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Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us. "But even the savings in first year compensation of $84,320 ... doesn't begin to tell the story. This difference in first year compensation has an enormous impact on the policy's cash values and this directly affects the policy's cost of insurance charges." Life insurance policy math is bewildering and open to significant spin. Disclosing the amount of commissions that will be received and their impact is a major area of distortion. Earlier this year we were engaged by an ILIT to review a $5,000,000 universal life policy that hadn't yet been delivered by the agent and therefore the free-look period had not yet commenced. The policy had base death benefits of $5,000,000, which means it produced the maximum selling expenses that are mostly commissions. Commissions for UL policies are determined via a secret target premium figure that is known to agents but not buyers or their fiduciary advisors. This all base UL policy has a target premium of $131,750 carrying commissions and overrides for the agent of $105,400. This is the retail version of this policy. But unknown to the ILIT there is a wholesale version. This particular policy can be blended with a 20% minimum base benefit. Therefore, a policy structure with $1,000,000 of base and $4,000,000 of term rider reduces the target premium to $26,350 and commissions and overrides to $21,080. We recommended to the ILIT that it insist on this wholesale design. Of course the agent was not pleased. He made four tries at logical arguments as to why the retail policy structure should be used. One of them was to acknowledge the commission amount as $68,000 (not accurate) and dividing by the target premiums for 15 years coming up with a commission percentage of 2.8%. He then compared the compensation percentage for the maximum wholesale structure we recommended as 0.5%. I suppose the agent believes the 2.8% vs. 0.5% comparison appears more benign than the $105,400 vs. $21,080 difference. But even the savings in first year compensation of $84,320 ($105,400 minus $21,080) doesn't begin to tell the story. This difference in first year compensation has an enormous impact on the policy's cash values and this directly affects the policy's cost-of-insurance (COI) charges. COI is determined by the policy's net-amount-at-risk (NAR) that is calculated by subtracting the cash value from the death benefit. The wholesale policy version has much more cash value so every year the NAR is lower and that makes the COIs less. Taking all of this into account to the insured's life expectancy produces present value savings to the ILIT of $250,000. All of this has the practical effect of reducing the target premiums $20,000 a year from around $159,000 to $139,000. Here is where this gets real interesting.
The ILIT Trustee is the son of the insured. All of our dealings were with
the Trustee. The agent, having no success concocting various rational
arguments to increase the base death benefits to increase his compensation,
went to the insured and successfully pleaded that he deserved more
than the $21,080 (that he claimed was actually $13,000) he would receive
under our design because of all of the neat estate planning ideas he had
presented (can't comment on this because we didn't review or pay attention
to how the planning was created). The agent proposed that a design of
$2,000,000 base and $3,000,000 term rider be used, claiming that this
would increase his compensation from $13,000 to $26,000 (in fact, the
correct commission figure is $42,160) for a change of only around $13,000.
What is $13,000 between friends - except this isn't the impact the
change had on the ILIT. The present value additional cost vs. our design
is $100,000, increasing the annual target premium by around $9,000. What
a wonderful example of life insurance agent professional skills at work.
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