Financial Underwriting: Red Light, Yellow Light, … Underwriting: Red Light, Yellow Light, Green Light? Mike Hesse Assistant Chief Underwriter September 15, 2017 Overview What Color

Financial Underwriting:Red Light, Yellow Light, Green Light?

Mike Hesse

Assistant Chief Underwriter

September 15, 2017

OverviewWhat Color is the Financial Traffic Light?

Stop- No offer until financial issues resolved

Proceed – with caution Securemore information

Proceed Financially

3

Risk Level is a Continuum

Why?

What is in force?

Other applications pending?

Ultimate Total Line?

Fundamental Questions

4

What Factors Determine the Color?

Need

Investment

Radically new, bold, creative sale

Clear documentation is key

Company / Amount / Issue Date

Purpose of Insurance

Replacement

Company / Amount / Issue Date

Additional / Competitive

5


Income replacement

Final expenses

Mortgage

Estate taxes (“death taxes”)

Retirement planning /deferred compensation

Estate equalization

Needs-Based Protection Against Loss and Current-Projected

6


Stock redemption / buy-sell

Key person replacement

Loan coverage

Charitable contribution

Kitchen sink- liquidity

Can consider ‘stacking’ needs (income replacement + mortgage + final

expense)

Needs-Based Protection Against Loss and Current-Projected

7


Asset protection

Alternative to low-interest CDs, volatile stock market

Gift tax exclusion transfer to trust to purchase life insurance on child who married poorly and gambled in the stock market

Investment and Financial Planning

8


Income with Respect to Decedent (IRA- income tax due at death)

Guaranteed / current / illustrated rate of return

Estate planning / transfer during lifetime

Inside build up advantage for life insurance


9


Tax mitigation, deferral, avoidance

STOLI, CHOLI, Surrogate insured

Commission rebating / premium advances / early lapses

Life insurance policy settlements (sales)

Windfall probability / potential


10


Adjustable or Fitted? Current/future needs

Was Head measured? Needs analysis

Within sizing guide? Formula

How much hair under the hat? Earnings stability

Will the hat still fit after ‘haircut?’ Financial setback

How often does client change hats? Replacement

Income Replacement Does that hat fit?

11


Current income

Assets- Liquid? Qualified?

Current budget

Liabilities?

Selling assets?

Trust funded?

Premium financed

Illustration assumptions

Medical assessment/COI

Estate Planning and Funding the Premium

12


Projection

Rate of return

Life expectancy

Calculator used

Guaranteed rates

Investment track record

Asset control/inheritance

Protection or creation?

Estate calculator

Estate Planning-Final Goal? Protect or Create Estate?

13


Who is Key Person?

• Rainmaker

• Sole proprietor

• Technical expertise, patent holder, special skills/experience

Low compensation currently BUT

• Stock options

• Equity share of the company will explode

• What is potential economic loss to business?

• Lost sales? Customer relationships? Inability to finance debt?

• High cost to replace? Business Continuation

Key Person-Gauging “Economic Loss”

Pinterest.com

14


Know all owners and percentage of ownership

Coverage proportionate to ownership

Need 1- 2 years business financials (trend)

Establish the value of the business

Buy/sell agreement should be in place

Buy/Sell

Quantafinancials.com

15

A Word About the Proposed Insured…

Occupation (Training required? Job market?)

Income: earnings history, ability to document

Net worth- composition

Reality check – income in relation to occupation income average / median

Source of premium

• Income + current liquid assets in relation to premium

Beneficiary designated

• Relationship

• Insurable interest

• Financial loss

16

How Was the Sale Made

What was Producer’s role in sale?

In overall financial planning?

Relationship with proposed insured?

Fiduciary Duty vs. Suitability

• Client’s interests first, no conflict of interest

How was sale developed?

What facts/analysis were used to determine Financial need?

Life Insurance Sales Process

17

Fiduciary Responsibility

February 1, 2017 - NY Times Business Section Article

Earned $650M in past 30 years

Hired Management Group to oversee his finances in 1999

Needs to sell significant assets to settle debts and for divorce settlement

Suing advisors- instead of protecting assets, they “engaged in years of gross mismanagement, self-dealing, and at times, actual fraud.”

Firm counter-sued Depp, arguing that it “did everything possible to protect Depp from his own irresponsible and profligate spending”

The Depp Riddle: Who Should Watch the Money?

18

Fiduciary Responsibility

Spending: $2M per month; has purchased 14 homes, a French town, a chain of islands in Bahamas, $5.6M interest of overdue taxes, $3M fire cremated remains of Hunter S. Thompson out of a special cannon

Depp didn’t keep track of his accounts, read documents before signing, or question late tax payments for 16 consecutive years

2015 President Obama- Fiduciary Responsibility “You want to give financial advice, you need to put your client’s interests first”

Others in industry oppose- places entire burden of responsibility on advisors rather than client, who should pay attention, will end up costing consumer more for financial advice

People should bear more responsibility for monitoring their finances and life

The Depp Riddle: Who Should Watch the Money?

19

Financial Considerations

Financial verification

Financial projections

Financial justification

Financial fantasy

Financial limits

• Jumbo limit

• Binding limit

• Retention limit

20

Financial Justification

Income replacement multiples

Percentage of income allocated to life insurance premium

Percentage of liquid current assets allocated to insurance premium

Estate planning – net worth projection

Key Person multiples

Stock redemption / buy-sell formulas

Deferred compensation formulas

Charitable giving formulas

Where does amount requested fall on the continuum based on formula?

Rule of Formulas

“Normal” Amount

21

Financial Verification

Life insurance contract - evidence

Application representations- part of contract? Need to amend?

Inspection Reports

Telephone-interview conducted by Underwriting

Representations –Most Underwriting is Based on This Information

22


Representation on application

Producer’s report or commentary

Inspection or tele-interview

Mainstream fits the formula assumptions

Consistency

Does it make sense?

● Representations ● Validity ● Depth of Verification ●

23


CPA/accountant

• Credential Verification

• Terms/history of association

Independent Financial Planner/Attorney

Vested interest in sale (Fiduciary? Suitability? Commission?)

Expert Opinion

24


1040 Tax return

4506-T signed- Tax Transcript

W-2 statements

Personal financial compilations

Brokerage statements

Appraisals / business valuations by experts

Business financial statements (BFS)

Documents

25

When Do You Need to be Really Sure Before Proceeding?

Less financial/medical volatility and risk exposure

MORE: High dollar risk, volatility, reputational risk, regulatory risks

Potential for Fraud

Walkway or Highway?

26

Is the Amount Justified?

How solid are the financials?

• Break down of net worth into assets and liabilities?

• Assets value been verified as fact? If not, can they be?

Named beneficiaries of policies in force?

• Agent states she’ll drop the $500,000 term policy, if necessary, to justify the coverage (expires in 2019)

• Does the $100,000 initial premium influence your decision?

o Where’s the $100,000 coming from?

What Additional Information Might be Helpful?

27

Financial Documentation

The application

Financial supplement that may or may not be signed/dated

The producer

The producer in role as CPA/financial advisor

Inspection or phone interview

Credit reports: ‘risky’ financial behavior not just bankruptcy

Does the Documentation Support the Financial Decision?

28


CPA- Credential verified or not? Existing relationship established?

Private bankers- Willing to talk? Being compensated on the sale?

Attorneys knowledgeable about finances and planning - Interest in outcome?

Business financial statements- Does it match Representations?

Does the Documentation Support the Financial Decision?

29


Personal

Property records searches

Brokerage statements

Zillow.com search results

Income tax returns or transcripts

Personal Financial Statement prepared by CPA or Attorney

30

Tax Returns

Supporting schedules needed?

• Depends on application $ amount, sources of income

• Income-based financial justification/verification

• Net worth-based financial justification/verification/inference

• Beneficiary-personal or businessoName of business oTrust-personal insurance or is trust used for business purpose?

Joint return: whose income is it?

Extraordinary gains, losses (and tax impact)

Average income vs. increasing income

The Good, the Bad, the Ugly

31

Federal Tax Returns

Salaries

Interest

Dividends and Distributions

Capital gains

Sole proprietor business income

Partnership, S corporation income owners-K1 forms-ownership percentage

Reading the 1040…and Assorted Schedules

32

Tax Returns Are Not Always…the Best Option

Often don’t include:

• Business holdings

• Real estate holdings

• Financial assets: CDs, Cash, Stocks, Bonds, IRAs, 401Ks

Business Insurance:

• Valuation of business, partnership form only, S-Corp form only

They Don’t Always Show the True Wealth of Folks

33

Tax Returns Are Not Always…the Best Option

Net worth verification

Basis of sale is estate protection

Copy of 1040 indicates total income of $98,300 with capital gains / losses showing negative number entry

Capital gains schedule sent in follow-up

• Losses actually over $3 million

• Limitations on tax reporting limited entry on 1040

• Majority of wealth in privately-held business-oAssets not “documented” by tax returns

“These losses prove my client is wealthy and worth the amount applied for.”

They Don’t Always Show the True Wealth of Folks

34

Business Financials

Privately held vs. public companies

Stockholders, investors / current owners / basis for tax returns

GAAP will show assets based on their historic costs rather than their current market values for items such as land

GAAP will show other assets at their fair market value such as financial investments

Scope and Target of the Financial Statements

35

Business Financials Evaluation

Ownership % of applicant

Type

• Sole proprietor

• Partnership

• S corporation

• C corporation

Source

• Spreadsheet prepared when, by whom, single-year or comparative

• Relevance today?

• If by CPAo Audited

o Review

o Compilation

36

CPA Source Business Financial Statements

Audited

The accountant has done extensive analysis, testing and prepared footnote disclosures plus a complete set of financial statements, expressing an opinion, or declining to provide one (red flag) on the fairness with which the financial statements represent the financial position, the results of operations and the changes in financial position.

Generally larger company, expensive, time-consuming

Types of CPA Statements are Not Equal

37


Review

The accountant has performed fewer procedures and offers less assurance, indicating only that no material modifications have to be made to the financial statements for them to be in conformity with GAAP.

Materially same result as Audited. Relies on supporting documentation for underlying financial information. Less expensive, quicker- more realistic for small businesses


38


Compilation

The accountant pulls together financial information for the company, does no testing for analysis of the financial information, and may not prepare footnote disclosures.

Compilations are management’s representations, and the outside accountant provides no assurance on the statement.

Generally provide accurate information (fraud is not common), but not sufficient to support larger face amounts


39

Business Financial Statements

Balance Sheet

Income Statement

Statement of cash flow

40

Balance Sheet Investopedia-5 Tips for Reading Balance Sheet

Balance Sheet- Snap Shot

41

Income Statement

Revenue investor signal- increase to improve profitability, steady trends favorable

Expenses:

• Cost of Goods Sold – producing/purchasing goods or services sold

• Selling, General & Administrative Expenses - salaries, marketing, overhead

• Depreciation/Amortization

Profits = Revenue – Expenses- Gross Margin (Profit) is key to sustainability

• Operating Profit- profit made from actual operation

• Net Income- bottom line after all expenses paid- may be managed to reduce tax liability or propped up to increase earnings per share (and value of Executive Stock Options!)

Conclusion: analyze company’s profit fundamentals- significant changes in revenues, CGS, and GG&A? favorable- increasing sales, rising margin compare with industry peers

Best Foot Forward: Investopedia-Key to Reporting and Predicting Company Earnings

42

Cash Flow Statement

How company obtains and spends cash

• Borrow to pay creditors?

• Earnings for high dividends?

Differences between net income and cash flows:

• EBITDA- Earnings Before Interest Tax

• Depreciation Amortization

o Better indicator – high non-liquid assets, long-term debt

o Misleading- short-term debt, no hope for future positive cash flow from operations (e.g. Dot-Com Bubble)

Where the Rubber Meets the Road

43

Cash Flow Statement

Cash Flow from Operating Activities

• In- Revenue from sales of goods and services

• Out- Payments to suppliers, employee, government, lenders

Cash Flow from Investing Activities

• In- Sale property, debt/equity securities (other company), collect principal on loans

• Out- Purchase property, purchase securities, lending to other entities

Cash Flow from Financing Activities

• In- Issuance/Sale of equity securities in company, issuance of debt securities

• Out- Dividends to shareholders, Redemption of long-term debt/capital stock

Segregates Cash Flows

44

Cash Flow Statement

Free Cash Flow is Operating Cash Flow minus Capital Expenditures

Conclusions:

• Tougher to fake cash flow than Earnings Per Share (can manipulate earnings)

• Negative cash flow could be large investment (or expensive financing!)

• Trailing FCF- demonstrates ability to pay creditors/investors and reinvest earnings

• Are company’s current business model and sustainable long-term?

Free Cash Flow ● Cash is King

45

Business Financials

Privately held small businesses

One definition used by business analysts is $5 million or less in revenue / sales

Quality of business financials

Intermixed business and personal assets / liabilities / expenses

Stockholder vs. tax return completion focus


46

Business Financials

Multiple business holdings

Independent

Interlinked

Missing consolidated financial statement


47

Business Financials

Slideplayer.com; FourweekMBA.com

48

Business Financials

1. Adverse/Qualified Auditor Opinion on cover sheet

2. Negative Cash Flow, restructuring loans to cover shortfalls

3. Cash flow short of covering interest

4. Liens, Material pending lawsuits that my impact financial viability of business

5. New loans at higher than market interest rates

6. Unfavorable Current/Quick ratio (current assets/ current liabilities < 1.0)

7. Increasing receivables, high percentage over 90 days, Factoring (selling AR)

Red Flags- Abridged List

49

Private Companies

Private companies range from tiny, family-run businesses to very large companies in terms of employees, revenues, and bottom-line earnings

Marketability / liquidity

Minority Interest in privately-held companies should be significantly discounted

Industry or sector trends

Equity vs. debt capitalization

Start-ups: high growth periods, long-term growth mirrors market sector

Finding comparable companies – estimate fair market value (FMV)

• A similar business just sold for $15 million,” per broker

• Location, number of employees, revenue history, FMV / specific investor value

Vary based on Multiple Criteria

50

Fair Market Value

The price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts

OK, where do I find that?

• On the producer’s cover letter, e-mail, phone call

• On the balance sheet?

• On the income statement?

51

Fair Market Value

Business FMV is based on projected growth rate and investor’s discount for use of money plus degree of risk (sector, this particular business)

Multiple of:

• Net income

• Earnings before non-cash expenses (depreciation and amortization)

• EBIT – earnings before interest and taxes

• EBITDA – earnings before interest, taxes, depreciation and amortization

• Percentage multiple of gross revenue

• Multiple of seller’s discretionary income (SDE)

Theory vs. Practice

52

Business Valuation

Tend to be dependent on owner/manager

Lower quality financial statements that are tax-oriented

Owners reluctant to pay for audited financial statements even when this opens access to credit markets

BFS likely to be limited in time period covered, unlikely to have footnotes or subsequent event coverage

Small-Business Valuation

53

Business Valuation

Have less access to (and pay more for) capital and must rely on infusions of capital from owner family and owner employee

Credit may be from second mortgage on residence

Access to debt capital is more limited and expensive

Owner or related party loans may never be repaid nor is there any intent to repay


54

Business Valuation

Higher chance of confusing personal and operational expenses and investments

Net income minimization with “excess” owner salary, diversion of funds for nonoperational expenses

Excess cash holding or long-term investment (securities) in excess of business operational needs

Majority owner may personally own other companies receiving rents or other expensed items on company financial statement


55

The Multiple

10x – RGA kept it simple: multiple net income before depreciation and amortization by 10 (EBITDA)

Other guidelines put the business in buckets by classification of growth rate (historical) as projected and perceived risk of investment

• Range may be from 4x to 15x

• Variables: size, risk, growth period, stability pattern

50x favored by producers eager to make the sale

What is the Magic Multiple Number?

56

Start-Up Business

Angels: individuals / smaller loans

Venture capitalists: individuals or businesses

• Private Equity Firm- help grow/manage business

• Hedge Fund- Investor only- limited insurable need

Investment expectations

• Higher Risk- Lots of failures- requires higher rate of return than traditional financing

• Big hits- growth industries with high future revenue goals

• Exit strategy (for profits), although some do run the business for a time

• Track record of picking winners? Are they the ‘SMART’ money?

Investment form

• Equity

• Debt

• Combination- Example- Preferred Convertible Stock (Locks in right to purchase shares of stock at discounted price in the event of Initial Public Offering)

Angels and Venture Capitalists

57

Start-Up Business

Burn rate- Under-capitalized?

Insure cash? Insure ‘investment’ risk?

Pro forma statement value?

Key person economic value?

Experience in this type of business

Past compensation

Total income vs. income from this business

Use of debt investment in company to purchase key person insurance

Premium financing using investment funds in company as collateral (Who’s skin in the game?)

• Death benefit itself as collateral for all or part of the ultimate loan

58

Business Valuation Lite

Sole proprietor business – key person role integrated

Net business income impacted / limited by:

• Tax focus of accounting

• Integration with personal finances / expenses

• Creditor protection money moves- collateral assignment

• Use of second mortgage on residences as business credit line

• Use of credit cards for daily expenses

Value on death – assets marked to current market value

• Variance from depreciated value and cost basis used on balance sheets

Sale of business – limited market of would-be investors

• Minority ownership discount substantial even if any investor interest

• Seller financing

One-Person Owner / Family Business

59

Juvenile Insurance

General Guidelines- parents multiple of children

Wealth transfer- well-developed plan, current family financial status

Life Insurance on juveniles as investment- windfall?

Future Inheritance- Best cases: consider discounted future value

Trusts and Business Ownership- assets irrevocably transferred?

Guaranteeing Future Insurability- avoid excessive/anti-selective sales- lapse risk

Reputational Risk: over-insurance on juvenile not in public interest

Consistent with Family Insurance Program?

60

Asset Reallocation – Older Age

Traditional insurance need?

Affordability/Over-insurance?

Benefits of Life Insurance: Guaranteed Benefit, Avoid Probate, Avoid Market risk

Concept Risks: Longevity, Funding/Profitability, Litigation

Client profile: liquid net worth, funds not needed to meet daily expenses, STD risks

Producer’s experience using concept, knowledge of client’s financial situation, Fiduciary vs. Suitability role

Efficient Use of Assets vs. Maximize Leverage?

61

Estate Equalization

Composition of family net worth- liquid assets?

Ability to comfortably fund with other assets?

Nature of assets transferred

Unequal vested interest by family members

Farms, Family Businesses, and Unique Assets

62

Estate Equalization

Farm, Small Business, Real Estate/Land, unique personal assets

Liquidity needed to avoid distressed sale in illiquid market to settle estate

Asset transfer to next generation already in progress

Protect assets, not Create assets

Client Profile: history of financial planning, non-volatile health, ability to comfortably fund life insurance (no premium financing)

Need to document fair market value of assets and premium source

Farms, Family Businesses, and Unique Assets

63

Scenarios

Incomplete or inaccurate disclosure of medical history impacts assessment of financial answers.

Eighty-two-year-old applicants need less money to live on so can spend more on life insurance premium.

Seventy-six-year-olds who transfer CD deposits to life insurance may earn a higher interest rate, but have difficulty accessing cash.

When listing value of asset components, small-business owners tend to give the “book” or equity value of the company on interviews with inspection vendors.

Start-up businesses are likely to fail.

The median income of nail care personnel at beauty salons is $50,000. (Hint: includes part-time workers.)

True or False

64

Red Light

Lack of Insurable Interest or Need

Unwilling to provide requested Financial documentation- e.g. 4506 Form

Fraud

Examples

65

Yellow Light

Possible over-insurance/ aggressive stacking

Multiple pending applications

Unable to document income

Weak insurable need

Examples

66

Green Light

Clear insurable need

Consistent total line

Consistent/Documented financials

Full medical/financial disclosure

67

Mixed Signals?

What factor(s) are most important?

Is one factor a “deal-killer?”

Could case presentation distort information?

Medical issues?

Lack of disclosure?

Competitive issues?

Lack of consistency in documentation?

Comfort level with Producer?

Producer’s relationship to client?

Cutting Through the ‘Visual’ Distortion

68

Mistakes

Fill in the Amounts that work for amount applied for

Ambiguity, Complication, Obfuscation

Misrepresentation

Lack of Candor

Fraud

Mistakes Happen ● INTENT IS KEY ●

69

No Light?

Ask questions

How was the sale made?

How was the need determined?

Enough reliable information to support decision?

What if There are no Clear Financials Signals?

70

What if There is No One to Ask?

Forensic Underwriting (Book of Business review)

Public data sources

Credit-based data

Look for patterns

Identify largest and most probable risks

On-Line Self-Service or Accelerated Underwriting

71

Case Study 1Income Replacement

72

Case Study 2Chronic Pain

73

Case Study 3

M 72 $5M GUL - Farm owner- Widower

• Farm value $2.5M- projected value $4M (realistic projection?)

• Annual revenue $500K, net loss after depreciation/interest $50K, land value $1.5M, equipment/other assets $1M-long-term debt $500K

• Annual adjusted joint income $40K, personal net worth $400K excluding farm- liquid assets $20K

• Owner/Beneficiary- Irrevocable Trust- To Be Established

• Considering Premium-financing

• Medically low-Substandard-due to mild Coronary Artery Disease- 2015- 2 stents credited to STD

• 4 children- 2 live in area- will inherit in equal shares per Will at Father’s death 2 live out of state- will inherit other personal assets

Farm/Estate Equalization—Can We Move From Red Yellow Green by Adjusting Details?

74

Case Study 4Juvenile

75

Case Study 5

Female 79 - $1.5M Indexed UL- Medically STD

• Retired, income $100K, net worth $2.5M Owner/Beneficiary Daughter (no details on IF); purpose: Estate planning

• Admits $1M IF with same carrier- no date of issue provided

• RGA’s records indicate additional $1M IF issued 2014 by another carrier

• IAI hits 9/16- 3 hits, 10/16

• Spouse has $50K IF (no details regarding his insurability)

• Senior Supplement from other carrier: ADLs ok, drives 5K miles/year- MVR clear, did not complete high school, Get Up & Go- 16 secs

• Chronic Interstitial Cystitis- disclosed on part 2

• NTproBNP 115 (<450), Hemoglobin 12.7 (12-16), Urinalysis WNL

Lack of Candor

76

Case Study 6

Outdoor Beverage CEO- M 43 $5M

$5M key person + buy/sell replace $250K IF

Established in 2010 by HS Teacher (Chemical Engineering degree)

Produces concentrated beer/soda drinks for backpacking

$250K key person- issued 2010 – UW reduced from $1M request- STD medically

No Cover Letter submitted

No age/amount or APS requirements submitted

Business Coverage

77

Case Study 6 (cont.)

Personal Financial Statement- net worth $1.1M- cash $300K, cash value

Life Insurance $250K ( on Term?), personal property $500K, no liabilities

annual salary $102K past 2 years, $104K this year

Business Insurance Questionnaire- Founder, holds majority of technical knowledge, key business relationships, no formal buy/sell agreement, no loans, C- Corp, amount determined by market value of business

Business Coverage

78


Business Financial Supplement- Assets $420K, liabilities $24K

Market Value $15M, PI’s share $7.5M, net losses: 2014 ($600K), 2015 ($650K), 2016 ($315K)

Profit & Loss Statement- 2016- not signed or source provided: Sales $123K, Cost of Goods Sold $144K, gross margin ($21K), Operating Expenses $98K, Staffing Expenses $191K, Utilities $20K, Net Loss ($355K)

Business Coverage

79


What would you ask?

• How as Fair Market Value calculated?

• Investment of $7.5M for 50% of company?

• How much capital did Key Person invest?

• What is economic loss in terms of lost future cash flow, growth in FMV?

Business Coverage

80


Supporting Financial Documentation

• Cover Letter(s)- Producer, CPA, Attorney, Appraiser, Banker

• Curriculum Vitae- experience, qualifications, accomplishments: Predictor of future success?

• Employment contract- Does it include ‘earn-out’ clause?

• Pro-Forma financials

• 3rd party? Audited? Reviewed? Compilation?

Business Coverage

81


Supporting Financial Documentation

• Business Plan: Includes investors’ role in managing business (if any) and how business activities will be funded

• Financing Prospectus (Equity, Private Debt, or Preferred Stock)

• Long-term debt or Line of Credit documentation from Bank

• Documentation of upcoming sales booked, capital investment

o Is the “Smart Money” investing in business?

Business Coverage

82

Case Study 7

F 31 $100K Term 20 + $250K Whole Life with PUAs- both paid annually-(may be applying for total of $1M)

• Resident Alien Card- expires 2021- citizen Vietnam- in US 5 years

• Cosmetics Manager at Macy’s for 3 years- income $50K, net worth $100K, Spouse earns $50K

• Beneficiary: Spouse Primary, Children 4, 5, 10

• Purpose: income replacement and college funding

• April 2016 DUI- Suspended Driver’s License- Reinstated July 2016

• Admits to DUI on Client Interview- ½ beer at birthday parties, application states

• Normal labs, negative health history, no ETOH criticisms

• RX Check- consistent with health history

“Green Card”

83

Case Study 8

Asset Reallocation (IRA max strategy)

F 69 $500K Whole Life 95- retired $5K IF

• PFS – carrier’s agents focus on financial planning

• Income $27K, net worth $500K

• IRA gifting $142K, cash/CDs $150K, residence $200K, no liabilities

• No illustration provided, but annual premium is $22,810 at STD rates

• 1988 Non-Hodgkin’s Lymphoma- no recurrence

• Breast calcifications- 7/16 probably benign Ultrasound- postpone for short-interval follow up

Older Age

84

Matching 1

Note: Death Benefit $100K

(except #3)

Match Financial & Medical Scenarios

1c, 2a, 3b, 4e, 5d

85

Matching 1

Note: Death Benefit $100K

(except #10)

Match Financial & Medical Scenarios

6D, 7B, 8E, 9C, 10A

86

Sunken Treasure

Male 69 $120M total line- case submitted in 2002

• Internal retention from multiple carriers + facultative reinsurance

• Standard medically

• Retired- Teacher- earned income $50K

• Net worth $200M+ from recovery of sunken treasure recovered while diving in 1998

• Multiple documents “attest” to value of jewels/coins

• complete listing with affidavit from Attorney submitted

87

Sunken Treasure

General Agency refused multiple requests for tax returns

Total $110M issued through 8 direct companies/reinsurers

Policies sold to Investors (IOLI)

Death Claim after 18 months in force- unadmitted respiratory hx- severe COPD

Per Claims- proposed insured was homeless- income less than $10K- no net worth

Lessons: Google, don’t proceed without tax return

88

Jumbo Line-The Big Easy

Total Line understated- exceeds net worth

Client Letter- ‘Distrusts’ Insurance Companies, but understands Contestable Period and accumulating large amounts of insurance

Real estate business- leveraged (typical for market)

Google reveals additional details regarding context of case

89

Last Exit-Bankruptcy

M 45 $4.5M Real Estate Developer

• Income $1M+ confirmed by 2014 tax return/net worth $25M- no 3rd party verification

• $15M IF- replacing $10M and applying for $50M total

• Previously had over $65m IF, but multiple policies lapsed during 2008-09

• 2011-2014 Bankruptcy with partner due to reduced real estate value/inability to re-finance highly-leveraged portfolio per Agent Cover Letter

90

Last Exit-Bankruptcy (cont.)

Partnership ultimately defaulted on $51M+ in debt

Google search reveals that business partner was killed Jan 2014- captured on parking lot security camera

• Due to failed repayment of debts ($20K to sub-contractor)?

Proposed went into hiding in 2014 because he feared for his safety- failed to attend large family wedding

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