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Life insurance through your BD or OBA

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Feb 10, 2008 9:24 am

Hey all you Indy advisors out there I need some help on a question.  I have 2 seperate clients interested in 2nd to die UL policies (each in an ILIT for estate tax purposes).  I am meeting with each this week to go over details and hopefully get apps started. 

The policies would each gross around 30K and my BD (Ray James) takes 20%.  For 12K I think it may be worth doing this as an OBA since it requires only an Insurance license. ( I have to double check if this is allowed on Monday)
My question then, what are the advantages and disadvantages of not going through the BD?  What would you do?   Thanks ahead  
Feb 10, 2008 1:55 pm

If it’s a variable contract, you’ll have to go through your BD.

If it’s a plain vanilla policy and you opt to do a deal outside of your firm, and be paid straight as an agent, you should be aware that your E/O coverage will not apply. That, to me, is the downside of working around your BD. I think it’s a small risk, but a downside none-the-less.

In a case where you have done everything appropriately, including outlining a worst-case situtuation for the policy, spent time reviewing the potential for lapse, and had the client sign all the appropriate disclosures, I say… it’s expensive to run it through your BD. Consider the other option, and keep more of the commissions.

Also, don’t forget to disclose to your client that this is being done OUTside of your firm’s RIA and that your are being paid a commission and not an advisory fee. You need to make the distinction that you are doing non-advisory business through this transaction.


Feb 10, 2008 4:19 pm

Thanks Captain, exactly the kind of info I'm seeking. 

It's a guaranteed non variable policy.  Sounds like it may be worth it initially assuming I can find those disclosure forms. The no E/O coverage sounds a little scary.    Anyone done a similar thing?  How'd it turn out?  Any other opinions?   I've done a few fixed annuities this way and besides the hassle it has seemed to work great.
Feb 10, 2008 6:36 pm

1) If it's allowed, don't do it through your B/D.  Go out and buy E&O insurance that will cover your insurance business.

2) You didn't ask, but..... never do a 2nd to die policy without looking at doing two separate individual policies.  This is especially true when doing UL instead of WL.   There are three reasons for this.  A) At the first death, the premium on the 2nd to die remains the same, but it may become harder to gift the premium without cutting into the lifetime exclusion since 100% of the premium is just coming from one person.   B) With 2 policies, at the first death, the premium will be cut substantially.  C) Especially if the man is older than the woman, it is very common for death to occur 10, 20, or even 30 years apart.

I'll make up an example for you.  Let's say that the husband and wife are both healthy and are 65 and 60 respectively.   The man dies at 70 and the wife dies at 90.   Let's look at the difference between a $2,000,000 2nd to die and 2 $1,000,000 single life policies.   A $2,000,000 2nd to die will cost $20,000.   The total premium paid will be $600,000 ($20K x 30 years).  At the wife's death at age 90, the beneficiaries will collect $2,000,000.   A $1,000,000 policy on the husband will cost $21,000.   A $1,000,000 policy on the wife will cost $13,000.  The total premium will be $34,000.  In my example, $34,000 will be paid for 5 years and $13,000 will be paid for 25 years for a total premium of $495,000.   In 5 years, a $1,000,000 death benefit will be paid into the trust.  If this gets an average return of 7% after tax, it will grow to $5.4 million at the second death.  The total payout at the second death will be $6.4 million!   I'm not saying to do 2 individual policies, but the idea should be explored.