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What is Captive Insurance?

Posted on: March 21, 2017 at 6:30 am, in

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

Posted on: March 21, 2017 at 6:29 am, in

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.

Equity Indexed Life Insurance policy that is MEC

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:
  1. 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.
  2. 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

Posted on: March 21, 2017 at 6:29 am, in

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.

Premium Financed Life Insurance

Posted on: March 21, 2017 at 6:29 am, in

Many premium financed (leveraged) 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 is one Premium Financed (Leveraged) Life Insurance program that offers 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 (Leveraged) 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 should be. There is, however, one program that is 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 (leverated) life insurance programs.

Defining Traditional Premium Financed (Leveraged) Life Insurance

With premium financed (levearged) 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 (leveraged) programs can be a risky proposition. Since typical premium financed (leveraged) 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 (leveraged) life policy. You need to be aware of the details of the lending terms when purchasing a premium financed (leveraged) 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 (Leveraged) Life Insurance

The best (PPLLI) premium financed (leveraged) 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 PPLLI plan offers substantial steady amounts of premium financed (leveraged) life insurance and is beneficial for anyone who is affluent, generally with assets over $8 million. These individuals also have a high probablity 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 cases, 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 (leveraged) program, the growth of the cash value is typically very slow and progressive. (PFLLI) premium financed (leveraged) life insurance plan differs from a traditional one as it makes use of indexed equity life insurance. In addition, the life insurance policy will be financed around the MEC (Modified Endowment Contract) minimum. 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 (PFLLI) premium financed (leveraged) 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 (PFLLI) premium financed (leveraged) life insurance plan, the cash value performance does not affect the loan repayment. This is what makes a PFLLI plan unique. The only requirement is that the life insurance policy remains in effect in order to pay off the loan.
When purchasing a (PFLLI) premium financed (leveraged) 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 (PFLLI), premium finance (leveraged) life insurance policy inside of an irrevocable trust.
Please contact Estate Street Partners at (888) 938-5872 and see how we can protect your assets and maximize your returns in retirement.

Premium Financed Life Insurance Policy

Posted on: March 21, 2017 at 6:28 am, in

It has already been established that using the best premium financed life insurance (BPRLI) policy will provide ultimate benefits to clients for Estate Planning and Asset Protection. The following article highlights the many benefits of using BPFLI as well as a detailed example citing just how much an insurance policy could grow by using BPFLI.

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 (leveraged) life insurance policy (PFLLI) differs greatly from a traditional premium financed life insurance policy. The PFLLI will provide additional benefits to affluent individuals, including the following:
  1. The superior (PFLLI) premium financed (leveraged) 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.
  2. Using the superior (PFLLI) 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.
  3. The death benefit with a superior (PFLLI) 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.
  4. Superior (PFLLI) 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 PFLLI program offers the lowest lending rates.
  5. 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.
  6. When the superior (PFLLI) 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.
  7. The superior PFLLI plan can be adapted so that clients over the age of 40 can receive the benefits for the program.

An Example of a Superior (PFLLI) 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 (PFLLI) premium financed leveraged life insurance policy, which would cost zero cash dollars. $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 PFLLI, 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 (PFLLI) 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 (888) 938-5872 and see how we can protect your assets and maximize your returns in retirement.

Life Settlement Contract

Posted on: March 21, 2017 at 6:28 am, in

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.

Life Insurance Asset Protection

Posted on: March 21, 2017 at 6:28 am, in

Warning: Some Life Settlement programs require the individual to be an accredited investor (definition: // 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 trust asset 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.

Asset Protection Using Life Settlements

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.

Life Settlements

Posted on: March 21, 2017 at 6:27 am, in

Warning: Some Life Settlement programs require the individual to be an accredited investor (definition: // 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 trust asset 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.

Asset Protection Using Life Settlements

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 vs Cash Value Equity Indexed Universal Life

Posted on: March 21, 2017 at 6:27 am, in

Section 79 is compared to the a high value cash value EIUL (equity indexed universal life). Wash loans are used in both comparisons. We see the tax free rates of return in retirement.

Section 79 Rates of Return

It is important to understand how Section 79 Plan illustrations are run. Typically, the administrator that demonstrates these plans will show a rate of return in the policy between 5.75% and 6% for the first five years. After that time period, the insurance administrator will return rates of return somewhere between 8-9.4%.
It is difficult to do get those rates of return for retirement with your traditional life insurance program, so we came up with an equitable model using a customary program for the Revolutionary Life comparison.
In the Section 79 scheme, we presumed for the years 1 to 5 of investment a rate of return of 6% and past the 5th year we presumed an 8% rate of return. For the Revolutionary Life, a 7.5% rate of return throughout the entire span of policy years is presumed. From years 1 to 5, the return is 1.5% higher for the Revolutionary Life, but for years 6-40+ the Section 79 has a rate of return .5% greater.
This is not an equitable comparison to the Revolutionary Life because having .5% higher for the Section 79 for 35+ years is showing partiality to the Section 79 even though the Revolutionary Life, in this demonstration, has a rate of return 1.5% higher from years 1 to 5. We used these rates of return as so-called conservative numbers that would show partiality for the Section 79. We’ll see what the actual tax free rates of return will be in retirement even with these partial rates for the Section 79 policy.
As we’ll see in this demonstration, even with the numbers slanted in the Section 79 Plan policy, the Revolutionary Life would still be a better tool for accumulating wealth. Wash loans were used with the Revolutionary Life and Section 79 policies.

Section 79 vs a good Cash Value Equity Indexed Universal Life

The small business owner funds $100,000 each year into a Section 79 policy from years 1 to 5. The business owner owns the plan and the accredited income of the employee is around $60,000 a year (with a 40% tax bracket).
Since the employee does not receive the $100,000 and, additionally, will have to pay $24,000 of taxes to pay for the $60,000 of income, the employee will, essentially, have to pay $24,000 in after-tax dollars in order to pay the income tax bill. This is because $60,000 of accredited income is multiplied by 40% tax bracket which equals $24,000.
How much would the business owner have to contribute to a cash value life insurance policy if he didn’t choose the route of the Section 79 Plan? In this case, the business owner would have contributed $60,000. He would have a gross income of $100,000 and when this number is multiplied with his tax bracket of 40% the result is $60,000. In addition, to the contributions of $60,000, he would have an extra $24,000 to contribute. Remember, he had to pay $24,000 in after-tax dollars if he chose the Section 79 plan; thus, with this choice of the Equity Indexed Universal Life he has an extra $24,000 to contribute. We need to compare the two investment opportunities equitably, so we add $60,000 plus $24,000 which equals $84,000.
In other words, the $60,000 that was left over from the $100,000 of income would be increased by $24,000 in taxes that would have been paid if the Section 79 Plan was implemented. In short, $60,000 + $24,000 = $84,000 that is available to fund every year for five years into a Revolutionary Life policy (i.e. a high cash value Equity Indexed Universal Life).
The numbers following compare $100,000 going into a Section 79 Plan EIUL policy versus $84,000 going into a good EIUL policy. The question is how much could be withdrawn from the Section 79 Plan policy tax free in retirement between the ages of 66 and 85? The answer is $83,646 annually. How much could be removed from the good EIUL policy? That amount would be $125,084 annually.

Pros and Cons of Section 79. Benefits of good Cash Value Equity Indexed Universal Life

Section 79 Plans are insignificant from a retirement planning and asset protection standpoint and they are usually pushed by an advisor who did not compare the Section 79 with other investment opportunities or is careless because these plans will help the advisor sell life insurance.
The rates of return are very clear. Using cash value life insurance policies offers excellent retirement returns. Manipulating a business owner to use a Section 79 Plan that is comparatively insignificant from the standpoint of simple tax free rates of return because the plan will allow advisors to sell a 40% deductible plan is a misconduct of ethics and is definitely not in the best interest of the business owner.
In addition, if you do have a money-making small business and wish to tax deduct $100,000 to $1.2 million each year into a benefit plan (in addition to getting asset protection), you may want to consider using a Captive Insurance Company, also known as a Captive Insurace Company.

Captive Insurance Company with Cash Value Equity Indexed Universal Life

Though Captive Insurance Companies are not benefit plans, they can prove to be an excellent retirement planning strategy that also offers asset protection. The asset protection comes in the form of business insurance. The business is really insuring itself against any losses. As well, providing insurance claims are minimal the business owner can withdraw the cash from the Captive Insurance Company with the long terms tax rate for any capital gains. With proper retirement planning, the business owner can withdraw the cash without paying any taxes.
Moreover, in a Captive Insurance Company set up, it is wise to use a high cash value Equity Indexed Universal Life policy as a strategy to grow the reserves in the CIC while having protection from the volatility of the stock market.
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. We offer advanced retirment planning and estate planning strategies such as the Cash Value Life Insurance, reduction of your taxes while enabling to transfer your assets to your beneficiaries and superior asset protection plans using our formidable Ultra Trust® irrevocable trust.

Life Insurance Accounts Receivable Factoring

Posted on: March 21, 2017 at 6:27 am, in

Many doctors are at risk for falling for a sales pitch that claims to protect the A/R (accounts receivables) in their medical practice. Many doctors are buying into certain life insurance plans that offer minimal benefits at all simply because they are trying to protect the assets of the accounts receivables in the medical practice. Doctors should be leery of using their A/R to finance life insurance plans.

Using Account Receivables Financing to Buy Life Insurance

Insurance sellers have been pushing plans that doctors should stay away from. These plans are called A/R Financing Plans for the purpose of buying life insurance policies.

Asset Protection or Retirement Planning?: A/R Financing Plans

This is an asset protection and retirement planning “concept” developed by insurance agents to sell more insurance. The medical practice or a company factors (borrows money against) their A/R and then invests the funds into a cash value life insurance policy for retirement purposes.
Using a good cash value policy to build tax-free wealth for retirement is a great idea, however, it is the way in which the policy is sold that is the problem. The angle that is used by life insurance agents to the doctor is particularly sly. The business owner or doctor is told that he:
  • Needs to protect the business’s accounts receivables from creditors (i.e. client patients)
  • Can build good retirement income with a cash value life insurance which is paid from the cash that’s been borrowed from the accounts receivables loan.
Many financial experts will state the retirement income is little and it also poses a danger. In most instances, the sales angle does not provide all the necessary details and information. Keep in mind that if an advisor comes to you with this angle without disclosing all of the accurate details, he is liable.
The sales pitch would be along these lines: Doctor, have you thought about your account receivable? It is one of your practice�s biggest assets and it can be claimed by creditors if you are sued? What is your account receivable doing right now to create more money for you? Would you be interested in learning how to protect your largest asset within your practice from creditors and learning how substantially increase your retirement income simultaneously?
It is difficult to not get persuaded to listen further.
This Asset Protection Planning tool is not really necessary because the risks are so minuscule.

Poor Asset Protection Planning Strategy

Most business owners will have no clue what they are really getting into and these plans are typically sold in a manner that does not consider all the necessary financial and legal details. The sales tactic by the life insurance agent in the above scenario is total hogwash. We have a close relationship with an attorney who instigated hundreds of lawsuits against doctors as his practice. For three years, he also managed a medical practice and he can also legally sell malpractice insurance to doctors. This attorney is the author of [“Asset Protection for Doctors”] book in which he discloses how doctors can really protect their assets from creditors usually involving an irrevocable trust.
The following is a short list of the errors of information when trying to sell life insurance using the accounts receivable to finance it:
  • The A/R (accounts receivable) is really not in danger from any sort of medical malpractice lawsuit. I’ve never heard of a doctor losing their accounts receivable income from a medical malpractice suit. Doctors have their own personal medical malpractice liability coverage and the medical practice itself has its own liability insurance policy apart from the doctors’ personal insurance. The medical practice insurance costs 10% to 20% of what the doctors pay for their personal malpractice insurance. The medical practice itself has significantly less liability in a usual malpractice lawsuit. So the medical practice�s assets (including the A/R) are usually not in any danger from creditors in medical malpractice suits. The A/R (accounts receivables) are actually at a higher risk from a sexual harassment lawsuit or even from a lawsuit as a result of an employee or patient who has an accident at the medical office than medical malpractice one.
  • The doctors are often informed that they may write off the interest of the loan as the money is borrowed from the A/R to buy the life insurance policy. Many life insurance agents will mention this as a side note because life insurance vendors who offer this retirement plan will not officially tell doctors that the interest can be written off. The idea that the interest can be tax deducted is a fallacy (Review it for yoursef: Title 26, 264(a) of the code). If doctors are unable to deduct the interest as an expense item, this retirement plan is not good.
  • Many of the forecasted financial data presented in the sales presentation is not realistic. The idea of using A/R to finance a life insurance plan is usually sold to doctors of any age, but the typical doctor is from 35 and 55 years of age. The financial data used by the life insurance agents will typically use a non-variable loan interest rate that is based on lower than market rates that are not sustainable over the period of the model.

Lawsuits from Accounts Receivable Financing Bought into Life Insurance

There have been a number of lawsuits over these sales strategies and even a handful of high profile cases. In fact, the Texas Medical Association desired to inform their doctors on this issue until a massive lawsuit was threatened by one of the members who bought into the accounts receivable financing to purchase life insurance plan.
Do not believe everything life insurance agents tell you regarding this retirement plan. Agents will do everything they can to sell doctors on A/R financing to sell more life insurance. Using this type of plan for mere asset protection should be avoided since the accounts receivables are not at a huge risk of lawsuits.
If you are looking for a good retirement strategies to protect your assets and transfer them to your beneficiaries, you should learn more about Captive Insurance Companies, buying a good cash value life insurance policy, or the Super 401(k) Plan.
Please contact Estate Street Partners at (888) 938-5872 and see how we can protect your assets and maximize your returns in retirement. We offer advanced retirement planning and estate planning strategies, reduction of your taxes while enabling to transfer your assets to your beneficiaries and superior asset protection plans using our formidable Ultra Trust® irrevocable trust.