Old McDonald Had a Farm — and Some Outdated Life Policies

How to approach a family farming operation and ensure their current life insurance policies best suits their family’s growing needs. Here’s how one producer enlisted the expertise of his CreativeOne Life Sales Team to boost his client’s life insurance benefits and enhance his revenue.


A CreativeOne Case Study

The agricultural community is fertile ground for opportunities to sell life insurance.This is especially true for producers and advisors who know their communities well and understand the nuances of a multi-million-dollar family farming operation.One of our life producers reaped a nice harvest recently just by asking the right questions of a family with whom he had a longstanding relationship.This producer served as the property-casualty agent for the family farm, owned by a couple who have three grown children. While talking about the current state of the farm during an informal visit, the producer posed the questions: “How are you set up for life insurance? Are you planning to transfer the farm to your children and do you have a plan in place to do so?”

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The couple did have a succession plan. One of the children, who owns a separate farm, has entered into a buy-sell agreement with his parents to assume ownership. The estate will then be divided among the siblings.

The producer continued to ask questions regarding the operation and learned each member of the family had a variable whole life policy written by a former producer. The mother and father owned each other’s policy while the policies of the three children were owned by a Family Limited Partnership (FLP), which was established by their former producer. This is an unusual policy ownership scenario, as FLPs are typically designed to centralize family business or investment accounts. At the time of issue, the children didn’t have any assets and were not employees of the farming operation.

The clients had adequate coverage; however the policy’s cash value declined during the recent financial crisis. Therefore, all five policies required continued premium payments. The older couple was hoping to be done paying premiums on their policies by this point.

Enlisting CreativeOne’s Experience and Expertise

Structure of a Family Limited Partnership

Source: Securian Financial Group, Inc.

The producer knew immediately he was dealing with a most complex case. Fortunately, he could depend on the life experts at CreativeOne to analyze the details and help him make the proper recommendations.

He sent the clients’ existing life policies to us for review. One of the first things we noticed was that the policies hadn’t been reviewed in some time. Despite all three children being married, the FLP was still listed as the beneficiaries of all their policies. How unfortunate would that have been if something happened and the surviving spouse couldn’t collect the death benefit.

Asking an individual how long it’s been since their policies have been reviewed is a great way to start a conversation. If it’s been a while or if the client can’t remember, most likely a portion of the policy or beneficiaries are out of date. This producer keyed into another aspect too… the former producer was no longer serving the family. No one was watching over this family and ensuring their wishes are fulfilled in the best way for federal and estate tax laws.

Changes in estate tax law hadn’t been addressed with regular policy reviews. When the clients’ original policies were issued, there were likely estate tax considerations. However, in the last 20 years the exemption from federal estate taxes has increased significantly while the estate tax rate has dropped considerably. This reduces the need for estate liquidity on family farming operations.

While these changes have removed many family farms from estate tax consideration, it’s not always a given. Operations that have greatly increased in value or that are part of estates with other considerable assets could make estate taxes an issue.

Another door opener to a similar opportunity could be: “Mr. and Mrs. Client, do you know how changes in estate tax law have impacted the succession plan you have in place? Or, have you considered whether the current market value of your estate places your heirs in a position to owe estate taxes after you both pass?”

Preemptive Call Keeps the Case Moving

As CreativeOne continued to review the clients’ existing policies, we were confident they could use their cash surrender values to adequately fund new policies for each family member. This would require a 1035 exchange on each of the five policies.

The biggest hurdle to completing this transaction was the FLP ownership of the children’s policies. To do a 1035 exchange, policy ownership has to remain the same between the old policies and the replacement policies. Because an FLP is an unusual scenario, we felt it might raise red flags when it was submitted to underwriting.

So, my team worked with the producer to develop a detailed cover letter explaining the situation and even phoned the carrier’s Chief Underwriter. The carrier’s Chief Underwriter put his approval of the arrangement in writing and signed it, which CreativeOne included in the application paperwork and sent it to the carrier.

Sure enough, the underwriting team came back with objections on the FLP ownership. These individuals get buried in paperwork, so it’s easy to overlook something like their Chief Underwriter’s signed approval. Once we pointed it out, the case went through quickly and flawlessly. Had CreativeOne not taken the initiative to receive prior approval before sending the case in, it may have been delayed and perhaps even denied.

$0 Out-of-Pocket Premium, Variable Whole Life Case Replacement and a Happy Ending for All

In the end, the clients and the producer were happy with the outcome.

The clients traded in their variable whole life policies for guaranteed universal life ones. What’s more, though the producer requested standard underwriting on all five, with CreativeOne’s assistance he was able to get four of the five insureds rated above standard, including a super-preferred rating on the 70-year-old matriarch.

In addition, a full surrender would have subjected the clients to taxation on the gains within the policy. By doing a 1035 exchange, the clients avoided that tax bill.

The best part of the case for the clients is that they used the cash surrender value of their existing policies to fund the new ones. Four of the five will require no additional premium to remain in force.

The producer earned commission on $30,000 in target premium and considerable excess premium. In addition, he picked up one of the children in the family as a new client and wrote a separate policy.

To better understand the potential in the agriculture market, ask your Creative Life Team about in-depth farming resources. And when you have a case, enlist CreativeOne’s expertise to review a client’s current benefits, needs and policies and ensure clients have more viable solutions.

FOR PRODUCER USE ONLY. Producers may not give tax, legal, accounting or investment advice. 13505 – 2014/6/25


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