A Case Study
Scott is a 40-year-old successful hedge fund manager who, with his wife Nancy, has three young children.  His current net worth is approaching $50 million-$30 million in the hedge fund and $20 million in real estate and other investments.  The fund also has a large carried interest and there will be an IRD issue upon his death.  He is confident in his ability to grow the fund in the future and, after meeting with his tax attorney, realized he needs $25 million in life insurance to accomplish all he is working for without suffering a substantial loss due to estate taxes.

Scott was advised of different estate freezing techniques but he feels he is too young to implement them.  Also, he is not particularly interested in charitable giving at this time.  He needs to keep sufficient liquidity for private schools, college and possibly graduate schools for his children. He is determined to not burden his children with high debt and student loans.

Because of these immediate goals, he needs to find the most cost effective way of paying for his long-term life insurance needs. Permanent insurance premiums quotes ranged from $80,000 to more than $200,000 per year.  A premium finance arrangement would cost him, out of pocket, about $10,000 per year for 20 years.

Scott understands the benefit of leveraging as a financial strategy and is interested in seeing how it may be used to pay for his insurance. 

Because of his young age, Scott and his advisors concluded that an indexed universal life insurance policy with a death benefit guarantee would work best in a leveraged situation. The indexed universal life policy's cash value could over the long term exceed the borrowing rate for the premium finance loan because of the underlying indexes the policy is tied to.  This strategy gives him time as his estate plan evolves and assets are moved to different vehicles which will not be exposed to estate taxes. Those assets or the earnings from them can be used in the future to pay down the premium finance loan.

The result is a flexible structure, not exposed to estate taxes, that lowers the chances that Scott will bear the cost of  life insurance for his lifetime.

Alan S. Kufeld, CPA, is a tax principal in the Rothstein Kass Family Office Group, specializing in the federal, state and local tax matters affecting high-net-worth individuals. Frank W. Seneco is the principal of Seneco & Co., a Connecticut-based advanced planning operation that specializes in high-end life insurance solutions for the ultra-affluent and their advisors.