3 great alternatives for large lump sumsArticle added by Jeff Reed on July 30, 2013
Jeff Reed

Jeff Reed

San Diego, CA

Joined: May 07, 2012

Recently, we talked about the lump sum capacity problem producers are facing based on restrictions on first-year premiums currently in place at many carriers.

While some cases can be solved through careful carrier selection, there are three alternatives — and they just might unlock superior performance for the client at the same time.

1. Split the exchange

This option is a rare one, but if the carrier the funds are coming from allows partial exchanges, this is an easy solution. Of course, this assumes that the limitation on first-year premium is based on the magnitude of the lump sum rather than a multiple of commissionable premium. The reduced face amount that comes with splitting the policy also reduces the target, resulting in a lower premium limit.

Given how rare it is for a carrier to allow the split exchange, we clearly need additional options.

2. Spread it out

Spreading the premium across multiple years is obvious and, in the current pricing environment, does not typically involve a significant hit to policy performance versus single-pay designs. The challenge here is how to execute on this strategy if the source of funds is an exchange.

Carriers don't typically hold the cash on the side and transfer it into the policy ... except when they do. There are contracts out there that have a "premium deposit account" built to do just that.
The other option here is to take a withdrawal from the policy and simply exchange the net cash value after the withdrawal. Depending on whom you talk to, that can create its own set of problems in the form of "boot" and a taxable event.

I have talked to experts on both sides of this issue and they agree to disagree on the likelihood of creating a taxable event. My best advice is to make sure everyone enters into this strategy fully informed.

3. Make a second sale

What's the best way to spread out a lump sum?

It might be buying a single premium immediate annuity (SPIA) and using the annual payments to fund the new life contract. There are some challenges in the execution of this strategy based on giving up control of the cash and the possibility of dying early in the contract, but those can be mitigated with thoughtful design.

Of course, there will be a bit of tax due each year based on the percentage of each payment that will represent gain. When spread out over a lifetime, however, that is typically not a significant issue.

The bonus in this last strategy is that it is, in fact, a second sale and generates a second commission — all good news for the producer.

One word of caution, however: In today's interest rate and investment climate, most carriers are not interested in participating in both sides of the transaction. Best practice is to select one carrier for the life insurance and a second for the SPIA.
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