Before I get started, did you see last week’s newsletter titled: Use an Online/Interactive 84-24 Form to Comply with the DOL Fiduciary Rule? If not, click on the following link. The online tool should be very useful to agents who have to comply with 84-24.
Will the DOL Fiduciary Rule Kill IRA-Pension Rescue?
One of, if not, the most abusive sales of life insurance in the industry today is the IRA Rescue sale. See my website www.stopirarescue.com.
To read my past article titled “IRA Rescue Using IUL Violates MEC Rules,” click on the following link:
http://strategicmp.net/archived-newsletters-and-webinars
In a nutshell- what is IRA Rescue?
It’s when an agent tells someone 60 or older (although I’ve seen it done with younger clients) to 1) remove money from their IRA (or qualified plan), 2) pay taxes on it, and 3) fund an IUL (Indexed Universal Life) policy.
The sale is that IRAs are tax-hostile and it would be better to move money from a taxable IRA so it can grow tax-free and come out tax-free from an IUL.
In theory it sounds good, in reality there are two major flaws.
1) Mathematically it’s a loser. IUL for older people doesn’t work well. The costs of insurance are too high and the number of years for growth is too short. The illustrations I’ve seen rely on unrealistic rates of return and a significant loan arbitrage for 20+ years. It’s total nonsense.
2) It violates the MEC rules. Because the client is older, those promoting this try to shove the premiums into the life policy over a three year period. Then they drop the death benefit down in year four to well below what the MEC guidelines will allow. The work around is that the policy is “reissued,” but this fix violates the MEC rules.
Will the DOL fiduciary rules finally KILL IRA Rescue?
Now insurance agents telling clients to pull money from an IRA and fund an IUL will have to abide by a “fiduciary standard” that should kill IRA Rescue. It will certainly open up agents who peddle this trash too easy to win lawsuits by their duped clients.
Agents have to abide by prohibited exemption 84-24 which requires agents to:
1) Abide by the best interest standard-advisors must give clients the best product recommendation/advice a similarly situated agent would give without regard to the financial or other interests of the advisor. This is impossible with the deceptive and bogus IRA Rescue sale.
2) No materially misleading statements-the entire sale is based on misleading clients.
3) Compensation disclosure– you must disclose to clients the commission you will make on the sale. Your compensation has to be “reasonable.” The commissions with IRA Rescue are some of the biggest in the industry which is why so many agents look the other way when selling their clients down the river with this sale.
Bottom line
The bottom line is that no one should be selling what is inarguably one of the most abusive sales in the industry today.
While many in the industry are not happy about the DOL Fiduciary rule, maybe one good thing that can come out of it is that IRA Rescue for income will be killed. We’ll see.
If you run into clients who were sold IRA Rescue, please contact me. I have a law firm I know that will take the case to sue the agent (and IMO and the insurance company) in an attempt to make the client whole.
Roccy DeFrancesco, JD
269-216-9978
roccy@strategicmp.net
