Life Insurance questions

Posted: Thu Jul 01, 2010 02:36 am Post Subject:

Lot's of questions.

First, what is Mom's networth? Estate taxes (which are currently gone but will be coming back next year) are roughly half of the estate after the deduction is gone, potentially 1 million dollars once the estate tax returns next year. This would mean, take her networth, deduct 1 million dollars from it, and whatever is left over you'll owe half of in estate taxes. (This might be more information than is necessary for you, but might prove helpful to others).

Cash value in a policy inside an ILIT is of very limited use, except for endowing a UL contract, but that's tough to do with a variable universal life contract.

Another option used is whole life insurance because death benefits generally increase through dividend's being used to purchase paid up additions, this is an inflation hedge most of the time, also one can use this type of policy to prevent payment of premiums in the future.

However, the current start of ILIT planning is Secondary Guaranteed Universal Life. It has virtually no cash value, and will not increase in death benefit, but it's guaranteed not to change in premium requirement so long as the premium is paid on time for either the entire contract, or until it's endowed.

Depending on Mom's health and insurability, this might be an option to look at.

Posted: Thu Jul 01, 2010 02:45 am Post Subject:

Estate taxes (which are currently gone but will be coming back next year) are roughly half of the estate after the deduction is gone, potentially 1 million dollars once the estate tax returns next year.

Posted: Thu Jul 01, 2010 02:50 am Post Subject:

Apparently my computer hates me so I'll continue typing with this post.

Ultimately, the VUL is something I'd be very cautious about. Used to be very popular back when the stock market was booming, now it tends to be a loathed product, not by everyone though.

As for the Pension

Pulling the policy out is tricky, get an accountant involved. You might be looking at a bigger tax problem than you thought, just make extra sure.

How many employees do you have? Or more importantly, how many were involved in the pension plan and were vested?

Also I want to be clear, because sometimes people lump pensions into basically all ERISA qualified retirement plans. This is a bona fide pension, as in defined benefit plan, funded to create a guaranteed income stream, with certain actuarial assumptions involved and all that jazz? Or is it possible this is say just a 401k plan that had life insurance inside it?

If it is a real pension, how does removing the policy effect the funding requirements of the pension. Even if the pension is defunct, there are still guarantees that exist for those who were vested. Removing a policy with cash value removes some of the funds from the pension, which might create a funding requirement from the business.

Posted: Thu Jul 01, 2010 02:54 am Post Subject:

BNTRS, if those idiots in Congress don't get this figured out and we revert to the first $1 million, I'm gonna have to kill something. I've heard all sorts of estimates as to what will be exempt, if they ever get to it, with the general average as the first $5 million. You heard anything? I've heard up to $7 million and as low as "they're not gonna do anything about it."

Posted: Thu Jul 01, 2010 05:37 am Post Subject:

You can't take the cash value out of an ILIT, so what's the point of building it up? If you are trying to transfer assets from the estate without the life insurance proceeds being included in the estate, an ILIT is the right way to go.

As BNTRS said, the least expensive way to transfer assets is with a Second-to-Die Universal Life policy. If a policy crashes at some point because there is not enough cash value to cover the cost of insurance charges, you essentially spent all the money for nothing. You want to make sure there is a benefit to be paid upon death, which is what the second to die policy will do at the lowest possible cost.

You can do what is called a 1035 exchange into another policy to avoid being taxed on any gains there may be. The cash value would be used to "buy down" the premium on the policy. Since cash value inside an ILIT is of no use, this may be the best option. More details would really be needed to make an accurate assessment. The trustee for the ILIT would have to sign off on any of these changes, of course.

On another note, make sure you know what the GUARANTEED premiums are, not just what is projected based on assumptions. Otherwise you may find yourself paying a lot more money than you expected.

Posted: Thu Jul 01, 2010 04:11 pm Post Subject: answers

Answers:

Networth is estimated 20-30 million (mostly value of the business)... but that is subject to change with ups and downs of the business climate.

Mom is 62 and is not insurable at this point. She is in good health, but had a small issue with breast cancer - gone completely. The Var UL is funded by gifts to kids & grandkids that in turn buy the premium.

Supposedly, the value of the VUL will help pay estate taxes on death. We also have a FLP to help increase kids ownership in assets for the long term.

60 employees - and it is a defined benefit plan. We know the funding can be affected by the insurance, but if the employees decide to cash it out, there is a cash balance of insurance. Each employee has the option to 401k it, roll it to an IRA, pay taxes, or get an annuity from it.

*And we are very glad to be done with that beast - it was a waste of resources, too high of costs, and not predictable at all*

I really do appreciate your replies.... as you can tell, it is a crazy mess and it is very hard to trust a financial advisor that got us in the pension mess in the first place.

Posted: Thu Jul 01, 2010 04:19 pm Post Subject:

Is there a reason she is uninsurable other than the breast cancer? That wouldn't necessarily cause her to be declined for life insurance. If it is completely gone and she is fully recovered, she could possibly even get a standard rate. If her husband is still alive, a second-to-die universal life policy could still be purchased even if she was uninsurable (assuming he wasn't also uninsurable).

With a net worth is $20-30 million, you have a bigger estate tax problem that just $5 million. Even if the estate tax exemption is restored to $3.5 million per person ($7 million for a husband/wife when properly structured), that would still leave $13-23 million as a taxable estate that will be taxed at a rate of 45-55%. If the exemption gets stuck at $1 million, the taxable estate today would be $18-28M.

Keep in mind that her net worth TODAY is $20-30M. What will it be in 10, 15, 20 years? If the business is successful and continuously growing, the estate may be worth $50-100M at that point.

When planning for estate tax purposes, you want a death benefit that is GUARANTEED at the number you want and not continuously fluctuating, whether it be $5M, $10M, $20M, etc.


Edit - just re-read your post and noticed there is a family limited partnership involved. Much of what you'd need to consider would depend on how that is structured.

Posted: Thu Jul 01, 2010 04:54 pm Post Subject: more details

I'm glossing over a few details...

some of the 20-30 million in assets is actually located in the FLP now... thus reducing the taxable estate.

the FLP is somewhat designed to help capture that growth as well as protection of assets

inside the ILIT, she actually has 2 policies that total 7.5 million .... the one that is 5m is the one that i'm concerned about

Posted: Thu Jul 01, 2010 05:26 pm Post Subject:

If you want to guarantee the cost of insurance and premiums required to keep the $5M in force, and the policy is solely for estate planning purposes, you would be best off with a second-to-die policy (if husband is living) or a guaranteed universal life policy if husband is not living. The real question would be how long ago the breast cancer was diagnosed and how long she has been free of cancer. If her other policy was purchased before the breast cancer and has a preferred rate, you would need to compare the numbers for the guaranteed benefit and see which is the best option.

A $5M policy guaranteed for life if she could qualify for a standard rate would be somewhere in the range of $80-100k/year. A second-to-die policy depending on age and health of husband would be roughly half that price. If there was a 1035 exchange with ~$370k involved, the premiums would be reduced substantially.

Posted: Thu Jul 01, 2010 05:37 pm Post Subject:

A quick point of clarification, I mentioned a Secondary guaranteed UL, and dgoldenz brough up second to die UL, there is a difference, though second to die UL can also have a secondary guarantee.

I assumed that there was no husband since only the mother was mentioned. If that's the case, a second to die policy becomes a little harder to use, though not impossible. If there is a husband still around, it's a very popular option.

As degoldenz has stated, and I alluded to, the cash value of the policy inside the ILIT is of very limited use, however it does have some use in this situation. As costs for the insurance under the VUL increase, you might start using the cash value to satify part of the premium payment. I would never work on the assumption that you can stop paying premiums and have cash values pay them, VUL is just too variable.

I too wouldn't necessarily assume that mom is uninsurable. You'd likely find an SGUL or the second to die UL requiring much less money than the is currently being put into the VUL. As dgodenz mentioned, a 1035 exchange can move the cash without taxable consequences.

I would look into mom's insurability and begin informal underwriting inquiries, insist the financial advisor/insurance agent perform them. This gives you the likely underwriting action without officially submitting an application. This is usefull because you can find out if a decline is likely. You want to avoid a decline because one decline from an insurance company tends to increase the chances of a decline at another.

I really do appreciate your replies.... as you can tell, it is a crazy mess and it is very hard to trust a financial advisor that got us in the pension mess in the first place.