Broker Check

Insurance Audit Reveals an Improved Client Benefit September 2009

A 69 year old female client found herself unable to pay the ongoing required premiums due on her $1.25 million life insurance policy for estate taxes set up by a previous agent. There were several problems with this well-intended plan that we discovered when performing our “free” insurance audit for this 69 year old female. What we learned from the client’s concerns and through our efforts were the following: (45% estate tax bracket, 35% income tax bracket)

  • The $1.25 million policy was owned inside her taxable estate which compounded the Estate Tax liability for her beneficiaries
  • The client owned a variable life insurance policy, which for estate tax purposes may not provide the stability and benefit she had initially hoped for when purchasing it given the recent stock market volatility
  • The policy was set to expire on a current rate basis in 11 years, and on a guaranteed rate basis in 5 years
  • The insured had a relatively illiquid estate and needed all income to support her lifestyle and expenses
  • The insured also needed additional income each year and would not be able to afford the $22,000 annual premium needed to keep the policy active for another 11 years
  • The insured needed the life insurance and was in need of alternatives that she wasn’t receiving from her agent, even after calling him 5 times in the previous year

Unfortunately, this is commonplace in the life insurance industry. Policies are sold by agents who are premium collectors, not financial planners. The ability to sit down with a client and listen to them, analyze the situation, bring in the support of competent CPA’s and Estate Planning Attorneys, and come together for the benefit of the client while having the client direct her financial goals is quite rare. Many clients are left wanting more like the 69 year old female in the case above. Our hope is that they meet up with competent planning professionals who provide alternatives that are in the best interest of the client. Fortunately, we had the opportunity to be involved in just such an experience for this client. Our outcome was the following:

  • The cash value inside the life insurance policy enabled the client to accomplish her designs by repositioning the cash value into an Immediate Annuity providing her with lifetime income (a lifetime income of $23,550, which is net of income taxes)
  • The immediate annuity provided her with enough lifetime income to cover premiums due on a new policy as well as, provide her with $5,550 excess cash each year of her life no matter how long she lived
  • The lifetime income enabled her to pay premiums on her new policy from a constant source of guaranteed income for her life only, instead of from her own cash reserves which could increase in value
  • The new life insurance policy was owned by an Irrevocable Life Insurance Trust, outside her estate which further reduced her estate tax liability
  • The new life insurance policy was a Guaranteed Universal Life policy, which remains active on a “Guaranteed” basis until age 120 as long as premiums are paid
  • The design saved her $22,000 per year going forward and provided her with a sound and effective insurance design to pay her Estate Tax and ease her cash flow concerns

Please let me know if I can be of service to you or your clients on any insurance matter going forward like this one or any other. I look forward to hearing from you.

See Important Disclosures below.

Life insurance policies are subject to certain costs, limitations and restrictions, and terms for keeping them in force. Annuity withdrawals are subject to current income taxes. Policy guarantees are based on the claims-paying ability of the issuer.

This information is for hypothetical illustrative purposes only and should not be considered specific tax, legal, investment or planning advice, which will only be provided on a personalized basis. Depending on individual circumstances, the strategies discussed may not be appropriate for your situation. Individual results may vary and the presented information is not a guarantee of future performance or success.

This information is based upon on our understanding of current laws, which is subject to change. Please note that a trust is a legal arrangement that may result in the inability to change the trust in the future, require relinquishing control over the trust assets, and to be properly administered.  Always consult a qualified advisor regarding your individual circumstances.

Policy issued by Lincoln Financial Group and the address is: 1 Granite Place, Concord New Hampshire, 03301.