Warning: Some Life Settlement programs require the individual to be an accredited investor (definition: //en.wikipedia.org/wiki/Accredited_investor). If you are not an accredited investor, please stop reading immediately.

Life Settlement Return Rates as high as 10-20% with No Stock Market Risk?

If you are like the majority of people, you do not care much for paying life insurance premiums. The exception to this may be if you are one of the many individuals who are using Retirement Life® as a means of creating tax-free income for retirement. One question you may be asking is why well-to-do clients are purchasing life insurance. The answer to this is likely to create the opportunity to pass along wealth to heirs. Life insurance can also be used later in life to pay estate taxes, if you have not put your major assets into an irrevocable trust such as the rock-solid Ultra Trust® irrevocable trust, the estate taxes could be imposed on the value of the estate that is being passed to your heirs.

The current exemption for estate taxes is $5 million per person, thanks to the 2010 Tax Relief Act. Thanks be to God that the Republicans pushed for the estate tax exemptions of the 2010 Tax Relief Act. If the act did not pass through Congress in 2010, that amount would have returned to the standard $1 million exemption. However, since it was in fact passed, you, as a wealthy individual, have the chance to take advantage of a $5 million exemption to gift your wealth into an irrevocable trust. (What is an irrevocable trust?)

Should you stop paying life insurance premiums because of the 2010 Tax Relief Act?

Perhaps you are someone who has less than $5 million in assets. You may also be married and have purchased a life insurance policy and already put the insurance into an irrevocable trust. You may be wondering what to do with the policy and whether you should cease paying premiums based on the new laws regarding estate exemptions. The answer to this is to never stop paying the premium unless you plan on dying before 2013. If you do such a thing, you will end up regretting this decision.

Let’s assume that you are 55 years of age and married. Your current assets are $5 million and in retirement, these assets are expected to grow to $10 million when you finally reach 85 years of age. You may have also had a financial advisor suggest that you purchase a life insurance policy that is inside an irrevocable trust for life insurance (ILIT) for the amount of $2.5 million. This policy would be used to pay the estate taxes when you die. When this advice was given, your advisor was assuming that the total tax exemption as a couple would be $2.5 million if the estate tax rate was 50%. The $2.5 million expected estate tax comes as a result of the following calculation: $2.5 million x 2 (or $5 million for the husband and wife) x 50% = $2.5 million in estate taxes.

In essence, if you decided against buying the policy, you (or, more likely, your beneficiaries) would eventually have to pay a tax of 50% on $5 million that is in your estate. At this time, you are paying $20,000 each year for the life insurance premium. You are not happy with these payments but believe they are necessary to ensure that your wealth is passed to your heirs.

Now, you may have heard about the 2010 Tax Relief Act allowing an exemption of $5 million per person. Your first question is whether you should now stop paying the life insurance premium. This is not a wise decision in regards to your future estate planning. You will not find any advisor that will suggest you stop making the payments. The reason for this is because the new $5 million exemption is only in effect for a period of 2 years and it will come to an end in 2012. This means that if the law is not reinstated, the exemption amount will return to $1 million. On the other hand, it may be reenacted and extend for another few years. It could drop to $3.5 million per person of estate tax exemption which is what most of us thought. Only God knows what will happen with this matter. However, you should not take the chance and place odds that the exemption will continue. If you cancel your policy now and the exemption amount drops to $1 million, you have just made a terrible financial decision that will ultimately affect you and your heirs.

Until there is a new permanent estate tax law passes, if you have assets that total more than $2 million, you should never consider cancelling your life insurance. With the instability of the economy and the politicians need to come up with funds to pay the deficit, there is really no way of knowing what will happen. With current Obama administration spending habits our nation is in for complete financial ruin. The government will then be forced to look for money and this could be negating the 2010 Tax Relief Act and abolishing the estate tax exemptions. Cancelling a life insurance policy will erase any protection you have over your assets and your heirs may end up paying hefty taxes upon your death.

Please contact Estate Street Partners at (888) 938-5872 or, if you are calling in the Boston, MA region, please call us at (508) 429-0011 and see how we can protect your assets and maximize your returns in retirement.

Warning: Some Life Settlement programs require the individual to be an accredited investor (definition: //en.wikipedia.org/wiki/Accredited_investor). If you are not an accredited investor, please stop reading immediately.

Life Settlement Return Rates as high as 10-20% with No Stock Market Risk?

People will ask is it even possible to use life settlements to avoid stock market risk? Is there really a way to generate wealth without having to invest in a volatile stock market or get sub 2% rates from CD’s? The answer is yes and it can be done with life settlements.

What are Life Settlements?

Life settlements are for accredited investors who can provide benefits for people who have a life insurance policy and no longer need it or cannot afford to keep it. By a policyholder selling their life insurance policy, individuals can receive the profits, which can be quite high depending on the value of the policy. It is possible for buyers to locate someone who has a policy and then offer the owner (i.e. the insured) cash for their life insurance. In addition, when a life insurance policy (i.e. life settlement) is bought, the buyer will be paid the death benefit if the original owner dies, and this amount will be tax-free even without an irrevocable trust. While this all sounds great, are there some risks associated with being a buyer of individual life insurance policies? Yes, should the original policy holder live longer than expected, the purchaser of the policy will be required to pay additional premiums resulting in a reduction of the overall rates of return – this is the risky part. The solution is fractional life settlements.

Fractional Life Settlements

This may sound like a confusing term, but fractional life settlements are pretty easy to understand. These settlements occur when there are multiple buyers of a life insurance policy. These individuals will combine their purchasing power to share the risks. This is done by buying a small portion of the life insurance policy instead of the entire thing. Doing so will drastically reduce risks, especially when the original policy owner does not die when they are expected to do so. An example would be if a client bought just $75,000 interest in a particular policy. We will say the life insurance policy has a total price of $1,500,000, so the client would only be purchasing 5%.

As mentioned, it would be extremely risky for one person to buy a complete life insurance policy. Should the insured individual die early it could turn out to be a great wealth building opportunity. However, if the original insured were to die later, there could be financial ramifications for the new owner of the policy and the rates of return drop significantly.

Since buying life settlements as an individual can be so risky, there are some companies that will help a potential buyer connect with others who are looking to buy policies, which would allow all parties to share the risks and only buy a portion of the policy – in other words, the fractional life settlement.

Retirement Planning and Statistics on Life Settlements

The life settlement industry is constantly growing. There are corporate buyers who are in the practice of purchasing millions, if not billions of dollars in death benefits. The reason for this is the returns are really spectacular and because there are so many people who no longer need their insurance and are looking to sell it for the highest amount possible.

It is believed that $135 billion in death benefits were sold in 2010 and in 2013; the total is expected to jump to $140 billion. By the time 2016 rolls around, this amount will reach $150 billion. When considering buying a life insurance policy (i.e. life settlement), it is important to ensure that proper underwriting is practiced. This will ensure that the owner of the policy will most likely die within a period of 2 to 7 years.

Examining Rates of Return of a Life Settlement

The table provided below will show the estimated rate of return of a life settlement. The scenario is someone who purchased a life settlement that included a $1.5 million death benefit. It is also based on the assumption that the life expectancy of the original life insurance policy owner is between 2 to 7 years.

Life Expectancy (of original life insurance)	Purchased Price	Discount	Year 1	Year 2	Year	Year 4
2-4	$900,000	58.0%	86.2%	31.8%	18.3%	10.6%
3-5	$825,000	53.0%	111.5%	40.7%	22.6%	15.4%
4-6	$750,000	48.0%	141.0%	50.6%	29.4%	19.5%
5-7	$675,000	43.0%	176.2%	63%	34.9%	24.0%

Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
9.7%	6.2%	4.0%	3.0%	2.4%	1.6%
12.7%	8.6%	6.5%	4.8%	3.5%	2.5%
15.9%	10.2%	8.7%	6.8%	5.3%	4.1%
19.4%	13.1%	11.1%	8.9%	7.1%	5.8%

Keep in mind that all insured individuals are underwritten medically. This is done to calculate the insured’s life expectancy. The bolded numbers will show the rate of return for the time frame in which the insured person is expected to pass. Returns could be anywhere between 34.8% to 12.1%.

The lowest rate of return that is possible is 1.6% if the life expectancy of the insured is between 2-4 years from now and the purchased price of the life settlement was $900,000. Even though this is the lowest, potential buyers of the life settlement should compare this to investments in the S&P 500 spider fund within the past 10 years which resulted in a dismal 1.41% rate of return from September 2001 to September 2011.

How to Fund Fractional Life Settlements?

As with most retirement planning, buyers can use any money that they have available that is not needed for daily living. In most cases, it only needs to be short term money, especially if the insured is expected to die within a few years. It may be a bit longer for where the insured has a longer life expectancy. Buying fractional life settlements is a sound investment and can help clients avoid the stock market ups and downs while offering great potential returns for retirement planning.

Should My Advisor Offer Fractional Life Settlements as an Investment Option?

Advisors should definitely mention this retirement planning option. Since so many people are leery of investing in an unpredictable stock market, this is a safer way to build wealth and get a level of asset protection from the stock market volatility. Fractional life settlements should be considered a point of asset allocation, especially when dealing with any long-term investments.

Read more about the Life Settlement Contract

Please contact Estate Street Partners at (888) 938-5872 and see how we can protect your assets and maximize your returns in retirement.

Section 79 plans may not be the wisest decision even though many small business owners would like to benefit from the 20-40% tax deduction salesmen are touting. We look at why the Section 79 gives lesser returns than other retirement plans and thus even with the tax deduction, they don’t make good financial sense. The following article discusses the disadvantages to using a Section 79 Plan.

Section 79 and Life Insurance Planning

Less than 10 Employees? Use Group Underwriting

If a business owner has 10 employees or less, laws restrict eligibility for any policy that has full medical underwriting. Instead, group underwriting will be required. Many insurance companies do not like group underwriting because these policies are more of a risk. When the math is revealed you will understand the reason these plans should be avoided for asset protection and tax minimization.

Section 79 Plans Disadvantages

The reason the Section 79 plans are so marginal is because the insurance policy that is being purchased, by nature and inheritance, is set up poorly to get the full deduction. In other words, the types of cash value life insurance policies resulting from the Section 79 do not return a lot of money in retirement. It would be more beneficial for the business owner to take a smaller deduction and have a better cash value life insurance policy. With a quality CVL (i.e. Cash Value Life), the business owner would receive a deduction of only between 5 and 8% which hardly makes economic sense. So how does a quality Cash Value Life policy compare with the Section 79 returns in retirement? Please read on.

Section 79 Results: After Five Years Convert to a EUIL or Variable Life Policy

After five years, clients will have the option to convert the Section 79 Plan into a better policy, such as an EIUL (Equity Indexed Universal Life) or variable life policy. These life policies can earn around 9% each year. However, even with the presumption that the rate of return will be 9%, the retirement returns are comparatively less than the policies we use.

Life Insurance Agents Who Sell Section 79 plans

Why do life insurance agents push Section 79 Plans without full disclosure? Agents have two reasons for pushing these plans. Firstly, business owners hate paying taxes and are attracted to the tax deductions with the Section 79. Secondly, advisors want to make a sale. Most probably really do not care about the well being of the business owner as long as a sale is made or the life insurance agents have not scrutinized the return of investments of other retirement strategies.

Business owners need to be informed so they can make educated decisions regarding these plans. From a financial standpoint, these plans do not provide much in terms of financial benefits, asset protection, or wealth building for retirement. In many cases, an agent will suggest these plans because they know the owner is looking for tax deductions. However, this does not mean that the plans themselves are overly beneficial – there are better ways to get tax deductions. Life insurance agents will seldom take the time to crunch the numbers and present the true breakdown to a client. Life insurance agents should be comparing the Section 79 plans with other policies.

This is why business owners have to be aware of what they are buying into. Instead of getting involved with a Section 79 plan, most small business owners would reap more benefits from paying the business income taxes and then funding a good EIUL (Equity Indexed Universal Life) to generate wealth in retirement.

Section 79 with good tax deduction vs. After-tax purchase of a Quality Cash Value Life

Let’s compare the returns of a Section 79 which has an initial good tax deduction with investments of funds of after-tax income into a good life policy. A proprietor buys $150,000 in premiums to a Section 79 Plan and he is 45 years of age and will be paying the premium for a period of five years. The proprietor will then borrow money from the life policy when he is between the ages of 65 and 84. We will compare this scenario with another option, which is for the proprietor to pay the taxes and use money to fund a good cash value life policy for a period of five years. The proprietor will then borrow from the life policy from ages 65 to 84.

Section 79 loaned money that is tax free annually = $125,469

Quality policy loaned money annually = $187,626

Is the difference in the amounts actually worth the 40% deduction for the Section 79 Plan? Of course not. It would actually be a very poor choice on behalf of the business owner if he decided to use a Section 79 plan after seeing the math.

To see a breakdown of the financial calculations of the Section 79 plan, please Section 79 income.

Pro or Con? Section 79

Agents will try to convince business owners into using a Section 79 Plan by focusing on the deduction. Unfortunately, many business owners will not look into these plans and calculate the numbers before they jump right in. Keep in mind that life insurance advisors are incentivized to make money, which means they want to sell insurance. They really must have not calculated the numbers or do not care if these plans are the right or wrong path for the owner. This is why it is essential for business owners to be aware of these plans and ask for full disclosure from the advisor before making any decision.

Contact Estate Street Partners to discuss how we can help you plan for retirement and what is the best investment to maximize your retirement income.

Read Part 2 on: Section 79 Insurance