Advanced Underwriting Consultants

How to Protect Your Business from Internal Theft

Are you concerned about an employee stealing money from your business?  Here’s an article written by a local CPA that gives tips for how to protect against that risk.

To read the article, please click HERE

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Interview with H.A. Beasley – Part Three

AUC:This is part three of an interview with H. A. Beasley, founder and director of H.A. Beasley & Company, PC, an accounting firm in Murfreesboro, Tennessee and ICS Law Group, PC.

Click on the following links to read: Part 1 and Part 2

Question: Let’s shift focus back to the IRS for a second. Is there something that a taxpayer can do to minimize the chances of an IRS audit?

H.A. Beasley: Our clients and friends seem to think that filing after April 15th increases the chance that they will be audited. If you file proper extensions, I’m completely convinced that it does not increase your chance of an audit. In fact, there are those out there that are publishing tax advice that say that the contrary is true, that when you file an extension you might actually reduce the chance of an IRS audit.

We believe we can help clients minimize the risk of an audit first of all by choosing the best form of business entity depending on the type of business.  There tends to be market differences in the way the IRS choose to audit for different kinds of businesses.

So whether a person operates as a sole proprietor, on one hand, or perhaps they incorporate or form an LLC on the other hand, can tend to reduce the chance of an audit.

They need to properly file all of the required information returns such as IRS Forms 1099 and W-2.  And they need to have someone that knows review their tax files to make sure they don’t look wrong. Sometimes just the way the information was put on the forms can raise a flag.

Question: What can a CPA firm like yours do to help business owners make sure their taxes are right?

HA: One of the first things we find beneficial is to make sure that all of the local, state and federal taxes requirements are being acknowledged and acted on.   Certain special forms may be required for those in the trucking business, for example, and the forms might be different for a food, service or retail business.

Another way we work with small business owners is that we arrange to have at least one other tax meeting in a year—not at tax time–to help the taxpayer.

During the tax preparation process in the spring, we also try to meet with each client, if they want to, and do our first shot at the tax plan for the year while we are doing last years return. We’ll identify, for example, whether estimated taxes need to be paid or will there be a more effective way to deal with tax liability.

After that first plan is put in place in the spring, or when we do the taxes, sometime before Christmas, probably around Thanksgiving, we’ll have the second meeting. Without a good spring meeting and follow-up late fall meeting, it’s very easy to pay too much tax unnecessarily just by not making the best decisions by the end of the tax year.

Because the clients have some choices with regard to how business cash flow and taxes are managed, some of our larger clients may meet with us three, four times or more a year. But for the vast majority, for hundreds of our clients, the twice a year cycle works out pretty well. There may be an occasional phone call when they are making a business decision that has a potential of tax consequences, just a quick call to determine the best way to handle that business transaction.

Stay tuned for next Thursday as we share Part Three of the interview with H.A. Beasley.

Where to Buy Life Insurance – Using An Agent

Today’s blog is from Life Insurance expert, Linas Sudzius.  Linas is a lawyer, speaker, former insurance company executive and author of the soon-to-be published book
What Most Life Insurance Agents Won’t Tell You. His law firm works with successful people on their estate planning, and with entrepreneurs on their business legal issues.
When he’s not working he enjoys being with his family and listening to audiobooks.

Reach him at linas.sudzius@underwriting.dev.

Where to Buy Life Insurance – Using an Agent

Most of the individual life insurance policies purchased are sold through the agency distribution system.  The life insurance company makes its products available to agents, and when an agent sells a policy, the agent earns a commission.

An agent can be captive, in that the agent is an employee of the life insurance company and is expected to sell that company’s products exclusively.  Or the agent can be independent, meaning that the agent is not exclusively affiliated with a single company, and is theoretically free to make deals to sell many carriers’ life products.

Independent agents who sell insurance policies to actual customers are sometimes referred to as retail agents.  Some life insurance companies contract directly with those retail agents.  However, because few agents are capable of selling lots of life insurance without hand-holding, life companies recognize that working with lots of retail agents is a very expensive way to sell their products.

Plenty of life insurance companies work only with wholesale agents, sometimes called managing agents.  The wholesale agent acts as a middle-man between the life insurance carrier and the retail agent.  The wholesale agent’s job is to recruit retail agents and get them to send business to the companies with which the wholesale agent is contracted.  The wholesale agent also becomes the retail agent’s point of contact with regard to information about policies and the underwriting process.  The wholesale agent also acts as the intermediary between the life carrier and the retail agent.

Most people don’t realize that much of the life insurance offered over the web is also sold using the agency distribution system.  That seems counter-intuitive to many.  It would seem that a product purchased with fewer distributors involved in the process should be cheaper for the consumer, and more profitable for the company.  However, it doesn’t work out that way.

Life insurance, as we’ve discussed in our description of products, is complicated.  The underwriting process is also complicated.  The process of naming beneficiaries can also be complicated.  Deciding on the right product in a specific situation can also require a certain level of professional expertise.

If the consumers are approaching the life insurance company directly with their questions, the company would have to hire lots of internal folks to deal with the inquiries.  That’s an expensive proposition.

So isn’t selling products through agents also expensive?  Yes, but life insurance agents only get paid when they sell something. If a company has to hire lots of folks to answer questions, that cost must be paid whether anything is sold or not.  Hence, most carriers choose to distribute their products through agents.

So what’s in it for the agent?  When a policy is sold, the agent earns a commission.

As of the date of this writing, the bulk of the commission for an agent selling a life insurance policy is paid in the first year.  How much is the commission?  It depends mostly on the type of policy and the relationship between the agent and the company.  For certain kinds of individual life policies, it is not unusual for the total first year commission to be more than the first year’s premium.

How is it possible for a life company to pay more commission than it takes in for the policy’s premium?  Good question!  The answer is that the insurance company’s actuaries can predict how long a particular life insurance policy will stay in force, and the aggregate number of annual premiums that will be paid.  Armed with that knowledge, they understand that they can pay more than 100% of the first premium as commission because they’ll recover the expense later—as more premiums are paid.

The fact that most life insurance agents are paid the biggest commission when they sell you something explains much about how they do business. So is the system bad?  I don’t think so!  If it was, life insurance companies and consumers wouldn’t put up with the system.

Life insurance companies like it because they prefer to deal with a relatively few number of agents rather than consumers.  Agents like the system because they get paid fairly for the hard work of selling life insurance.  And consumers seem to prefer it because the products are priced competitively, and they usually get relatively good service—at least during the buying process–from their agent.

Is the agency distribution system perfect?  No.  Is it always the right fit?  Again, no.  For many, though, it’s the most efficient way to buy life insurance.

This post is designed to help educate readers about general matters.  If you need specific advice you can rely on, please consult your professional advisor.

First Experiences with Life Insurance

Today’s entry is by Linas Sudzius, one of our Advanced Underwriting Consultants.
Linas Sudzius is a lawyer, speaker, former insurance company executive and author of the soon-to-be published book
What Most Life Insurance Agents Won’t Tell You.
His law firm works with successful people on their estate planning, and with entrepreneurs on their business legal issues.
When he’s not working he enjoys being with his family and listening to audiobooks.

First Experiences with Life Insurance

When I was a young lawyer back in the mid-1980’s, I worked for a law practice that provided prepaid legal services to employees of a big company.  I did a wide variety of legal work in that role.

One day an employee about my age came by the office with a universal life insurance prospectus in his hand.  He wanted me to take a look at it to give him advice about whether he should buy the policy or not.  Well, I had no particular expertise with regard to life insurance at that point in my life.  I was a relatively new lawyer, single and poor.  I’d never bought a financial product in my life—certainly not any life insurance.

So how did I handle the situation?  I did what most lawyers would do when asked to evaluate a financial deal—I read the document.

Notice that I said that the universal life policy came with a prospectus back then.  These days most universal life contracts are not required to have a prospectus.  But in the early days, when the rules weren’t really settled, some life insurance companies provided them.

Reading the words in the document—I think it was about 50 pages—made me realize that it was almost impossible for a non-expert to understand how that policy worked.  I remember trying for about half a day, and realized that I wasn’t going to be much help to my client.  I don’t remember exactly what I told him, but I think I asked him whether he trusted his agent.  If the answer was yes, he should buy.  If the answer was no, he should refuse the policy.

It’s pretty much the same advice I’d give to a client today.

Sometime later, another client brought by a universal life computer illustration to the practice.  Since I was the office expert on universal life—due to my experience with the prospectus–the task fell to me.

The client had purchased a policy about four years before, and had the illustration that she been given when the policy was purchased.  She wanted to know if she could stop paying the premium for the policy, but still continue to grow the policy’s cash value.  I thought I could help her figure it out by looking at the papers she’d brought along.

I didn’t know it at the time, but my understanding of universal life was inadequate for the job.  I remember talking to the client, and then discussing the situation with the agent.  I also remember the agent being frustrated because he couldn’t make me understand the difference between the policy’s actual performance and the growth predicted on the illustration.

At the end of the day, the client took back her papers and resolved to contact the insurance company directly.  That was a relief for me, because I didn’t have a better idea of what to do.

Both those experiences were embarrassing for me, because clients came to me expecting that I would have expertise with regard to how life insurance, and especially universal life, worked.  I thought I could understand the products.  After almost twenty-five years in the business, I now feel like I’d be able to help someone understand.  It’s a main reason why I decided to write “What Most Life Insurance Agents Won’t Tell You.”

This post is designed to help educate readers about general matters.  If you need specific advice you can rely on, please consult your professional advisor.

First Experiences with Life Insurance

Today’s blog is from Life Insurance expert, Linas Sudzius.  Linas is a lawyer, speaker, former insurance company executive and author of the soon-to-be published book
What Most Life Insurance Agents Won’t Tell You. His law firm works with successful people on their estate planning, and with entrepreneurs on their business legal issues.
When he’s not working he enjoys being with his family and listening to audiobooks.

Reach him at linas.sudzius@underwriting.dev.

First Experiences with Life Insurance

I was about ten years old—this would have been about 1970–when I first became aware of life insurance.  My mother was a single parent to three children, and also owned a business—a beauty shop.  She had responsibilities and a mortgage, and was aware of the difficulties her kids would face if something happened to her.

Mom bought life insurance from a career agent.  I don’t remember what life insurance company he was affiliated with.  A career agent is an employee of the life insurance company, and his job is to sell that company’s life insurance policies to as many people as possible.

Being the youngest in the family, I went with Mom on one of her visits to the agent.  I remember him explaining a little about how the policy worked, and how it would help protect the family.  I also distinctly remember feeling the kind of unease I always felt in the presence of a high-pressure sales person.

The agent sold Mom some kind of whole life policy.  He stressed the importance of the policy’s cash value element, as well as its death benefit.

Years later, when I had graduated college, Mom asked me to contact the company to find out its value in the event of surrender.  I went to the agent’s office, and they gave me a quote.  After I compared what Mom paid to what the policy was worth, I realized that she wasn’t getting her money back—that, in fact, she was getting far less than she paid.  I remember my impression was that it didn’t seem fair.

I believe the kind of policy that Mom bought would have been guaranteed whole life.  The premium was a set, level amount that was due every year.  The death benefit was guaranteed to be available so long as the premium was paid.  And the policy developed cash value according to a guaranteed schedule printed inside the insurance policy.

Did Mom make the right decision in buying that life insurance policy from the pushy agent?  Even after all I’ve been through since then, it’s hard for me to say.  Certainly her family was protected by the life insurance death benefit while the policy was in force.  Could she have made a more efficient purchase?  Would she have been better served by a more professional agent?  I still wonder.

Do you have similar uneasy memories about buying life insurance?

This post is designed to help educate readers about general matters.  If you need specific advice you can rely on, please consult your professional advisor.

Question of the Day – September 7

Ask the Experts!

Here’s the question of the day.

Question: If an insurance company fails, does the guaranty fund of the insurance company’s domicile or the guaranty fund of the policy owner’s state of residence kick in?

 

Answer: Each state has its own system for guaranteeing the life insurance products and annuity contracts of a failed life company.  In general, each state’s system will provide limited protection for the owner of a life or annuity contract issued by a carrier that is no longer able to meet its obligations.

 

Financial and insurance professionals may not tell their prospective clients about state guaranty funds (SGFs)—at least as any kind of solicitation to purchase insurance.  While each state has its own version of law prohibited using SGF information with clients, each of them does have such a law.  New York’s law is typical.

For policyowners of an insolvent company licensed to do business in the policyowner’s state of residence, the state of residence will provide the guaranty.  Policyholders who reside in states where the insolvent insurer was not licensed to do business are usually covered by the guaranty association of the company’s home state.

The National Organization of Life & Health Insurance Guaranty Associations is a gateway for additional information about state life and health guaranty rules.  Their website is at www.nolhga.com.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

New Tax Act Extends Charitable Opportunity

As part of the recently passed tax compromise, President Obama and Congress recently extended a charitable giving opportunity that had previously expired in 2009.  In 2010 and 2011, some of our senior clients will be able to make tax-favored charitable donations from their IRAs.

Prior to 2006, if a person wanted to make a charitable distribution using IRA money, he’d have to take a taxable distribution from the IRA and write a check to the charity.  Many taxpayers who did that were unable to claim a full charitable deduction for the money donated, because they didn’t itemize their deductions or because they otherwise failed to qualify for the deduction.

This year and next, taxpayers who are older than 70 ½ may donate money to charity directly from their IRA account.  The distributions to charity will be tax-free.  Taxpayers are allowed to donate up to $100,000 per year from their IRAs.  Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution.

One other positive result of implementing the strategy is that amounts sent directly to charity also qualify for meeting minimum distribution requirements.  Clients ought to seriously consider using IRA money instead of just writing a check if they are

  • Older than 70 ½,
  • Already supporting a charity with financial contributions, and
  • Facing the prospect of taking otherwise unneeded distributions from an IRA.

Since the new extension was enacted so late in 2010, Congress included a special provision that allows charitable transfers done before the end of January, 2011, to qualify as 2010 transfers.

This special opportunity is for a limited time, so take advantage while you can.

TRUTHING THE STRETCH WHAT FINANCIAL PROFESSIONALS NEED TO KNOW

INTRODUCTION

 Clients see a fair amount of information about stretch IRAs.  This can lead to confusion, as they try to understand what stretch might mean in their circumstances. 

Pensions, IRAs and nonqualified deferred annuities (NQDAs) can all potentially be stretched at the account owner’s death.  “Stretch” means that the beneficiary can delay the federal income tax consequences associated with the transfer of the account. 

Stretch choices may differ based on the 

  • Timing of the taxpayer’s death,
  • Type of account,
  • Relationship of the beneficiary, and
  • Timing of the stretch election. 

The financial professional will be called on to help a client draft beneficiary designations for IRAs, pensions and annuities.  One of the key factors in drafting beneficiary designations is the potential tax consequences to the beneficiary or beneficiaries of the account.  

Stretching the tax result associated with an IRA, pension or NQDA is not always the right choice for the beneficiary.  However, since it’s often hard to predict the circumstances that will exist at the account owner’s death, keeping the option of stretching open is usually the best help a client can get.

HELPING CLIENTS MANAGE LIFE INSURANCE, ANNUITY AND PENSION ISSUES DURING A DIVORCE

INTRODUCTION

 Working with clients on their financial and estate plans can be messy.  For every family where the couple has a stable marriage and great relations with responsible children, there seem to be four families with marital issues.  The financial professional’s responsibility is to help clients match up a planning strategy with family particulars. 

Inevitably, those who work in the insurance and financial planning businesses will deal with clients who are going through a separation or divorce.  Both create stress in clients in many ways.  Financial issues and how to sort them out are a big part of the divorce difficulty. 

Each state has its own rules about the divorce process.  We won’t attempt to sort them out in this newsletter.  However, we can make some general observations about the process. One of our objectives is to define the role of the financial professional in helping a client think about tax and practical issues during the early phase of the divorce process.  Another objective is to make sure the details are buttoned up during the final phase. 

What financial issues might a client going through a divorce need help in sorting out? 

  1. Dividing up nonqualified investments
  2. Planning for the division of a pension account
  3. Thinking about the tax issues associated with child support and alimony
  4. Changing life insurance beneficiary designations to conform to new circumstances 

The divorce process is usually a difficult and emotionally-charged process for our clients.  It can be incredibly helpful to be the objective voice of reason during the process.  There are plenty of opportunities for mistakes during divorce, which can be hard to overcome.  The financial professional who acts as a technical and practical guide can strengthen the relationship with the divorcing client.