How to prevent a client’s life insurance policy from expiring prematurely

I recently met a senior partner at a small CPA firm who was adamant about letting me know he never gets involved with a client’s life insurance, almost as if it were taboo to do so. I say to him and to others of a similar mindset: Since you are your client’s most trusted advisor and meet with your client at least once a year, you are in the best position to alert your client to the actions they need to take to prevent their life insurance from expiring years earlier than anticipated.

For those who purchased a life insurance policy between 1983 and 2003, there’s a 45 percent chance they purchased a “flexible premium/universal life” policy. Unlike its more expensive predecessor, “whole life insurance,” flexible premium life insurance was not guaranteed to last for the rest of one’s life.

Today approximately 23 percent of these policies are expiring prematurely due to reduced, sustained interest rates and neglect on the part of the amateur trustee. Usually a client’s eldest son or daughter who wasn’t aware that life insurance needed to be actively managed just like any other stock, bond or real estate portfolio. The American Bar Association referenced this situation in a Flagship book it published earlier this year, “The Life Insurance Policy Crisis.”

A recent Harris poll found that 65 percent of the insurance-buying population mistakenly thought the price initially established with an insurer for a universal life policy was set in stone and would last for the insured’s entire life. However, 70 percent of this group hasn’t reviewed the performance of their life insurance portfolio, including their expiring term policies, for more than 12 years. Lastly, over 90 percent of the trustees of all irrevocable life insurance trusts and special needs trusts are managed by the insured’s eldest son or daughter acting as the “amateur trustee,” often to avoid paying a fee to an institutional trustee. While these amateur trustees may be well intentioned, they rarely if ever have the skills or knowledge to do what’s in their beneficiary’s best interest, primarily because no one is advising them what needs to be done.

To make matters worse, many insurers are now exercising their contractual right to increase the internal cost of insurance, or COI, further exacerbating an already deteriorating situation for many insureds and their beneficiaries.

Why haven’t CPAs focused on this insidious growing problem that can so adversely affect the families and businesses they’ve been protecting for years? Why do many choose to draw the line at providing guidance concerning a client’s life insurance portfolio, when their values exceed upwards of 40 to 50+ percent of a client’s net worth?

There are many reasons why accountants have decided against including the subject of life insurance when counseling their clients about various financial matters.

Perhaps it’s the complexities and unique workings of a product many CPAs may not fully understand nor have the resources in place to refer a client to. Perhaps many accountants are under the misimpression that the agent or broker who sold their client a life insurance policy, or the insurance company itself, was monitoring the policy to make certain it would remain in force. However, that’s not the case. The agent is contracted with and obligated to the insurance company, not the insured. It’s the agent’s or broker’s job to merely market and deliver the insurance policy to customers. It’s the insurance company’s responsibility to merely provide coverage and an annual statement, not to manage the policy. Putting that aside, the insurer benefits significantly when a policy lapses, as it can keep the premiums and never have to pay a death claim.

It’s the responsibility of the insured, owner or trustee to manage the performance of their life insurance policy, but most aren’t aware there is an underfunding problem or an expiring term life insurance policy that requires attention. That’s where a client’s CPA can advise that the sooner a problem is discovered and addressed, the more options the client will have available, and the less costly it will be to fix the problem.

The accountant should first determine if the client’s policy is a non-guaranteed flexible premium universal policy, and if so suggest the client retain a trusted independent insurance consultant or their former agent or broker to order and review the policy’s “historic projection” to determine how much longer the current contract will remain in force based on the current and past premiums paid. They can then determine how much in additional premiums will be necessary to keep the policy in force for the duration desired.

There are three variables attributable to any universal policy: death benefit, premium and duration. Below are several alternatives to obtain the desired effect using a combination of options:

1. Clients can pay a higher premium to keep the same death benefit in force for a longer duration.

2. Clients can reduce the death benefit to maintain the same premium to keep the coverage in force to a specified time period.

3. Depending on the clients’ health, they can purchase a new policy, with various updated benefits as well as the ability to extend their guarantees until a later date.

4. If over age 70, they may be able to sell their life insurance policy as a life settlement in which case they may receive more than if the policy was merely surrendered for its cash value

5. An arbitrage strategy, where all or part of an existing life policy is sold in conjunction with the purchase of an additional life policy, at a reduced cost.

For more information, see this article in the August 2017 New York State Society of CPAs’ Tax Stringer publication.

Source: Accounting Today

Together or alone? Preparing returns in front of clients

A tax preparer advising a client.

Bloomberg News

Is it better or worse to prepare returns in front of clients? Tax pros differ over whether it’s better to have the client present so they can answer questions, or to prepare the return distraction and check their work before sharing it with the client.

“I prepare returns in front of clients most of the time and have for about 50 years,” said Marilyn Meredith, of Michigan-based Meredith Tax Service. “This is the most efficient and most thorough way of preparing returns.”

“We prepare as many tax returns with the client present as possible,” said Enrolled Agent Debra James at Genesis Accounting & Management Services, in Lorain, Ohio. “It enables us to do a higher volume of work, ask questions while we work and get to know our clients better not just on a business level but a personal level – which I believe helps retain clients.”

“My goal is to complete the return with the client during our scheduled appointment,” added Marilyn Heller Ayers, a CPA in Brick, N.J. “During our conversation, I usually learn important facts that affect the return or will affect it in the following year.”

“My preference is to prepare returns as part of a face-to-face interview,” said Jeff Gentner, an EA in Amherst, N.Y. “I feel most confident when I sit with the taxpayers and do a thorough interview while entering data. I also know that my clients want to leave with results, as well as knowing that it is complete.”

“Having my clients sitting at my desk from start to finish is my preferred method of preparation,” said Kathy Hallford, an EA at Kathy’s Tax Service in Gilbertown, Ala. “Time is saved when questions can be asked, answered and documented all at the same setting.”

LET'S REVIEW

Time to double-check work figures is top of mind for preparers who don’t prepare returns in front of clients. “I’ll give an estimate of refund or amount due in most circumstances, but as a rule I take the return and process it in a few days and get it back to the client,” said Joel Grandon, an EA in Marion, Iowa. “It gives me a chance to review the final product and I find I make fewer errors when I’m not trying to carry on a conversation and enter data at the same time.”

Said Nicole Green, an EA at NGG Tax Group in Easton, Mass., “I prepare less than 1 percent of my returns face to face. As a solo practitioner, I want to be able to prepare the return, put it down and then review at a later time for possible errors.”

CPA Brian Stoner, in Burbank, Calif., will sometimes prep in front of clients “if the client is rushed and needs to file that day or has a pressing issue, but I prefer to not handle the returns that way,” he said. “If I do prepare the returns that way, I’ll review the returns then and discuss with the client before we sign the e-file forms.”

A MATTER OF STYLE

A recent practitioners’ survey by the National Society of Accountants revealed that slightly fewer than half of respondents (45.7 percent) collect client data in person to prepare a return. The survey didn’t specify actually preparing the return in front of the client.

“Not my style,” said Morris Armstrong, an EA and registered investment advisor with Armstrong Financial Strategies in Cheshire, Conn. “I interview a client, collect documentation and an organizer, review it and make notes and then do the return in private.”

Said Chris Hardy, an EA in Suwanee, Ga., “Most times clients don’t have all the necessary items ready to complete a return even if they complete the organizer.”

“I used to do it all the time. I was doing a quick and dirty calculation before they left anyway, to give them an idea of what they would owe or get back,” recalled EA Terri Ryman, of Southwest Tax & Accounting in Elkhart, Kan., whose husband asked why she didn’t just finish the return in front of the client and probably get paid faster. “Very seldom would it be incorrect when I reviewed it later that day before transmitting,” Ryman said.

VALUE SERVICE

EA William Keats of Keats Tax & Financial Service in North Merrick, N.Y., prepares about three-quarters of personal returns in front of clients. “Estate returns and corporation returns, as well as payroll and sales tax returns, are usually dropped off or mailed in to me,” he said.

With complex returns such as those corporations or partnerships, EA Laura Strombom at All About Numbers in Stockton, Calif., gets the information for the entity or complex portion of the return on a 1040 either through her bookkeeper or from the client, “and then we review their books and ask questions before going with the books on a return,” she said. “I then prepare the return outside of the client appointment … and then present the return to them in the appointment.”

Those trained in some chains were used to the face-to-face. “Ninety-five percent of the returns I prepare are done in front of my clients,” said Frederick Reynolds, an EA in Utica, N.Y. “I work for H&R Block, and that’s just the nature of the beast.”

“The first year that I did taxes was at H&R Block, in 2000,” Armstrong recalled. “We did do most returns with the client sitting there – and they’d interrupt all the time and ask, ‘What are you doing?’ One person wanted to watch everything and have everything explained to him so that he could do the returns for his friends … .”

“A key motivation is that by reviewing a return as a whole, without the pressure of the client, there’s a better chance of spotting something else in the big picture that would be beneficial, said EA Richard Ogg at The Master’s Tax & Financial Services in Santa Rosa, Calif. “Another downside is if you are too quick, some clients may wonder why they’re paying the fee that we charge.”

“Preparing returns in front of clients could have a downward pressure effect on fees for preparers,” added Stephen Mead, an EA in Bradenton, Fla. “Time trumps knowledge in [clients’] value equation.”

“I do 80 percent of my clients’ returns in my office while they wait,” said Patrick O’Hara, an EA in Poughkeepsie, N.Y. “These are clients that we can prepare, print and review returns within an hour or less. Many of my peers disapprove of this model,” he added, “but I believe it’s a more efficient use of my time and I’m able to get paid on the spot. It’s also a good opportunity to reinforce relationships and ask for referrals or a review of our service.”

“I do prepare returns in front of clients, generally speaking. But I do give them an option to … send it via mail, fax it, scan and e-mail it or we can even do a Skype meeting,” said Theodore Prioleau, an EA at Hunt Valley, Md.-based Teddy The Tax Man and Hunt Valley Retirements. “I find that the more flexible I am, the more options they have, the more they love it.”

Source: Accounting Today