the life insured, and sent back to the life insurance companies.
Per industry standard, when a life insured dies within two years of policy issuance, there is a formal review. The house came down. Case closed and no money was paid out.

How can you avoid being duped or inadvertently being involved? 1) If you are worth $xx million, triple check with the insurance company to make sure you are allowed to apply for $xx plus million, 2) Life insurance placed into an entity as a form of investment without the direct approval of the insurance company nullifies the policy, and 3) Check the application twice even if you prepared it before signing.

Always Asking, Never Assuming™ Christopher Holtby