The wealthy often have to confront financial problems by trying to prepare for events far into the future. That’s why advanced planning strategies need to be highly flexible.
Quite often, that flexibility is achieved through life insurance.
High-income executives and successful business owners, for
example, have to be ready to pay estate taxes while ensuring they have enough money for retirement. Developments in the life insurance field, meanwhile, provide solutions that can include funding for estate taxes and retirement. Using insurance in this way is attractive because it’s versatile enough to plan for events that won’t happen for decades.
Structuring The Life Insurance Policy
By and large, premium financing is used to purchase large life insurance policies that can be used to pay estate taxes. In the right circumstances, this is a viable and cost-effective approach. However, it’s possible to take this concept and derive other potential benefits:
• Providing retirement funds for the policyholder.
• Financing the insurance without the need to post collateral.
• Having the buildup in the policy pay off the loan.
The best way to use life insurance as a way to pay estate taxes or generate retirement income is a function of a client’s situation. Specially designed life insurance policies with customized riders are required, and they achieve a number of goals:
• Getting the client’s entire premium within a certain period of time—often about 10 years.
• Avoiding the need to post collateral as interest payments are paid annually. The interest payments with this strategy can be structured over time in a level, increasing or decreasing fashion.
• Getting a guaranteed return tied to a market index.
To better understand this strategy, let’s briefly look at three case studies.
• A 42-year-old executive purchases a life insurance policy with a $10 million face value. He borrows $400,000 per year for 10 years to pay the premiums. He pays interest on the loan that averages out to $77,000 per year.
The loan is fully paid off in the 10th year. The executive then receives a tax-free annual income for 20 years—from age 65 to 85—of $458,832, or nearly $10 million in total. Meanwhile, the life insurance policy will still provide a death benefit to heirs of nearly $8 million.
• A 47-year-old business owner purchases a life insurance policy providing a $45 million death benefit. She borrows $1.5 million a year for 10 years, during which time the average loan interest is $247,500 per year.
The loan is fully paid off in the 10th year. From the age of 67 to 90, she takes a tax-free annual income of more than $1 million. Total income over this time period would be nearly $27 million. A death benefit of more than $29 million is still in place.
• A 52-year-old business owner purchases a life insurance policy that has a face value of $120 million. He borrows $7.4 million per year for 10 years and the average annual loan interest is about $1 million each year.
The loan is fully paid off in the tenth year. Because of the success of the business, the need to pay estate taxes becomes the main issue. Consequently, the client forgoes taking an income, resulting in the death benefit at age 85 of more than $169 million. At age 90, the death benefit becomes more than a quarter of a billion dollars.
When it comes to the wealthy, advanced planning strategies need to be as flexible and adaptable as possible. Here we considered a creative and highly versatile use of life insurance that meets two often pressing needs of high-income executives and successful business owners: greater retirement income and money to pay estate taxes.