It happens all the time. You are in the middle of the fact finding process with a client who owns one or more permanent life contracts. It has been years since anyone really understood how the policy is performing or even thought about if it is still needed by the client. Over the years since policy issue a number of loans have been taken, and now you discover that the light you see is in fact a train rushing headlong at the client. This policy is headed for a lapse. All the loans that represent any gain over the cost basis will become taxable if a lapse occurs.

So the question becomes how do we hit the brakes on that train before the collision? While that is certainly something we have explored in the past, it warrants a review based on a couple recent market trends: The restriction of cash value a carrier will accept in policy year one has reduced the number of products that we can actually use to try and rescue these cases, and the restrictions on loan to cash value ratios reduces the pool further still.

We all know by now that the current economic environment has driven carriers to limit the amount of premium they will accept in the first policy year, but why the limit on the loan balance as a percentage of total cash value? While I have not had this conversation directly with the carrier, it stands to reason that the primary driver behind this is future policy performance. Even a wash loan is going to have a significant impact on the policy if the loan is large enough. Combine that with the fact that most products do not offer wash loans until later in the contract and you can see that all we may do by moving to a new contract is delay the inevitable.

Of course, a "line in the sand" approach that limits the percentage on all cases might not be the only answer. What that type of requirement misses is the performance of the current product. An argument can be made that even if the new policy is still not going to perform ideally, if it significantly improves the client's position the case may still be viable. It may, in fact, be a suitable recommendation. So we need to find a carrier that has a more flexible stance on this issue. They are out there, but they have become harder and harder to find. At least one I know of takes these on a case by case basis, and does in fact review the sales illustration before giving the case the thumbs up or thumbs down.

The flexibility that provides can slow down that oncoming train and give us the time we need to get off the track and out of harms way.