It’s Monday, April 26, at the 2004 Annual Meeting of the Association for Advanced Life Underwriting (AALU), in Washington D.C. A thousand attendees sit in a packed auditorium, waiting to hear a legislative update from Senate Minority Leader Tom Daschle (D-S.D.). Introducing the senator is native South Dakotan and a close friend, Bill McGreevy, CLU, LUTCF, of Sioux Falls, and a third-generation insurance agent.
McGreevy tells the audience that the senator shares with them a common passion for small-business owners and family farmers, as well as an understanding of the critical role life insurance plays in the lives of America’s families and businesses.
Coming from the heartland, both McGreevy and Daschle understand the importance of life insurance for everyday people. Both men have been staunch supporters of corporate-owned life insurance (COLI) and estate tax reform. Both understand the difference, however, between what McGreevy calls “small cap” and “large cap” COLI. “The corporations I do business with are not the same as the Fortune 500 corporations you read about in The Wall Street Journal and The New York Times,” notes McGreevy.
Commenting on recent headlines in the press about scandals at WorldCom and ENRON and regarding abusive COLI plans for senior executives and exposés on their so-called ‘janitor insurance’ programs, “I cringe,” says McGreevy. “Too often, the authors of these stories lose sight of the distinction between COLI plans for the types of closely held businesses that most of my colleagues and I represent—the small-cap COLIs, and the exotic and abusive large-cap COLI plans used by some of these corporate behemoths.”
“COLI, if properly utilized, provides a wonderfully flexible way to ensure business succession as well as fund compensation and benefits.”
— Sen. Tom Daschle
McGreevy, who is a NAIFA trustee and Senate coordinator for NAIFA, AHIA and AALU, also worries about potential congressional response to these scandals. “We’ve got to make sure that in the process of reforming abuses, the folks in Washington don’t throw the baby out with the bath water. That’s one of the reasons I think so highly of Senator Daschle. He understands that there are two different corporate Americas and two different types of COLI plans.”
Daschle agrees. “We need to weed out COLI abuses, but we need to support its legitimate use,” he says. “Small businesses in South Dakota use this as a critical tool to ensure that businesses continue to thrive and jobs stay in our communities. COLI, if properly utilized, provides a wonderfully flexible way to ensure business succession as well as fund compensation and benefits.”
Of course, whenever you talk about family business, farms and life insurance, you also end up talking not only about COLI, but about estate-tax reform as well. The senator and McGreevy also share a heartland perspective on this issue.
The senator was born in Aberdeen, S.D., where he grew up in a working family. “It’s wrong, and it’s bad for our economy, to force the sale of small businesses and family farms just to pay taxes when owners die,” he says. Rather than repeal, he favors estate-tax reform.
COLI in the heartland
Back home in Sioux Falls, McGreevy meets with Dick DeVaney, a long-time friend and CFO of a local family business. DeVaney is there to talk about his company’s various COLI programs that fund keyperson, buy-out and executive compensation needs.
“Our corporation has from its earliest days recognized the importance of life insurance to protect our organization, our employees and our stockholders,” says DeVaney. “We are conscious of our mortality and how insurance programs help to insure not only our lives but our plans and the future of our business as well.”
McGreevy is passionate about COLI plans for family and closely held businesses. “The acronym COLI has taken on so many negative connotations. COLI is nothing more than life insurance to protect against the loss of key people, to provide cash to purchase stock or to be used as a funding device for executive compensation,” he says. “A COLI plan I just love is nonqualified deferred compensation. What a flexible planning device for the insurance professional! It’s essentially ERISA exempt so you can concentrate benefits on the highly compensated and management team.” Also, the plan has no vesting or funding limits so you really give your client the ability to custom design an effective recruitment and retention tool. In addition, defined compensation COLI is the perfect supplement to an employer’s 401(k) plan, where he “piggy-backs” or wraps the deferred compensation around the qualified plan on a coordinated basis.
McGreevy points out that retirement planning guidelines indicate that a comfortable retirement must target a 75 percent replacement ratio. This means that the individual must plan a retirement income that represents 75 percent of his or her preretirement income. “Since the government limits what a person can contribute to their 401(k) plan, we can implement a COLI deferred compensation that permits the plan participant to save additional dollars on a tax-favored basis to reach that 75 percent goal,” says McGreevy.
McGreevy also uses deferred compensation in closely held family businesses that have grown to where they rely upon nonfamily managers. Highly talented and motivated managers are hard to find and once located, “they are hard to motivate if the company has a glass ceiling for nonfamily, employee-career advancement or equity ownership,” he adds.
He finds that phantom stock plans, which peg ultimate plan benefits to growth in company profits and stock, give nonfamily executives a sense of owning “a piece of the rock,” without actual stock ownership. “COLI has been great for our clients, their businesses and their families, and we need to continue to remind the folks in Washington of that fact,” he says.
Estate planning at work
Life insurance plays a key role in keeping the American dream alive for another family from the heartland—Jimmy and Marianne Lawler. They are the parents of John Lawler, the husband of McGreevy’s daughter, Michaele Lawler. Both John and Michaele are life insurance agents, like McGreevy.
John was raised on a farm in northwest Iowa and recently was able to help his parents implement an insurance-funded estate plan for their family farm. “What a wonderful way to earn a living, having the satisfaction of helping families and businesses accomplish their dreams,” says John.
“Jimmy and I don’t believe the estate tax will ever be permanently repealed,” says Marianne. “John showed us how a second-to-die policy could provide the family with sufficient cash to pay possible estate taxes when we eventually pass on. That way, the kids won’t have to sell off the farm to pay the taxes.”
Jimmy and Marianne are also determined to treat their children equally. In addition to taxes, Marianne wanted enough cash to equalize the shares passed to the other children who are not working on their farm. “I was proud I could help mom and dad,” says John. “Life insurance will help us keep their dream alive.”
|A Tool for All Seasons|
Bill McGreevy loves his profession. He is a life insurance agent first and foremost, although he sells anything that will help his clients achieve their financial goals and manage their risks.
“That’s my granddad SR McGreevy,” he says, as he points to the photograph on his credenza. “He started this agency on March 1, 1914, with Union Central Life, and you know we’re still doing the same thing today that SR did back then.”
At first thought, Bill’s statement seems hard to believe or to understand. The photograph shows a distinguished looking gentleman dressed in a jacket and tie, with riding breeches and knee-high boots astride a handsome horse. “Granddad used to call on clients on horseback—there weren’t a lot of paved roads in the Dakotas before World War I.”
So how could Bill’s granddad possibly have done the same thing that Bill does today? “This business will never change,” says Bill. “We help families and businesses manage the risks of dying too soon, being sick or disabled, and living too long. It is true “that SR frequently did business from horseback while I use a car or a plane, and that he used a telegram where I use email, but the rest is identical. We both use insurance products to help our clients face the risks that all people have faced from the beginning of time.”
John F. Gephart, J.D., CLU, is second vice president, advanced sales, with Union Central Life Insurance Company in Cincinnati, Ohio. He is a member of CAIFA and the 2004 conference chair for the LIMRA Advanced Sales Committee. You may reach him at 513-595-2685.