A Boca Raton life-insurance agent has set up a system that can provide people with universal life insurance with a reduced commission and at little overall cost - If economic factors work in their favor. Ted Bernstein, president of Life Insurance Concepts, said he developed the concept years ago with his father Simon Bernstein, and they have about 500 clients in their two-and-a-half-year-old company. Ted describes his business as "premium financing specialists."
But some observers familiar with the rare, unconventional practice say it's not for everyone. John Bardes, an insurance agent with Soloman and Bardes in Boca Raton, described it as a "small market practice" that is done by very few agents because it's so complicated to arrange and doesn't have wide appeal.
Bernstein's company first identifies a life-insurance package for the client with a face value of at least $500,000. The firm then has an agency - a third party - take out a loan from the bank to pay the client's premium. That process adds cash value to the premium, which the agency uses as collateral for its loan with the bank.
While there are no regular fees, there are three obligations for the client. The client must set up a CD account worth about 0.5 percent of the face value of the policy. It acts as a security deposit should the client cancel the policy in the first four years. The client can withdraw the money, including interest, after these four years.
The client must also pay taxes on the policy since a company provides it to the client. Bernstein said the taxes are determined by the face value of the policy and the client's age. For a man in his 40's with a $1 million policy in a 30 percent tax bracket, the after-tax cost would be about $300. Bernstein said.
The final obligation depends on interest rates. Right now bank loan interest rates are lower than the rates the insurance companies enjoy on cash premiums. That means the third party agency will be reimbursed for the interest it owes the bank for the original loan by the interest collected on the premium.
But if bank interest rates should ever go up without the insurance company's rates increasing as well, then the client would have to pay the agency the difference. Bernstein said this happens only rarely and for short periods of time, but Bardes said it would be a steep risk for people with limited financial resources.
"There're four of five ways it could blow up in your face," Bardes said. "My concern is that they won't appreciate the risk. I would recommend it only to the fabulously wealthy people who are worth at least $10 million."
Bernstein said that his main market is the extremely wealthy, but he believes the plan works better with young working families who want a cheap way to provide for their children should anything happen to them.
But Bernstein does not recommend his program for people over 70, because the interest rates would shift, and cost them more money once they reach that age.
While Bernstein sells his plan as an inexpensive alternative to traditional life insurance, other insurance agents, like Bardes, consider it controversial. Bernstein said that's because his company doesn't collect lucrative commissions from the insurance company. It gets a commission passed down from the insurance company that is 80 percent less than normal commissions.
"Other agents don't like this because we make much less than the traditional agents, so agents worry that the market for their commission will be set lower by the insurance companies." Bernstein said. |
Boca firm offers life insurance financing with reduced commission
