About 6 months ago, this column covered slashing premium costs while increasing life insurance benefits. We offered to analyze the current insurance policies of readers and report back what we learned. The following four analyses are typical of what we received. In all cases, we were able to raise the death benefits. Premium costs either stayed the same, were substantially reduced or were eliminated.
In all the following examples Joe is married to Mary. Net worth is for the combined assets (excluding insurance) of Joe and Mary.
Case #1: Mary (age 73) is the insured. Joe is uninsurable. Net worth: $1.2 million.
Mary's original policy had an annual premium of $12,036 for a $350,000 death benefit. The cash surrender value (CSV) was $11,294.
Our network insurance consultant discovered that a subsidiary insurance company (of the company that carried the $350,000 policy) would issue a new policy with a death benefit of $578,897 for the same $12,036 premium. The CSV went up to $32,881.
Case #2: Joe (71) and Mary (69) are the insureds. Net worth: $4.3 million.
Joe and Mary had a second-to-die policy with a death benefit of $1.1 million, an annual premium of $22,645; and a CSV $268,000.
Our network insurance consultant created a premium financing plan using the $268,000 of CSV as collateral for a loan. It kept the old policy and bought a new second-to-die policy. Combining the old and new policies raised the net death benefits to $1.9 million, with a new annual premium cost of $55,645. Every year the premium will be paid by a loan, so the cash outlay for Joe and Mary will be zero. Interest on the loan will be paid by additional loans. The loan will be paid in full (after both Joe and Mary die) out of the policy death benefits.
The final results: The net death benefits (after paying off the loan) will always be $1.9 million or more. Neither Joe nor Mary will ever spend one-out-of-pocket penny for premiums.
Case #3: Joe (70) is the insured. Mary is uninsurable. Net worth: $8.4 million.
Joe was paying $63,332 for a $4 million 10-year term policy with 8 years left to term.
Our consultant had us create a subtrust as part of Joe's 401(k). We rolled a Rollover IRA into Joe's 401(k) account, which increased his account balance to $1.95 million. The subtrust bought (and will pay the premiums for) a $2.7 million policy on Joe's life.
Next, we created an irrevocable life insurance trust (ILIT) to purchase $1.8 million of additional insurance. Joe will gift the $59,040 annual premiums to the ILIT. Joe lowered his out-of-pocket premiums cost from $63,332 to $59,040, yet he increased the death benefit by $500,000 to $4.5 million. Of even greater importance, Joe guaranteed his family $4.5 million of tax-free death benefits.
Case #4: Joe (50) is the insured. Joe and Mary (44) are the insureds for a second-to-die-policy. Net worth: $13.5 million (including a $5.5 million business that has 10 to 15 percent growth per year).
Joe had a portfolio (six policies) of insurance on his life: total death benefit of $1.7 million; CSV of $187,000 and an annual premium cost of $19,800.
Our network insurance consultant had an Irrevocable Life Insurance Trust (ILIT) buy $4 million of insurance on Joe's life and had a separate ILIT buy a $14 million second-to-die policy on Mary and Joe. With adequate collateral, all the premiums on both policies would always be paid by loans; interest on the loans would be paid by additional loans; and all loans would be paid when the insureds died.
The results: No out-of-pocket premium costs for Joe or Mary and a tax-free death benefit to their children in the amount of $18 million. A little added bonus: Joe cancelled the old policies and pocketed the $187,000 CSV (tax-free).