Shifts in the Economy Prompt Changes to Decades-Old Life Insurance Tax Code

In December 2020, Section 7702 of the U.S. Internal Revenue Code IRS tax code was amended, resulting in the first major change to the tax code since 1984.

If you’re not familiar with it, Section 7702 was created specifically to differentiate between a genuine life insurance policy and investment vehicles imitating life insurance contracts. The main objective of Section 7702 is to ensure that only legitimate life insurance policies receive tax-advantaged treatment. It also defines just how much tax-free money is permitted to accumulate inside a permanent life insurance policy.

Simply put, Section 7702 determines whether a life insurance contract actually qualifies for tax benefits and how proceeds from a life insurance policy are to be taxed.[1] If a contract fails to meet the government’s definition of a legitimate life insurance policy, any proceeds from the policy will be considered taxable as ordinary income — whether money is withdrawn from the policy or not.[2]

What has changed? 

The amendments to Section 7702 will now permit certain life insurance policies to build cash value up to an established limit and in proportion to the policy premiums paid, before the IRS considers the policy a modified endowment contract and taxes it accordingly. For policy owners, this change will allow them to put more cash into the savings portion of permanent life policies.

According to the Wall Street Journal, U.S. House staff report that the changes to Section 7702 were necessary “to reflect economic realities” and provide consumers “access to financial security via permanent life-insurance policies.”

To be more reflective of current economic conditions and low interest rates, Section 7702 has also changed the guaranteed insurance rate for the cash value accumulation in permanent life insurance policies from 4% to 2% for this year, and will use a variable rate moving forward.

Conclusion

In general, the overall consensus is that amendments made to Section 7702 will provide benefits to the industry as well as consumers, helping stabilize the life insurance industry amid historically low interest rates and making permanent life insurance more attractive to the public.   

About FastrackCE

Do you have a looming deadline for completing your life and health insurance continuing education credits? FastrackCE can help you save time and money by getting all your life and health and property and casualty continuing education credits in one place and on your schedule.


[1] IRS.gov.
[2] Investopedia.

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Are Your Life Insurance Clients Underinsured?

Next month signals not only the beginning of fall, but also the start of Life Insurance Awareness Month (LIAM). Every year during the month of September, Life Happens, a nonprofit organization dedicated to helping consumers take personal financial responsibility through the ownership of life insurance and related products, raises awareness regarding the importance of life insurance.

With 102 million adults living with an uninsured or underinsured life insurance need gap, you likely have clients in your book of business that require more life insurance coverage. During LIAM, the Life Happens website provides resources and information you can use to better educate prospects and insureds on the importance of reviewing life insurance policies to identify possible gaps in coverage. 

Most Americans that have life insurance through work don’t have enough coverage

According to the Life Insurance Marketing and Research Association, of the 59% of Americans who have life insurance, more than half don’t have enough coverage. The main reason is that most households have coverage through a group life insurance plan — policies that are typically offered through the workplace.

The problem with group policies is that they are designed to accommodate all employees and often fall short of meeting their individual needs. LIMRA research shows that an estimated 9 million households with group life benefits fall short of having enough life insurance coverage, with an average coverage gap of at least $225,000.

At best, most group life policies will provide death benefits equal to or double the employee’s annual salary. For clients with a family, a mortgage and other significant debts, this likely isn’t going to be enough. In general, it is recommended that couples, especially those with children or who are carrying large debts, should have anywhere from five to 12 times their annual salary in coverage.

Group policies often have fewer options

While an employer’s group life insurance policy is nice to have, in many cases, it shouldn’t be the sole source of protection. Because group plans are established by the employer, employees may not always have the option to increase their coverage as their lives and financial situations change — such as with the adoption or birth of a child, marriage, a change in income, or purchase of a new home.

Another challenge with having life insurance through the workplace is that some policies may be final expense or burial insurance policies with a death benefit of, say, $10,000 to $15,000. And while this may be offered as a no-cost or a low-cost benefit, it clearly falls short of what most American families need to maintain their current standard of living should the primary wage earner pass away. In addition, most group policies aren’t portable. In the event the employee leaves his or her job, coverage under the employer-sponsored group plan will typically end.

Conclusion

The fact is, life insurance isn’t a one-size-fits-all product. By relying exclusively on group coverage through the workplace, employees are missing the opportunity to personalize their coverage based on their specific needs. During LIAM, take the time to strategize on how you can better educate your clients on the potential shortcomings of group life insurance policies. A good place to start is by scheduling a life insurance needs assessment to determine whether your clients may need to supplement their coverage with a stand-alone life insurance policy.

About FastrackCE

Need to complete your life and health insurance continuing education credits? FastrackCE can help you save time and money by getting all your life and health and property and casualty continuing education credits in one place and on your schedule.

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What Makes Selling Insurance in a Hard Market So Challenging?

There has been a great deal of noise in the insurance industry regarding our current hard market cycle. But what exactly is a hard market and what makes selling insurance such a challenge in this type of economic environment?

What is a hard insurance market?

In the insurance industry, a hard market cycle can be characterized as a period of time when there is high demand for insurance products but a low supply of available coverage. Key factors such as inflation, fraud, increased litigation and weather-related catastrophic claims events are a few of the many contributors to a hard insurance market. More recently, the hard market was exacerbated by COVID-19.   

In a hard market, you are more likely to be up against:

  • Fewer available options. With a limited market, insurers will be more selective in the risks they are willing to accept. 
  • Increased premiums. To compensate for the many contributing financial factors as listed previously, insurers typically end up increasing their rates.
  • Changes in acceptance rules. In response to tight market conditions, carriers may not be willing to renew certain policies, or even permit changes to be made on policies in the middle of a term due to changes/updates in their risk appetite.   

Hard insurance market selling tips

There is a lot of advice out there regarding how to improve sales performance in a hard market cycle. Basically, it all boils down to deploying the following three main tactics.

  • Start the new-business and renewal processes early. With more stringent underwriting criteria, you need to plan on a longer lead time for applications. Plus, getting started early provides the extra time needed to re-market accounts that may have been nonrenewed. Typically, the optimal time frame in which to submit new-business applications is 120 to 150 days ahead of the proposed inception date, and 90 days for renewals.
  • Submit full and complete applications. Incomplete Acord applications, missing supplemental forms or absent loss runs will only delay the quoting/renewal process. This can be frustrating for insureds having to wait until the last minute. A complete submission will help an underwriter quickly and efficiently log in new business, streamlining processing and avoiding delays. 
  • Maintain communications with policyholders. For renewals, it’s important to help insureds understand what they might be up against in terms of their coverage and premium. For example, if you know that the incumbent carrier will be looking at a 15%-20% increase or is reducing general liability limits on a particular line of coverage, convey this to your insureds — and do so as early as possible. Then, see how you might be able to help them secure the coverage/limits/pricing they need. Not only does this demonstrate your commitment to service, but it also helps determine whether you need to approach another carrier.  

Conclusion

To be clear, efforts insurers impose in a hard market aren’t meant to make things more difficult for agents, but instead are set to ensure that companies remain financially secure so that they can make good on their promises to pay claims. By starting the marketing process early, submitting complete submissions and maintaining communications with policyholders, you’ll be in a stronger position to successfully ride out this cycle.

About FastrackCE

Focus less on your continuing education credits and more on selling! At FastrackCE, you can get all your life and health and property and casualty continuing education credits done in one place and at your convenience.  We offer online courses in most states covering a broad range of topics, including most of the state-mandated courses that include long-term care – to name just a few. For more information, call 800-544-3605 or visit us at fastrackce.com.

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When Is It Necessary To Purchase Insurance From a Car Rental Company?

After a year of staying close to home, more Americans this summer are looking for an escape and hitting the open road. For those considering renting a car, whether or not they should opt for the insurance offered by the rental company is a common issue of concern.

Most rental companies offer the following common insurance options:

  • Loss or collision damage waiver in case the rental is stolen, damaged or vandalized.
  • Liability or supplemental liability insurance in the event the driver causes damage to other vehicles or property; this typically includes coverage for medical expenses.
  • Personal accident insurance that pays for medical expenses for both the driver and the passengers.
  • Personal effects coverage for items stolen from or damaged in the rental car.

So, is it absolutely necessary to buy insurance coverage from a rental car company? In many cases, the answer is no. However, there some situations that should be considered. This summer, help your policyholders better understand whether they need the coverage the rental car company is trying to sell them or if their personal auto or homeowners’ policy offers the protection they need.

When insurance follows the driver

In general, auto insurance follows the car. However, when it comes to renting a vehicle, the insurance (depending on the policy) will follow the driver, extending to the rental — just as if the individual were driving his or her own car. As long as a policyholder has liability coverage on his or her vehicle, that protection will transfer to the rental car.

It’s important to remind policyholders that the limits they have on their current personal auto policy are the same limits that will carry over to the rental car. For example, insureds who have a personal auto policy with liability only won’t have comprehensive or collision (full coverage) for damage to the rental. In this case, they should opt for coverage in the event the rental is damaged or stolen. In addition, an insured with low liability limits may want to consider increasing coverage prior to taking a trip or purchasing supplemental liability insurance.

Personal injury protection (PIP) and medical payments (MedPay)

In most cases, it won’t be necessary for insureds with personal auto policies to purchase the rental company’s accident insurance. This is because a personal auto policy with PIP will provide coverage for the driver and passengers for things including medical bills, legal fees, lost wages, etc., if they are involved in a vehicle accident — regardless of fault. MedPay typically only pays for the driver’s injuries and medical bills. However, individuals who don’t have health insurance may want to consider purchasing the accident insurance offered by the rental car company. Why? Because typically, once all other forms of medical payments have been exhausted, a health insurance plan will have the final financial responsibility for treatment related to car accident injuries.  

Traveling with personal items of value

Alert policyholders to the fact that the comprehensive coverage on their personal policy provides coverage only in the event the rental car is stolen, and it won’t cover stolen personal belongings. When traveling with personal items of value or if they just want the additional protection, they should consider coverage for personal effects. However, insureds with a homeowners or a rental policy will have coverage for theft.

Conclusion

It’s always a good idea to regularly review coverages with your policyholders. Consider putting an article in your agency’s newsletter or next email reminding them to give you a call if they have questions regarding rental car coverage so you can review coverages together!

About FastrackCE

Need to complete your insurance continuing education credits this summer? FastrackCE can help you get all your life and health and property and casualty continuing education credits done in one place and at your convenience.

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Summertime Celebrations: Helping Your Clients Understand Special Event Insurance

Summer is a time for weddings, family reunions and other celebratory events. This year, as COVID-19 restrictions are lifted, we’ll likely see a record number of events this summer, as well as an increase in attendance. As a result, your clients will be looking to you, their insurance professional, to help them understand what their liability exposure could be for these types of gatherings and how event insurance can help provide protection. The following are commonly asked questions insureds ask when it comes to event insurance coverage.

Is event insurance necessary?

Most any venue (indoor or outdoor) will require some type of special event liability insurance. Even if the event is at a private residence, the homeowner can be sued for accidents and injuries that guests may incur. Advise your insureds to request insurance requirements and limits from their venue of choice as early as possible, so you have time to secure coverage and prepare a certificate of liability insurance.

What does a basic event liability insurance policy cover?

Special event liability provides protection against claims made by third parties for bodily injury, accidents or property damage that occurs during an event. Policies will differ among carriers and the types of event, but coverage is generally provided for:

  • Liability costs associated with an injury.
  • Legal costs for property damage caused by event attendees.
  • Cancellation coverage that reimburses a percentage of fees if the event must be canceled due to issues outlined in the policy.

What about coverage for alcohol-related risks? 

Be sure to ask your insured whether they will be serving or selling alcohol at their event. Remind them that if a guest drinks too much, they could be held liable. And while not all carriers include liquor liability insurance in a special event policy, most can add it or provide coverage under a separate policy. 

Will a homeowner’s general liability policy extend to an event held at the insured’s residence?

Most insureds assume that their homeowner’s policy will cover any liability claim issue that may arise when hosting a special event. The fact is, the liability limits on a homeowner policy might not provide enough protection for a large event — especially one where alcohol is being served. When discussing coverage for an event that is being held at your insured’s private residence, be sure to review their home insurance policy to determine whether the additional protection of event coverage is needed.

Are these policies expensive?

Most insureds will want to know the cost of event coverage. In general, a basic policy will run between $350 and $400. However, if liquor is being served, the premium could double. Before running a quote, be sure to get all the information regarding the event, such as whether alcohol will be served, how many people will be in attendance, the type of event, venue insurance limits/requirements, etc.

Conclusion

Special events are just that — meant to be special. Be ready to help your insureds understand the importance of having the right insurance protection so they can focus less on the risk and more on celebrating!

About FastrackCE

Need to complete your personal lines insurance continuing education credits this summer? FastrackCE can help you get all your life and health and property and casualty continuing education credits done in one place and at your convenience.

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