With tax never far from mind for investors, and particularly when there is a national election in the offing, we talk to an insurance firm that has been broadening its offerings for HNW clients. Besides the benefits, we talk about a few problems that have arisen and how to avoid trouble.

Tax never goes away as a source of financial activity but in an election year like this one, there’s an added edge.

Tax mitigation is a hot issue for Shawn Goheen, partner at Goheen Insurance, a Texas-based outfit which operates in premium finance life insurance. (Premium financing is a loan that is used to buy a life insurance policy.)

There’s a toolkit of insurance policies and structures in play at the moment because clients, mindful of upcoming changes to estate taxes and potential other alterations, want to put robust structures in place, Goheen told Family Wealth Report in an exclusive interview.

The firm works with wealth and other types of advisors and specialists around the US, Goheen said. “We want to be the quarterback on the planning side of things,” he said. Goheen says that financial professionals including, CPAs, financial advisors, lawyers, etc., must collaborate to ensure that clients receive a comprehensive and tailored plan to meet their individual needs. Additionally, collaboration allows each professional to focus on their area of expertise, leaving clients more educated and increasing client confidence.

Goheen Insurance focuses on premium financed life insurance, life insurance financed equity, and life insurance solutions for high net worth individuals. The company works with advisors of all kinds, such as certified tax advisors, empowering them with advanced financial advisory services, premium finance solutions, and customized estate planning services.

In May last year, Simplicity Group, a financial product distribution company, acquired Goheen Insurance. Part of the value of that deal was that it gave Goheen more resources to serve high net worth clients. 

A long-standing challenge is getting people to use insurance more as a way of mitigating risks to wealth, he said. “A problem is that premium life insurance detracts from portfolios,” he said. “Life insurance is a valuable tool for mitigating risk because it is the most tax-efficient way to do so, particularly in reducing estate taxes. When purchased, life insurance becomes a separate asset class, as does non-premium life insurance.”

“Despite concerns that it detracts from wealth, these assets can be retained within the portfolio and even enhance it by serving as collateral. This aspect makes life insurance an appealing option and powerful tool to advisors as it helps maintain assets within the portfolio,” Goheen continued. 

“Depending on how you build and design it [insurance] you can treat it as a separate asset class and can take it [the policy] out of an estate. Understanding the best policy to use requires a lot of guidance,” he continued.

Goheen Insurance is headquartered in Texas but has a national presence, putting the company in a position to see trends in what HNW individuals are doing to protect their wealth across the country. Private placement life insurance is an element of the toolkit that allows the policy holder to secure a good rate and more insurance, he said.  

Goheen identifies which companies can manage this for money managers. This is especially important when one deals with hazardous occupations, such as a race car driver. Other entities include Intentionally Defective Grantor Trusts (DGT) and Dynasty Trusts (DT), Goheen said. 

Cutting through the terminology is important: DGTs are used to freeze certain assets of an individual for estate tax purposes but not for income tax purposes; DTs are long-term trusts created to pass wealth from generation to generation without incurring transfer taxes – such as the gift tax, estate tax, or generation-skipping transfer tax – for as long as assets remain in the trust. Another entity is the Irrevocable Life Insurance Trust. These are created during an insured’s lifetime that owns and controls a term or permanent life insurance policy or policies.

Such structures have been around for some time. Clients want to know that these approaches are robust, Goheen said.

Beware the gray zone
There are some problems in this market, however.

“There are a lot of people selling stuff out there that is very `gray’ and possibly over the line,” Goheen said. 

Within premium finance life insurance, for example, if policies are poorly constructed and explained, trouble ensues, with clients losing collateral. A report (Insurance News Net, April 18, 2024) noted that a premium financing deal went bad in New York State, creating worries that the practice is often misused. Filed in New York State Supreme Court, Ester Aronson and Baruch Aronson are suing Brave Strategies, Penn Mutual Life Insurance Co, MassMutual Life Insurance Co and New York Life Insurance Co. The life insurance policies in Aronson’s premium finance deal included death benefits totaling more than $150 million. Plaintiffs claim that the deal violates New York’s Regulation 187, which took effect in 2020 and is considered the toughest state best-interest law.

“Our business stands out through rigorous stress testing of each policy we present to clients. By showcasing worst-case scenarios involving collateral and interest rate fluctuations, we empower clients to anticipate and navigate potential challenges. Additionally, we emphasize the need to craft an exit strategy, to help ensure clients are prepared for any eventuality,” Goheen said, when asked about issues in the sector.

“A key issue in the industry is the lack of client education. We address this by placing a strong emphasis on educating our clients thoroughly. Through a comprehensive policy delivery receipt, where both clients and agents sign off on, we strive to help ensure all parties have read and understand the policy and its terms. When you’re borrowing money from the bank, posting collateral, or are dealing with increasing interest rates, risk will be involved, making education a valuable asset,” he continued. 

“Additionally, overselling policies is a common pitfall in the life insurance industry. We counteract this by helping to ensure policies are age-appropriate and align with the client’s financial capacity. Ultimately, our approach empowers clients with knowledge and tailored solutions to navigate the complexities of the insurance landscape,” he said. 

The business does not disclose its revenue model or charging structure: charges vary by individual, Goheen said.

“Ultimately, policy decisions should be driven by each client’s unique needs. It is important to establish a deep understanding of clients, including factors such as age, health, income and lifestyle to determine the most suitable trust, tax plan, or will. Ownership structures vary, with some clients benefiting more from a family partner plan while others require a limited family partner plan,” he said. 

“Regarding the broader industry, a critical adjustment is needed in how buy and sell agreements are managed. Often, clients overlook the planning process, leading to detrimental consequences for their business upon death. Additionally, there’s a prevalent lack of education among life insurance agents, resulting in skipped steps and shortcuts. To address these issues, collaboration with a team of advisors and proper estate attorneys is crucial,” Goheen said.

FWR asked Goheen about potential conflicts of interest in the insurance business, and the role of the regulator.

“While regulatory oversight in the life insurance industry is crucial for maintaining integrity, it can sometimes hinder providers’ ability to offer comprehensive product comparisons,” he said. “For instance, index universal life providers must adhere to whole life insurance parameters to ensure industry balance. However, this framework may not always facilitate accurate analysis. For example, an index universal life provider might only be permitted to present returns of 5 to 6 per cent for comparison, despite actual performance reaching 7 to 8 per cent. Overall, regulators are doing what they see as fair given their knowledge of the life insurance industry.”

To see a separate story about the need to manage conflicts of interest in insurance, see this interview from January 2024 with Steven Zeiger, of KB Financial.