My response to a client about her questions regarding a term conversion notice from the carrier.
By Bill Boersma
Dear Client:
It was nice to talk last week. As a summary, I believe we decided that there’s nothing for you to do now. The policies are still convertible for some time if you choose to do so. However, we discussed that you would only do that if you wanted permanent insurance and you were no longer insurable at favorable rates. Otherwise, we’d go back out to the market and look for the best pricing for term insurance products with more favorable contractual language.
In the meantime, if you do decide you don’t need or want to retain as much death benefit as you currently have, you can simply stop paying for the policy(s) you’d like to fall off the books.
That being said, I told you I’d follow up with some numbers and discussion about permanent insurance. What I’m going to share for now is really all about estate planning and estate tax liquidity.
More than likely, you’re going to end up in a situation where your estate exceeds the amount you can protect from taxation, maybe by quite a bit. Also, too many people look at the current exemptions and plan according to them. I think this is just about pointless, though there is no reasonable alternative. This is because no one knows what the exemption is going to be 9 years, 17 years, 28 years or 40 years down the road when it matters. This is always a political football that’s going to possibly be changed every time there’s a different party in control.
The point is you need to think about some big picture ideas regarding what you’d like to happen based on potentially very different scenarios. I work with people who have a broad array of goals and ideas, including the following as a handful of examples:
- leaving everything to charity
- leaving what ever the exemption is to heirs and everything else to charity
- leave it all to heirs and pay whatever the tax is and they get the rest
- buy insurance in an irrevocable trust to pay the expected estate tax so heirs get the full value of the estate after the IRS takes their piece
- decide how much they want heirs to get and buy that much insurance and leave everything else to charity
There are only three places your estate can go: heirs, charity, IRS. You can “disinherit” up to two of them. For example, if you leave it all to charity you’re disinheriting heirs and the IRS. If you are in an estate taxable situation, the only way you can disinherit the IRS is by incorporating charity.
I mentioned the insurance premiums can be considered the “price tag” of disinheriting the IRS. This may sound odd when I say it this way, but if you do it right, the IRS is essentially paying for the insurance premiums to disinherit themselves. By this I mean, since the IRS is going to get a portion of your estate if you do nothing, use some amount of that portion you were going to have to pay in taxes to buy life insurance. This insurance can be used to pay your estate taxes upon your death. Yes, you’re using your money today for the premiums, but that money would be accumulating in your estate for them to get at some point anyway. If that doesn’t make sense, I’ll look forward to explaining when we have a chance to talk.
This is the type of planning that estate planning attorneys do all the time. There are a multitude of options they can bring to the table and insurance is simply an ancillary tool to make things happen.
When it comes to charity, some people leave it outright to particular organizations, some choose a community foundation, others create a donor advised fund and some create a family foundation for the heirs or other appointed individuals to manage indefinitely.
It sounds like your kids won’t be coming into the company, so this affords you some flexibility and doesn’t “force” you into the insurance route to keep the company in the family. You can easily choose to simply pay tax and the heirs get the rest.
The bottom line is that most people feel that there is something better than having the government get a part of anything, even if charity and insurance premiums are the price tag for doing so.
I’ll leave it at that and turn to some introductory insurance options. This is by no means a comprehensive evaluation of the market, but simply an example of what many people in your situation consider and often implement.
For now, I’m only going to review survivor life options, sometimes called second-to-die. Not taking anything for granted regarding your insurance knowledge, I’ll state that a survivor life policy is a single policy on two lives, you and your husband. This is popular because it only pays a death benefit at the survivor’s death when the estate tax is due. All estate tax can be deferred to the second death.
There are multiple types of insurance and I’m not going to dive into that in detail in an email, but some are more death benefit focused and some are more cash value focused. I’ll concentrate on death benefit focused insurance because that is predominant for estate tax planning.
There are also more conservative and more aggressive types of life insurance, meaning some have full guarantees and others don’t. There is even insurance that is securities based where you choose sub accounts where your cash value goes, like with a 401(k), rather than it being in the general account of the insurance carrier. Though it sounds like an oxymoron, even this type of insurance can be structured with a competitive guaranteed premium and death benefit while still offering upside potential.
For now, I’m not even going to attach the insurance illustrations because they probably won’t mean much to you and they are 30-50 pages long each. I’m pulling numbers out of thin air for illustrative purposes.
My examples will be for $5 million of death benefit. There are an endless number of ways to design policies, including the number of years to pay premiums, from every year until death to a limited number of years all the way down to a single premium. I’m only going to share “full pay” numbers now, which means pay every year.
I looked at a number of insurance carriers and focused on their variable life policies. Variable life is the securities-based type of insurance, though it has a guaranteed premium and death benefit. The numbers for $5 million come in at an average of roughly
$45,000/year with the lowest at about $43,000. This is assuming you and your husband at the second-best preferred rates, just because I don’t like being aggressive and lowballing premiums.
I think that’s all I’m going to share for now. It’s just something to start thinking about and we can find a time to discuss. I’d look forward to it.
Thank you and enjoy your day.
Bill
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 616-456-1000.
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