Premium Finance for Life Insurance: A Guide for High-Net-Worth Individuals
As a high-net-worth individual, you understand the importance of protecting your assets and securing your financial future. Life insurance is a crucial component of any comprehensive wealth management strategy, providing financial security for your loved ones in the event of your passing. However, the cost of life insurance premiums can be substantial, especially for those with expansive estates. That’s where premium finance for life insurance comes in.
Understanding Premium Finance for Life Insurance
Premium finance for life insurance is a strategic approach that allows policyholders to borrow funds from a third-party lender to pay for their life insurance premiums. This strategy is particularly beneficial for high-net-worth individuals who require large amounts of life insurance coverage but prefer to keep their capital invested in other ventures. By leveraging borrowed funds, policyholders can allocate their money to potentially higher-yielding investments, aiming to generate substantial returns that can be used to repay the loan.
With premium finance, a lender makes the premium payments on behalf of the policyholder, with the understanding that the policyholder will repay the borrowed amount along with interest at a later date. In some cases, but not all, policyholders may need to provide collateral to secure the loan, ensuring that the lender has recourse in the event of default. If the insured passes away before the loan is fully repaid, a portion of the death benefit is used to satisfy the outstanding loan balance, with the remaining amount paid to the beneficiaries.
Who Benefits from Premium Finance?
Premium finance for life insurance is most suitable for high-net-worth individuals with significant assets, typically exceeding $20 million. These individuals may have a need for substantial life insurance coverage but prefer not to liquidate their assets to pay the premiums outright. By utilizing premium finance, they can retain their capital for other investments that may offer higher returns than the cost of borrowing.
Advantages of Premium Finance
1. Tax Savings
One of the key benefits of premium finance for life insurance is its potential to minimize estate and gift taxes. High-net-worth individuals often face substantial tax liabilities upon passing their wealth to the next generation. By using premium finance, policyholders can free up their capital to address these tax obligations while still maintaining the desired level of life insurance coverage.
2. Leverage
Premium finance allows policyholders to leverage their existing assets and the cash surrender value of their life insurance policies to obtain the coverage they need today while deferring the cost of premiums to a later date. This strategy enables policyholders to make their money work harder by investing in other ventures that may offer higher returns than the interest rate on the premium finance loan.
Assessing Eligibility for Premium Finance
While premium finance can offer attractive benefits, not all individuals are eligible for this strategy. Lenders have specific criteria that potential borrowers must meet to qualify for premium financing. Here are some factors that lenders typically consider:
1. High-Net-Worth Status
To be eligible for premium finance, individuals need to demonstrate a high-net-worth status, typically defined as having $1 million or more in liquid assets. Liquid assets include cash, stocks, bonds, and other readily marketable securities that can be used as collateral or to repay the loan.
2. Age and Health
While age is not a strict disqualifying factor, lenders generally prefer policyholders who are younger than 70 and in good health. Younger individuals are more likely to qualify for longer loan terms, providing them with additional time to generate returns on their investments to repay the loan.
3. Significant Premiums
Premium finance is most suitable for individuals with substantial life insurance premiums. Lenders typically require minimum premium amounts to justify the cost and complexity of the financing arrangement. The exact threshold varies among lenders, but premiums in the range of $100,000 or more per year are typical. But who really wants to pay premiums of that size out of their own pocket? Most premium financed life insurance plans allow for up to 95% of the premiums to be covered by the lender.
4. Collateral Availability
Collateral is a crucial component of premium finance. Lenders require borrowers to provide collateral that can be used to secure the loan. This collateral can include cash, marketable securities, or the cash value of existing life insurance policies. The availability and quality of collateral play a significant role in determining eligibility for premium finance. In many modern designs, the cash value acts as 100% of the collateral so you never have to worry about covering the collateral shortfall with more traditional designs. While the more conservative deigns reduce the risks associated with this type of planning, they also can reduce the benefits. Ask your professional for several illustrations so you can compare and contrast the risks and the benefits of different flavors of planning. One size doesn’t fit all.
5. Professional Guidance
Given the complexity of premium finance arrangements, it is essential to seek advice from a qualified financial advisor or legal professional who specializes in this area. These professionals can assess the viability of premium finance for your specific circumstances and guide you through the entire process.
6. Ability to Repay the Loan
While the death benefit of a life insurance policy is often used to repay the premium finance loan, lenders typically require borrowers to demonstrate an alternative means of loan repayment. This ensures that the loan can be repaid even if the death benefit falls short due to unforeseen circumstances.
Risks Associated with Premium Finance
While premium finance can be an effective strategy for high-net-worth individuals, it is not without risks. It is crucial to consider the potential pitfalls and weigh them against the benefits before proceeding with premium financing. Here are some risks associated with premium finance:
1. Interest Rate Risk
Premium finance loans often have variable interest rates that can fluctuate based on market conditions. Rising interest rates can increase the cost of borrowing, potentially eroding the returns on investments and making the loan less attractive. It is crucial to carefully assess the potential impact of interest rate changes on the affordability and profitability of the premium finance arrangement.
2. Policy Performance
The performance of the underlying life insurance policy is another critical factor to consider. If the policy fails to generate the projected returns, the policyholder may face challenges in repaying the loan. It is essential to carefully evaluate the policy’s historical performance and assess the potential risks associated with policy underperformance.
3. Collateral Risk
Collateral plays a significant role in premium finance arrangements. Fluctuations in the value of collateral assets, such as marketable securities, can impact the loan-to-value ratio and trigger additional collateral requirements. It is essential to monitor the performance of the collateral and be prepared to provide additional collateral if necessary to maintain the loan. If this risk appears to be too big for your comfort level, it may make sense to evaluate a plan that doesn’t require additional collateral. Plans can be customized for anyone with a more conservative outlook.
4. Financial Sustainability
Premium finance loans typically have a limited term, often three to five years. At the end of this term, the loan may need to be renewed or refinanced. The lender assesses the borrower’s financial status and collateral at each renewal, which may result in changes to the loan terms or even the denial of renewal. It is crucial to ensure ongoing financial sustainability to meet the requirements for loan renewal.
Conclusion
Premium finance for life insurance offers high-net-worth individuals a strategic approach to manage their life insurance premiums while freeing up capital for other investments. By leveraging borrowed funds, policyholders can potentially achieve higher returns and minimize estate taxes. However, it is essential to assess eligibility criteria, understand the risks involved, and seek professional guidance to determine if premium finance is the right strategy for your specific circumstances. With careful planning and ongoing monitoring, premium finance can be a valuable tool in your wealth management arsenal.
Disclaimer: This article is for informational purposes only and should not be construed as financial or legal advice. Please consult with a qualified financial advisor or legal professional before making any decisions regarding premium finance for life insurance. Call us for a free evaluation to see if you qualify and attain a free illustration with all of the different type of programs available.
Premium Financed Life Insurance: A Solution for Frustrated Policyholders
Premium Financed Life Insurance: Solution for Frustrated Long Term Policyholders
Premium financed life insurance has emerged as a viable option for policyholders, offering a way to improve policy performance and potentially save on out-of-pocket expenses. In a challenging environment of falling interest rates, many life insurance companies struggle to meet the expectations of their policyholders, leading to reduced dividend rates and impaired policy performance. This article explores the concept of premium financing, its benefits, and potential risks, providing insights for policyholders considering this option.
The Challenge of Falling Interest Rates
For decades, falling interest rates have posed challenges for life insurance companies, making it difficult for them to achieve targeted investment returns on policy blocks. As a result, dividend rates have declined significantly, impacting policy performance. Whole life policyholders, for example, have witnessed a decline in dividend rates from a peak of 11.5% in 1989 to as low as 4.25% in recent years[^1][^2]. This decline in dividends puts policyholders in a dilemma, forcing them to make tough choices:
Pay more to sustain their policy benefits as planned.
Keep paying planned premiums and reduce the death benefit.
Allow the policy to lapse.
In some cases, even tax-free exchanges for new policies cannot compensate for the performance shortfall[^1].
Case Study: Jane’s Policy Restructuring
Image Source: FreeImages
To illustrate the potential benefits of premium financing, let’s consider the case of Jane, a policyholder disappointed with the performance of her policies. Jane, 55 years old, wanted to free up more cash flow for investment opportunities and reduce her annual premium expense of $68,980. Her three policies had a combined death benefit of $10,903,000 and a cash surrender value of $1,599,000. Without any action, Jane could expect the death benefit to remain around $10,800,000 at her life expectancy plus five years[^2].
Exploring Policy Exchange Options
One option for Jane was to roll or exchange her policies into a newer product design with a lower cost structure. Since her policies had no encumbrances and were beyond the surrender penalty period, she could use the $1,599,000 cash value to fund a new policy. After considering multiple choices, a protection indexed universal life (PIUL) policy seemed to offer the best outcome. However, the resulting death benefit of $7,794,000 meant sacrificing $3.02M in coverage. Given concerns over increasing estate tax exposure, Jane decided against this option[^2].
The Premium Finance Option
Premium financing presents an alternative solution for policyholders seeking to improve policy performance while maintaining flexibility in their cash flow. This option allows policyholders to obtain third-party financing to pay life insurance premiums, reducing initial and ongoing cash outflows. By utilizing premium financing, policyholders can keep their capital invested in higher-yielding assets without having to liquidate those assets to cover policy costs[^2].
Advantages of Premium Financing
Premium financing offers several advantages for policyholders like Jane:
Improved Death Benefit: By accessing premium financing, policyholders can potentially increase their death benefit, providing greater financial protection for their beneficiaries.
Enhanced Cash Value: Premium financing may also contribute to the growth of the policy’s cash value, increasing its overall value over time.
Increased Investment Opportunities: With premium financing, policyholders can redirect their cash flow towards higher-yielding investments, taking advantage of external investment opportunities.
Flexibility in Cash Flow: Premium financing allows policyholders to maintain flexibility in their cash flow, ensuring that they can meet other financial obligations while keeping their life insurance policies in force.
How Premium Financing Works
In a typical premium financing scenario, a policyholder secures third-party financing to cover life insurance premiums, minimizing their initial and ongoing out-of-pocket expenses. This approach enables policyholders to leverage their outside investment opportunities, projected to yield higher returns than their life insurance policies. By redirecting their annual cash flow towards these investments, policyholders can potentially achieve better overall financial outcomes[^2].
To understand the mechanics of premium financing, let’s revisit Jane’s case study. After favorable medical underwriting, Jane opted for an IUL policy with an initial death benefit of $18,010,390. The funding for the new policy involved two components: the carried-over $1,599,000 in cash value from her existing policies and an additional $997,947 financed by a bank specializing in premium financing[^2].
Jane projected that she would be able to repay the loan and accumulated interest using the policy’s cash values within 15 to 20 years. In the event of her passing before this time, the death benefit would first be used to repay the outstanding loan, with the remaining balance going to her beneficiaries. The new policy’s death benefit was designed to increase over time, projecting a net death benefit of $22,900,000 for Jane’s beneficiaries at age 89[^2].
Risks and Considerations
While premium financing offers potential benefits, it is essential for policyholders to carefully consider the risks involved before proceeding with this option. These risks generally fall into three main categories:
Lending Risks
Lending risks primarily relate to the interest rates and terms associated with the loans. Changes in loan duration or repayment terms can impact the desirability of a premium financing loan. Policyholders should assess the stability of the lending institution and evaluate the potential impact of interest rate fluctuations on their premium financing arrangement. But there are many lenders out there, so you ever had an issue with one lender, another can be found quickly. From the banks perspective, this is secure loans which contributes to their Tier 1 assets. These loans to fund life insurance premiums are highly desirable to the lenders and the regulators that oversee them.
Personal Risks
Personal risks are closely tied to an individual’s net worth, liquidity, and posted collateral. Factors such as a significant decrease in net worth or inadequate collateral can make it challenging to secure future premium loans or result in the lender calling in the outstanding loan. Policyholders should carefully evaluate their financial position and collateral requirements before entering into a premium financing agreement.
Policy Risks
Policy risks involve changes to the performance of the life insurance policy itself. While a policy can perform better than expected, there is also the possibility of it failing to meet expectations in terms of its crediting rate or dividend payments. Insurance companies may adjust insurance costs to meet profitability targets, requiring policyholders to pay additional premiums to maintain the policy’s intended performance[^2].
Conclusion
Premium financed life insurance offers an avenue for policyholders to enhance their policy performance while maintaining flexibility in their cash flow. By leveraging third-party financing, policyholders can potentially increase their death benefit, grow their policy’s cash value, and take advantage of external investment opportunities. However, it is crucial for policyholders to carefully assess the risks associated with premium financing and consider their specific financial circumstances before committing to this option. Consulting with a licensed professional can provide valuable guidance tailored to individual situations, ensuring informed decision-making[^2].
Disclaimer: The information provided in this article is for informational purposes only and should not be considered investment, tax, or financial advice. Policyholders should consult with a licensed professional to receive advice specific to their situation. Contact us to get a custom quote and illustration at 508-429-0011. No cost or obligation to see how the numbers work out. New rules restrict overly optimistic illustrations.
Life insurance is a crucial component of a comprehensive financial plan, providing protection and financial security for your loved ones. However, the cost of life insurance premiums can be significant, especially for high net worth individuals and business owners. That’s where premium financing for life insurance comes into play.
In this comprehensive guide, we will explore the concept of premium financing for life insurance, its benefits and risks, and how it works. Whether you’re a high net worth individual looking for ways to optimize your life insurance coverage or a business owner seeking to protect your key people, this guide will provide you with all the information you need to make an informed decision.
Why do 72% of high net worth couples, who explore their insurance options, choose premium financing for life insurance?
Now, let’s dive deeper into each section and explore the world of premium financing for life insurance.
Image Source: FreeImages
1. What is Premium Financing for Life Insurance?
Premium financing is a strategy that allows individuals to obtain life insurance coverage by taking out a loan to pay for the premiums. This approach is particularly popular among high net worth individuals and business owners who want to preserve their capital and maintain liquidity while still benefiting from the protection and financial advantages of life insurance.
By leveraging a loan, individuals can fund a substantial portion of the life insurance premiums, reducing their out-of-pocket costs. The loan is typically secured against the cash surrender value of the life insurance policy, providing collateral for the lender. Premium financing can be used for both new life insurance policies and existing ones.
2. Who Benefits from Premium Financing?
Premium financing is a versatile solution that offers significant benefits to various groups of individuals. Here are some key beneficiaries of premium financing:
High Net Worth Individuals: High net worth individuals often have substantial assets and investments that generate significant returns. By leveraging premium financing, they can keep their money invested in high-returning asset classes while still obtaining the life insurance coverage they need.
Business Owners: Business owners understand the importance of protecting their key people and ensuring the continuity of their businesses. Premium financing allows business owners to fund the life insurance premiums of their key employees, protecting the business while maintaining cash flow efficiency.
Estate Planning: Premium financing can be a valuable tool in estate planning, helping individuals minimize gift and estate taxes while maximizing the overall internal rate of return on their estate. It allows individuals to accumulate an additional asset class with cash surrender value, providing added financial security and flexibility.
3. How Does Premium Financing Work?
Premium financing involves a series of steps and considerations. Here’s a breakdown of how premium financing works:
Step 1: Evaluation and Planning: The first step is to evaluate your life insurance needs and determine if premium financing is the right solution for you. This involves assessing your financial situation, goals, and risk tolerance.
Step 2: Loan Application: Once you decide to pursue premium financing, you’ll need to apply for a loan with a premium financing company or a private bank. The lender will assess your creditworthiness, financial stability, and the cash surrender value of the policy you intend to finance.
Step 3: Loan Approval and Structure: If your loan application is approved, the lender will provide you with a term sheet that outlines the terms and conditions of the loan. This includes the interest rate, repayment schedule, and any collateral requirements.
Step 4: Policy Acquisition and Collateral: With the loan approved, you can proceed to acquire the life insurance policy. The lender may require you to assign the policy’s cash surrender value as collateral, providing security for the loan. Additional collateral may be required if the value of the policy declines.
Step 5: Premium Payments and Loan Repayment: You will be responsible for making the interest payments on the loan, usually on an annual or quarterly basis. The loan may have an interest-only payment structure or include capital repayment at the end of the loan term. It’s crucial to make timely payments to avoid defaulting on the loan.
Step 6: Loan Renewal or Repayment: At the end of the initial loan term, you may have the option to renew the loan or repay the outstanding balance. The lender will evaluate the cash surrender value of the policy and your financial situation to determine the next steps.
4. Benefits of Premium Financing
Premium financing offers several benefits that make it an attractive option for individuals seeking life insurance coverage. Here are some key advantages of premium financing:
Cost-Effectiveness: Premium financing allows individuals to obtain life insurance coverage with reduced out-of-pocket costs. By leveraging a loan, individuals can fund a significant portion of the premiums, preserving their capital for other investments or expenses.
Asset Optimization: Premium financing enables individuals to keep their money invested in high-returning asset classes. Instead of liquidating assets to pay for life insurance premiums, individuals can maintain their investments’ growth potential.
Estate Planning Opportunities: Premium financing can be a powerful tool in estate planning, helping individuals minimize gift and estate taxes. By leveraging the cash surrender value of the policy, individuals can increase the overall internal rate of return on their estate.
Flexibility and Liquidity: Premium financing allows individuals to maintain liquidity by reducing the upfront costs of life insurance premiums. This can be particularly beneficial for high net worth individuals and business owners who need to allocate their capital strategically.
5. Risks of Premium Financing
While premium financing offers significant benefits, it’s essential to be aware of the potential risks involved. Here are some key risks associated with premium financing:
Lender Risk: Premium financing involves borrowing from a third-party lender, which introduces the risk of the loan coming due before the cash surrender value is sufficient to cover it. Lenders may have the discretion to call the loan or choose not to refinance it based on various factors, such as credit scores, collateral value, or changes in the life insurance company’s ratings.
Loan Interest Risk: Premium financing loans often have adjustable interest rates tied to benchmark rates such as LIBOR or Prime. While historically interest rates have remained low, there is a risk of future increases. Borrowers can mitigate this risk by opting for fixed-rate premium financing, although it may come at a higher cost.
Collateral Risk: Premium financing requires collateral, typically the cash surrender value of the life insurance policy. If the value of the policy declines or the policy underperforms, additional collateral may be required. Non-recourse premium financing arrangements can eliminate personal collateral risk but may come with higher interest rates.
Policy Performance Risk: There is a risk that the life insurance policy will not perform as well as initially projected. Poor policy performance can result in higher premiums, reduced cash surrender value, or the need for additional collateral. Diversifying the premium financed life insurance portfolio can help mitigate this risk.
Policy Charges Risk: Premium financing for universal life insurance policies carries the risk of increasing policy charges. While whole life policies have fixed charges, universal life policies have dynamic charges that can erode policy performance if not managed effectively.
It’s crucial to carefully evaluate these risks and consider your individual circumstances before pursuing premium financing for life insurance.
6. Choosing the Right Premium Financing Solution
When considering premium financing, it’s essential to choose the right solution that aligns with your needs and goals. Here are some factors to consider when selecting a premium financing solution:
Lender Expertise: Look for lenders who specialize in premium financing for life insurance and have a deep understanding of the industry. They can provide valuable insights and guidance throughout the process.
Loan Terms and Conditions: Evaluate the interest rates, repayment schedule, and flexibility offered by different lenders. Consider the loan term, renewal options, prepayment penalties, and any additional fees associated with the loan.
Collateral Requirements: Understand the collateral requirements of the lender. Some lenders may require additional collateral beyond the cash surrender value of the policy, while others offer non-recourse options.
Financial Stability: Assess the financial stability and reputation of the lender. Look for established institutions with a track record of providing reliable premium financing solutions.
Relationships and Trust: Consider lenders with whom you have existing relationships or those recommended by trusted advisors. Building a strong relationship with your lender can increase the likelihood of loan renewal and favorable terms.
By carefully evaluating these factors, you can choose a premium financing solution that meets your specific needs and minimizes the associated risks.
7. Premium Financing Companies and Banks
Premium financing solutions are offered by various companies and banks specializing in this niche area. Here are some reputable premium financing companies and banks that provide premium financing for life insurance:
Byline Bank: Byline Bank is a full-service commercial bank that offers premium financing solutions tailored to individual needs. With a focus on prompt and professional service, Byline Bank aims to provide efficient premium financing options to its clients.
JP Morgan: JP Morgan is a prominent financial institution that offers premium financing services through its private banking division. With a creative and problem-solving approach, JP Morgan tailors premium financing loans to match unique individual needs.
Other Banks: Various private banks, including UBS, Deutsche Bank, Bank of Singapore, Societe Generale, Barclays, Credit Suisse, Standard Chartered, and DBS Bank, offer premium financing solutions with different loan-to-value ratios and terms.
When considering premium financing, it’s advisable to explore options from multiple lenders and banks to find the best fit for your specific requirements.
8. The Application Process for Premium Financing
The application process for premium financing involves several steps to ensure that the lender assesses your eligibility and determines the terms of the loan. Here’s a general overview of the premium financing application process:
Step 1: Initial Consultation: Start by discussing your premium financing needs with a life insurance broker or wealth manager. They will help you evaluate whether premium financing is suitable for your circumstances and guide you through the application process.
Step 2: Gather Documentation: Prepare the necessary documentation, including financial statements, policy details, and personal information. The lender will require this information to assess your creditworthiness and collateral value.
Step 3: Loan Application Submission: Submit the complete loan package documentation to the lender. This includes the loan application form, policy details, financial statements, and any additional information required by the lender.
Step 4: Loan Evaluation and Approval: The lender will evaluate your loan application and assess your creditworthiness, financial stability, and the cash surrender value of the policy. They may request additional information or clarification during this stage.
Step 5: Term Sheet and Agreement: If your loan application is approved, the lender will provide you with a term sheet that outlines the terms and conditions of the loan. Review the term sheet carefully and seek professional advice if needed.
Step 6: Loan Closing: Once you accept the terms of the loan, the lender will proceed to close the loan. This involves signing the loan agreement, providing any necessary collateral, and completing any additional paperwork required by the lender.
The application process may vary slightly depending on the lender and specific circumstances. Working closely with a trusted advisor can help streamline the application process and ensure a smooth experience.
9. Case Studies: Success Stories of Premium Financing
To illustrate the benefits and outcomes of premium financing, let’s explore two case studies showcasing successful premium financing arrangements.
Case Study 1: High Net Worth Individual
John, a high net worth individual with significant investments, wanted to obtain a substantial life insurance policy to protect his family’s financial future. However, he didn’t want to liquidate his investments to pay for the premiums. By leveraging premium financing, John was able to fund a significant portion of the premiums while keeping his investments intact. This allowed him to maintain liquidity and potentially earn higher returns on his investments.
Case Study 2: Business Owner
Sarah, a successful business owner, recognized the importance of insuring her key employees to protect her business’s continuity. However, funding the life insurance premiums for multiple key employees could strain her cash flow. By utilizing premium financing, Sarah was able to finance the majority of the premiums, ensuring her business’s protection while maintaining cash flow efficiency.
These case studies highlight how premium financing can provide practical solutions for individuals with unique financial circumstances, maximizing their financial potential while obtaining the necessary life insurance coverage.
10. Conclusion
Premium financing for life insurance offers a strategic approach to obtaining life insurance coverage while preserving capital, maintaining liquidity, and optimizing investments. It provides an attractive solution for high net worth individuals and business owners who want to protect their financial future while minimizing upfront costs.
However, it’s essential to carefully evaluate the benefits and risks associated with premium financing and choose a solution that aligns with your financial goals and risk tolerance. Working with experienced advisors and reputable lenders can help navigate the premium financing process and ensure a successful outcome.
Remember, premium financing is just one tool among many available for optimizing your life insurance coverage. Consider consulting with financial professionals to explore other options and determine the best strategy for your unique needs.
By understanding the nuances of premium financing and making informed decisions, you can leverage this financial strategy to secure the life insurance coverage you need while maximizing your financial potential.
It has already been established that using the best premium financed life insurance policy will provide ultimate benefits to clients for Estate Planning and Asset Protection. The following article highlights the many benefits of using PFLI as well as a detailed example citing just how much an insurance policy could grow by using PFLI.
Ultimate Benefits of Using PF Premium Financed Life Insurance Policy for Estate Planning and Asset Protection
As mentioned in the previous article, the premium financed life insurance policy (PFLI) differs greatly from a traditional premium financed life insurance policy. The PFLI will provide additional benefits to affluent individuals, including the following:
The superior (PFLI) premium financed life insurance policy inside the irrevocable trust will use a special structure in which the principal and interest on the loan is paid to the lender no matter how much cash value the policy accumulates (as long as the life insurance policy is in effect). All of the costs associated with the loan (i.e. interests, principal and other fees) will combine each year until there comes a time where the loan is retired or the policy holder passes away. At this time, banks operating in the US do not have the option of offering a non-performing loan.
Using the superior (PFLI) premium financed life insurance policy inside an irrevocable trust will create a unique chance for the insured to use financial leverage. They will also be able to earn a return on any of their assets that have been put up for collateral. With other traditional life insurance plans, the profits from the assets would have been used to pay the premium on the insurance as well as any gift taxes that were due.
The death benefit with a superior (PFLI) premium financed life insurance policy inside the irrevocable trust will be estate tax free and will be increased in order to pay all beneficiaries the death benefit amount that was originally desired.
Superior (PFLI) premium financed life insurance policies offer an unconventional relationship between the client and the lender. It is one that has a longer term and the lowest interest rates possible. When compared to US programs, the superior PFLI program offers the lowest lending rates.
All assets that are used for collateral will be left under the complete control and management of the owner. There will never be a situation in which the lender will take control of the assets.
When the superior (PFLI) premium financed life insurance policy is structured in a proper manner, an insured has the opportunity to use real estate for collateral instead of stocks or mutual funds. The lender does not have need to have guarantee. Assigned assets are the only ones that can be used for collateral.
The superior PFLI plan can be adapted so that clients over the age of 40 can receive the benefits for the program.
An Example of a Superior (PFLI) Premium Financed Leveraged Life Insurance Policy in Action
A couple, aged 49 and 48, wish to acquire a large life insurance policy worth $25 million for the benefit of their son. The couple has an estate that has a current value of $35 million. The cost for the premium each year would be $273,000 until the older spouse reaches the age of 100. The spouse has the option of gifting the premium amounts to an irrevocable trust or ILIT (irrevocable life insurance trust), but doing so would add to the annual cost due to gift taxes. This would increase the cost per year to almost $400,000. Should the spouse reach the age of 100, $19.5 million would be the outlay and this amount does not even include any missed investment opportunities.
The couple in this example has three choices in regards to what they should do. 1) They can decide to not purchase any insurance at all. 2) They can pay for the insurance from their own cash account, which would equal around $19.5 million. 3) They could use the superior (PFLI) premium financed leveraged life insurance policy, which would cost zero cash out-of-pocket outlay. $2.27 million would be the peak collateral at risk amount and the assigned or designated assets what would be used as collateral would be $2.76 million. The “at risk” means the net amount that would be at risk for the defected loan.
In order for the couple to use PFLI, they will assign or designate certain assets as collateral so they can apply for and receive the loan for the premium. The collateral that is at risk is the actual difference between the bank loan balance and the cash value at the time of surrendered in the life insurance policy. The following displays what the at risk collateral will be for each year:
Year
Risk Collateral
1
$1.67 million
2
$1.69 million
3
$1.87 million
4
$1.98 million
5
$2.22 million
6
$2.27 million
7
$2.19 million
8
$2.05 million
9
$1.81 million
10
$1.29 million
11
$610,000
12
$120,000
13
$0
Based on these projected numbers, after the 11th year, the couple will have minimal capital at risk, with it completely dropping to zero in year 13. In other words, there will be no net amount that will be at risk for a defected loan. This means that they could simply give up the loan and pay off the debt by giving the life insurance policy to the bank. Of course, this is the wrong thing to do because the benefits that will be gained from this plan will skyrocket in the future.
By the 19th year, there should be enough cash value in the life insurance policy so that the couple can do one of two things: pay off the balance of the loan by using a zero-interest loan from the life insurance policy, or simply let the cash value to remain in the policy, allowing it to provide coverage until the age of 100 with no additional premiums. As the cash value increases, the face value of the insurance policy will also do the same. So when the older spouse reaches age 75, the face amount of the policy will be worth $32.5 million. Age 80 would increase the amount to $44.7 million. Should the owner reach the ripe old age of 90, the face value will be $100.9 million.
The superior (PFLI) premium financed life insurance is without equal when it comes to the availability of loans offered, the life insurance policy conditions and collaterals that can be used for the loans themselves. As one can see, this is a powerful way to build wealth inside of an irrevocable trust and could provide generations of wealth for your blood line for the right person and family.
Please contact Estate Street Partners at (508) 429-0011 and see how we can protect your assets and maximize your tax-free returns in retirement.
Many premium financed life insurance policies will require individuals to have liquid wealth or assets. These will be used as collateral when taking out a loan to fund the insurance policy. Most types of these programs are not advantageous, but there are a couple of Premium Financed Life Insurance program that offer a solid opportunity in our opinion. With these programs, the cash value of the life insurance stands as the collateral. The following article discusses the main differences between a traditional premium finance life insurance and the new “PF” program found.
Estate Planning and Asset Protection: A Premium Financed Life Insurance Program Design to Benefit Individuals
There are literally dozens of life insurance programs that are financed by borrowing money to cover premiums. Unfortunately, many of these are not as investor-friendly as they could be. There is, however, a couple of programs that are designed to provide optimal benefits to wealthy individuals and makes the most sense for those seeking this strategy. To have a better understanding of these types of policies, we examine traditional premium financed life insurance programs.
Defining Traditional Premium Financed Life Insurance
With premium financed life insurance the affluent individual will fund a sizable life insurance policy with borrowed money. The details that are involved are pretty straightforward. The individual will first borrow a certain amount of money each year. That money is then used to pay the premium on a cash value life insurance policy. As with any type of loan, the individual is personally liable for the amount that has been borrowed (i.e. recourse) as well as other assets that will be used as “collateral”. The significant difference is that, in most instances, there will be no interest payments on the borrowed amount unless the actual cash value of the life insurance policy dips under a set dollar value.
What this means is that as long as the cash value remains relatively higher (than that set dollar value), the individual will not pay the interest amount because the lender will be paid back the load when the insured dies. The loan repayment is done with the amount that is received from the policy as a death benefit. However, if the value does drop below the set dollar value that is stated in advance, payments must be made on the loan (which could include the interest and the principal amount). Many insured individuals will use their other assets to make these payments. If everything works as expected, you will be getting a death benefit for “a very low or near zero cost.”
Stocks/Mutual Funds as Collateral for Loan Over Cash Value of Life Insurance
There are multiple life insurance programs which the insured will be forced to provide collateral for the loan. This collateral is typically in the form of mutual funds or stocks. The reason for this occurrence is for the lender to be able to sell the stocks should the loan need to be repaid and the client does not have the money readily available.
The above scenario is one reason why typical premium financed programs can be a risky proposition. Since typical premium financed life insurance plans will necessitate the insured to have liquid assets to be used as collateral, it is difficult for anyone without these liquid assets to secure a premium financed life policy. You need to be aware of the details of the lending terms when purchasing a premium financed life insurance policy. The agreement will usually provide the lender with access to wealth in the event that the loan cannot be repaid.
A Better Premium Financed Life Insurance
The best (PPLI) premium financed life insurance plan will be assumed to be a viable program for anyone who is eligible and who shows a need for carrying life insurance for a long time. These policies are not short-term, nor do they have high rates of interest. They are a long-term solution with a recourse loan arrangement to offer the insured a life insurance policy with the least amount of collateral in order to obtain premium loans for considerable insurance.
The best PPLI plan offers substantial steady amounts of premium financed life insurance and is beneficial for anyone who is affluent, generally with assets over $3 million. These individuals also have a high probability of zero cash expense to pay for the life insurance policy. In order for the life insurance policy to quickly build high cash value to meet the collateral conditions of the loan, large contributions must be made to the insurance policy. In some case designs (but not all), outside collateral may be required in order for the loan process to begin. This is especially true when the policy is just in the beginning years. The goal is for the cash value in the policy to become the primary source of collateral. When this happens, all outside collateral is let go and the loan will be covered by the cash value of the policy.
When using a traditional premium financed program, the growth of the cash value is typically very slow and progressive. Premium financed life insurance plan differs from a traditional one as it makes use of indexed equity universal life insurance. In addition, the life insurance policy will be financed around the MEC (Modified Endowment Contract) minimum to maximize the tax benefits of a policy. This policy is unique because it is created in a way that the cash value growth will cover the balance that will be accumulated on the loan every year.
One of the most important aspects of using a (PFLI) premium financed life insurance plan is the exit plan of action. Every plan that can be purchased will offer some type of exit plan of action on the loan which will either occur during the owner’s lifetime or when they die. With a premium financed life insurance plan, the cash value performance does not affect the loan repayment. This is what makes a PFLI plan unique. The only requirement is that the life insurance policy remains in effect in order to pay off the loan.
When purchasing a premium financed life insurance plan, an irrevocable trust is used. The process involves the irrevocable trust purchasing a life insurance policy. The face amount of the insurance policy will be enough to cover the cost of estate taxes or enough to build a solid family legacy inside the irrevocable trust. The lender will make an agreement to pay all premiums and the insured will have the opportunity to let the interest add up for a specified term. When the loan term comes to an end, the insured owner may renew the loan and have it underwritten again. All of the beneficiaries named on the trust will obtain the death benefit.
In Part 2 of this article we will highlights the many benefits of using a (PFLI), premium finance life insurance policy inside of an irrevocable trust.
Please contact Estate Street Partners at (508) 429-0011 and see how we can protect your assets and maximize your returns in retirement.
A captive insurance company, often referred to as a “captive”, is a risk transfer entity and an alternative to the traditional commercial insurance and reinsurance markets. A captive is a privately held insurance company that is usually a subsidiary of the insured business. It issues policies, collects premiums and pays claims, just like a commercial insurer. The major difference, however, is that it does not offer its services to the public. An 831(b) captive benefits from the preferred tax treatment afforded to small insurance companies by the IRS. 831(b) captives can record up to $1.2 million a year in premiums without any federal income tax implications. Premiums are deducted from a business’ ordinary income and a captive’s profits can be distributed to shareholders at long term capital gain rates.
Captives were once considered too outside the mainstream of risk management practices. However, within the past decade or so, most major corporations have either utilized captives or actively considered the feasibility of captives. Captives are now truly considered a mainstream and cost effective risk management alternative. It is estimated that between 75-85% of S&P 500 companies use captive insurance for risk transfer purposes.
Businesses often find themselves with a need for comprehensive risk management. By establishing a captive insurance company, business owners can craft insurance coverage that addresses their particular needs. The ability to be creative and task specific is a tremendous advantage of captive insurance company ownership. Additionally, using the captive structure companies can create employee retention and executive compensation benefits.
Further, captives can provide significant estate planning benefits. In many scenarios the parties that own the captive also own the business that is insured. In some instances it makes sense for the children of the owners of the business to own the captive. The captive can also be owned by a trust structure, effectively removing the profits and assets of the captive from the estate of the business owner. This can only be accomplished if the captive meets the requirements of the Internal Revenue Code’s section 831(b).
Captives have also demonstrated the ability to provide important asset protection benefits. In particular, if the captive is formed offshore and chooses to make an IRC 953(d) election, thus treating the captive as a domestic corporation, the captive will be able to transfer assets to offshore banks or investment vehicles. There are requirements that disclosures are made about foreign bank accounts. The real advantage comes when dealing with creditors. Creditors would be obligated to pursue their claims in these foreign jurisdictions.
Another advantage is the anonymity that captive ownership provides. Information regarding the ownership of a captive is often protected by the jurisdictions that allow captives. Therefore, ownership information is not readily available to third parties.
Additional protection can be obtained by forming the captive as a Limited Liability Company. Captives can benefit from the LLC structure; this provides an added layer of protection for the owners, who are able to restrict their personal liability.
Our team of advisors has a unique blend of over 100 years of combined experience in the insurance and financial service industries. By combining our extensive experience and knowledge of financial services and insurance we are able to design and implement insurance solutions tailored to fit our client’s insurance needs. We offer comprehensive captive consulting services to wealthy individuals and business owners seeking innovative tax minimization and wealth preservation strategies.
MEC Equity Indexed Life Insurance vs. Fixed Indexed Annuity
When planning for retirement and weighing the options of an FIA or an Equity Indexed Life Insurance policy, the EILI policy will often provide higher annual returns. This means that it will generate more money in retirement. Not only will the client benefit from increased income amounts, but the life insurance policy will also have a death benefit that is not found with an FIA. Life insurance policies that are MEC are a great way for any client to begin building wealth for retirement.
Based on the example client in the first section of the article, we now ask what the best option is for the client when he reaches the age of 66. We will first make the assumption that he will take 20 years to equally spend down assets equally. We will go on to assume that the FIA being offered will return 5.5% each year and the life insurance policy will have a return of 7.5%. You may already be asking why there is such a difference between the two returns. An FIA will usually have an upper limit on the amount that it can earn each year and that amount is between 7 and 9 percent of the stock index. The life insurance policy will also have an upper limite, but the amount is 12 to 16 percent, which is determined by the policy that is being used. The higher limits will indicate that the life insurance policy will also produce higher returns.
Fixed Indexed Annuity Returns vs. Equity Indexed Life Insurance Returns
When the client reaches the age of 66, how much money will he have the opportunity to remove from an FIA? Between the ages of 66 and 85, the amount would be $13,190. With the life insurance policy, that amount is increased to $17,110 each year for the same age bracket. This equals a return that is 23% better than the return from the FIA. In regards to how the income is treated in terms of taxes, the taxes will be the exact same for the two unless the client chooses to annuitize the annuity.
Variable Loan with Equity Indexed Life Insurance
Let’s look at the same situation if the numbers are changed a bit. The $17,110 was based on an interest rate of 7.5% of the amount of the funds that were borrowed from the policy between 66 and 85. The life insurance policy will have a variable loan option and this will produce a positive spread between the lending and crediting rates on loans from the policy. To learn more about how variable loans work, please visit: cash value life insurance
What would happen if the interest rate changed to 6.5% and the variable loan option was used? This would then mean that the client would have the ability to remove $19,091 each year, which is now 30% better than using an FIA. If there was a 2% positive spread, the number would jump to $21,202 each year, equaling a 38% increase over an FIA.
Equity Indexed Life Insurance (EILI) is a higher risk and have more expenses
Unfortunately, things are never this simple. Even though the life insurance policy, which is a MEC, will return more money than the FIA, there is a higher risk to using the policy instead of the annuity. Life insurance policies will always have more expenses and these costs are typically offset by offering higher caps and returns annually. However, this only rings true if the policy performs well in the long run. Otherwise, the annuity will take top billing.
To explain this even more, let’s take a look at an example. We will say the life insurance returns just 6.5% and a 5.5% loan rate is being used. The client would then be able to take $15,428 from the policy. However, if the lending and crediting rate were both 6.5%, the amount would decrease to $13,792 annually.
MEC Life Insurance Policy Advantages
There are various benefits to using a MEC life insurance policy instead of funding an FIA. These advantages include:
Upon death, the death benefit of the insurance policy will not be taxed when it is passed to beneficiaries. Keep in mind it will still be subject to estate taxes unless an irrevocable trust is the owner of the policy. In the case of the example client, if he died at the age of 85, there would be a death benefit of $50,000 payable to heirs. This would not be the case if the client funded a FIA instead of the insurance policy.
With the life insurance policy, the death benefit will exceed the value of the annuity. When the policy was purchased at 55, the death benefit was $270,000, which is already $170,000 more than what would be passed to heirs from an annuity.
Modified Endowment Contract Cash Value Policy & Fixed Indexed Annuity
MEC rules have changed the way clients are able to fund a cash value life insurance policy. The following article discusses these new rules and examines how they have an effect on those who are trying to find a way to generate wealth in a tax free manner to be used in retirement.
Fixed Indexed Annuity: For those near retirement
Fixed or equity indexed annuities (FIA) are some of the first things that advisors will think of when they are considering a protective tool for building retirement income. The reason these come to mind is because a Fixed Indexed Annuity will provide an individual with principal protection. They will also provide upside potential as long as the stocks’ returns are good. Annually, an Fixed Indexed Annuity should return between 4.5 to 6.5 percent. These are excellent retirement tools that are commonly used by those who are very near to retirement.
Cash Value Life Insurance Policy: for those under the age of 65
When an individual is under the age of 65, the FIA may not be the best choice. Instead, advisors will suggest a cash value life insurance policy that can be used to protect and generate wealth. The cash value that is in the policy will, generally, grow at a higher rate and will be tax free. These funds can also be removed from the policy without taxes when the person reaches the age of retirement. Cash value life insurance policies are not recommended for those who are over 65 years of age because of the mortality costs that are associated with the policy.
Over funded MEC (Modified Endowment Contract) Life Insurance Policy
The policy will have to be over-funded if it is going to be used as a means of generating retirement income. The policy can be over-funded by using cash and the death benefit of the policy will have to be available at the lowest possible amount that is allowed by the MEC, Modified Endowment Contract, rules. Should the insurance policy become a MEC, funds that are borrowed from the policy that are in excess of the premiums that have been paid will be considered taxable income?
Single Premium Life Insurance Policy
Prior to the development of MEC rules, it was possible to purchase single premium life insurance policies. These policies would allow clients to put thousands of dollars into a single policy in one year if the death benefit was low. This actually makes a lot of sense because the client will generally be looking to buy the policy as a means of generating income and not so much for the death benefit. The faster a client is able to fund their policy, the more retirement growth they will achieve.
MEC (Modified Endowment Contract) Rules:
These old types of policies were very popular, which is why the MEC rules were passed by Congress. The rules established a timeline of 7 years in which premiums had to be paid in order to drive the death benefit that the individual has to purchase to avoid the life insurance policy from becoming a MEC.
For example, the old rules may have allowed a client of 55 years of age to pay a premium amount of $100,000 into a cash value policy in one year and have the death benefit be a low amount. Since the death benefit is as low as it is, the policy will have a tremendous amount of cash that could later be used for retirement income.
With today’s rules, if that same client attempted to fund the same amount over a year’s time, the death benefit that the client is required to purchase in order for the policy to be considered MEC would be over $1.5 million.
Funding Cash Value Policy over 5 to 7 years
This creates an enormous difference in the costs when a policy that has a $270,000 death benefit is compared to one that has a $1.5 million benefit. The rules create an unattractive situation for those who want to short-fund any cash value policy with the sole purpose of getting the most benefits in retirement. This is one of the main reasons planners will recommend that all premiums be paid over a 5 to 7 year time span. This will help with MEC compliance and will lower the amount of the required death benefit while increasing the cash value in the policy.
The big question that is often asked is whether it would be better for a client to make use of an FIA or if they should over-fund a single premium policy that is considered a MEC. The best way to answer this question is to use an example. A client is 55 years of age and is lucky to have good health. The client also has $100,000 available funds in a money market account that can be allocated to a safe account that will create tax free retirement money.
The options the client has is to use a FIA or an Equity Indexed Life Insurance policy, especially Revolutionary Life. We will make the assumption that the client will fund $100,000 in the first year in an FIA and the same amount into an EILI. The EILI will have a low death benefit and is a MEC.
For many years, policy holders have wanted to sell unneeded life insurance, via life settlement contracts, but this was done in a way that was not beneficial to the client or the advisor. A new method has been introduced which will mitigate abuse of the life settlement broker who may not fulfill his fiduciary responsibilities. The life settlement contract can be placed for auction to offer the best price on the life settlement sale.
Life Settlement Contracts in Retirement Planning for Auction
To understand how these sales are made, a life insurance policy holder must first be aware that a life settlement contract refers to the sale of a current life insurance policy and the sale is to be made for cash gains. There are many people in the country who still have life insurance and really have no need for it. This is especially true for those who are over the age of 65.
If these individuals have a cash value in their policy, they have the option of giving up the life insurance and receiving the value for the policy even if it is inside an irrevocable trust. While this is the route many people take, there is also another option. These policies could be sold to a life settlement agency. When this is done, the individual can receive more money and, in many instances, for a much greater value, thereby, maximizing their returns of the life settlement contract. If the individual has a policy that is term life, they could let the policy expire and then make the decision to sell it for cash.
Current Sales Model for Selling Life Settlements
In most cases presently and in the past, these policies have been sold with very little regulation. Financial advisors will often turn to a broker who deals with life settlements. These life settlement brokers will take the time to shop around to determine the value of the policy. They will also collect some information on the life insurance policy holder, such as medical facts.
When using a life settlement broker, the life insurance policy holder and the financial advisor will not have much knowledge regarding the number of buyers the broker will be contacting. They will also not know what the final price of the policy is. This means that most life settlement contract brokers will probably make quite a bit of money on these policies because they do not disclose all information to the client or the advisor.
There have been many reported cases of these life insurance policies being sold where the broker’s commission exceeded what the life insurance policy holder received. The broker can receive manipulate bids by not seeking sufficient bidders, extra side commissions, set the prices of the life settlement contracts, etc. Why does this happen? Because there are no legal, governmental regulations on the sale of the life insurance policies. This all results in very little trust within the industry and this is an issue that all senior life insurance policy holders should be aware of. This is abusive and financial advisors and life settlement brokers are not fulfilling their call of fiduciary responsibilities.
Auction-style of Life Settlement Contracts
This is a new model that is being used as a purchasing system for life settlement contracts. It involves the life insurance policy holder getting full disclosure and, in this case, will not, in any terms, violate the financial advisor�s fiduciary responsibility to an individual.
The sale is similar to items being sold on eBay like an auction item. When someone is selling an item on an auction site, the seller will often set a price that will serve as a initial price and this price will expire within a set amount of time. Potential buyers will see the item and begin the bidding process. The final result is that the highest bidder will get the item. The life settlement industry has adopted this type or selling and purchasing method.
The method that is used by the life settlement industry is very similar to the eBay auction concept. The first step is to locate an individual who has a life insurance policy they wish to sell. Financial information on the insurance policy and medical facts of the insurance policy holder will then be collected. The life insurance policy will then be appraised to determine the maximum selling price. It is then placed up for auction and the policy will be sold to the highest bidding individual.
During this process, the buyer of the policy will have access to all of the medical and financial data of the life insurance that is gathered. However, it should be known that this information is private and no life insurance policy holder names will ever be revealed. The reason buyers even get the information is so they can do their own research to determine what they wish to bid.
Pros of Life Settlement Contract Auctions
Using this new life settlement contract auction-style process will benefit insurance policy holders because they know they will be getting the best possible price on the policy. They also know that the policy will be made available in an open market, so there is no question as to whether life settlement brokers are skimming off the top of the sale and not fulfilling their fiduciary responsibilities. The financial advisor will also win in this situation. They will remain in compliance and there will be no question of violating fiduciary duties of any party. Under the current and past processes for selling the life insurance policies, advisors faced the possibility of multiple lawsuits for violation of their duties. Now, that possibility is eliminated and this creates a winning situation for all involved.
qPlease 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?
No, this is not irrevocable trustasset protection. With the dramatic fluctuations that have occurred in the stock market, many investors cannot handle the volatility. Over the past few years, the market has fallen as much as 46% peak to trough. This is one of the reasons investors are looking for other ways to generate wealth with some stock market asset protection. This has resulted in the increased sales of fixed indexed annuities (especially the 7% guaranteed fixed indexed annuity). To make things even more unstable, economists have announced that we are very likely be doomed for the years ahead because of the insurmountable $1 trillion stimulus package that was passed by President Barak Obama and the democratic government which is accelerating our nation’s debt. (prayer: God help us and give Your wisdom to our leaders.) Only God knows what will happen in the stock market these days.
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.
