Post on 07-May-2018
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
What Factors Determine the Color?
Income replacement
Final expenses
Mortgage
Estate taxes (“death taxes”)
Retirement planning /deferred compensation
Estate equalization
Needs-Based Protection Against Loss and Current-Projected
6
What Factors Determine the Color?
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
What Factors Determine the Color?
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
What Factors Determine the Color?
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
Investment and Financial Planning
9
What Factors Determine the Color?
Tax mitigation, deferral, avoidance
STOLI, CHOLI, Surrogate insured
Commission rebating / premium advances / early lapses
Life insurance policy settlements (sales)
Windfall probability / potential
Investment and Financial Planning
10
What Factors Determine the Color?
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
What Factors Determine the Color?
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
What Factors Determine the Color?
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
What Factors Determine the Color?
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
What Factors Determine the Color?
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
Financial Verification
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
Financial Verification
CPA/accountant
• Credential Verification
• Terms/history of association
Independent Financial Planner/Attorney
Vested interest in sale (Fiduciary? Suitability? Commission?)
Expert Opinion
24
Financial Verification
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
Financial Documentation
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
Financial Documentation
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
CPA Source Business Financial Statements
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
Types of CPA Statements are Not Equal
38
CPA Source Business Financial Statements
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
Types of CPA Statements are Not Equal
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
Scope and Target of the Financial Statements
46
Business Financials
Multiple business holdings
Independent
Interlinked
Missing consolidated financial statement
Scope and Target of the Financial Statements
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
Small-Business Valuation
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
Small-Business Valuation
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
Case Study 6 (cont.)
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
Case Study 6 (cont.)
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
Case Study 6 (cont.)
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
Case Study 6 (cont.)
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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