by Guest » Wed Jun 30, 2010 05:11 pm
I have a multi-part question.
Background:
Our family owns a business. Some of the assets have been put in a trust. In an ILIT is a $5m insurance policy for my wife's mom (the owner of the business who is age 62).
My first question is this: The policy is a UL Variable Life policy and we aren't sure how much it will take to feed it at some point in the future. Current value is around $370k and it takes as insurance costs about $30k/year. She drops about 100k in it and is expected to do so for the next 4-6 years. Is this doable or is there a better option?
Second question: We decided to end our pension plan due to Pension Act of 2006. Inside of the pension is another UL Variable policy. I have the option of pulling out the policy and funding it long-term. It has a cash value of 22k (of course you have to pay taxes minus the ps-58 costs). The policy is $1m and would require a 10k/year funding option till age 65k. Financial advisor also said that I could pay it like a term policy and pay around $1.8k year. Is it useful to keep this policy around long-term?
Thanks in advance!
Background:
Our family owns a business. Some of the assets have been put in a trust. In an ILIT is a $5m insurance policy for my wife's mom (the owner of the business who is age 62).
My first question is this: The policy is a UL Variable Life policy and we aren't sure how much it will take to feed it at some point in the future. Current value is around $370k and it takes as insurance costs about $30k/year. She drops about 100k in it and is expected to do so for the next 4-6 years. Is this doable or is there a better option?
Second question: We decided to end our pension plan due to Pension Act of 2006. Inside of the pension is another UL Variable policy. I have the option of pulling out the policy and funding it long-term. It has a cash value of 22k (of course you have to pay taxes minus the ps-58 costs). The policy is $1m and would require a 10k/year funding option till age 65k. Financial advisor also said that I could pay it like a term policy and pay around $1.8k year. Is it useful to keep this policy around long-term?
Thanks in advance!
Posted: Thu Jul 01, 2010 05:38 pm Post Subject: thanks
Thanks for the info... is that 80-100k a year for the rest of her life?
Posted: Thu Jul 01, 2010 06:07 pm Post Subject: again..thanks
She remarried a few years ago to a man not involved in the business - or involved in any of the transactions. Prenups..etc.
He is also 10 years older with health issues, so I'm not sure if that second to die policy would fit.
Our company has quite a few benefits. We had a contributory 401k in addition to the pension. We needed to move away from the pension liability and get to something more predictable, like a profit sharing aspect inside of the 401k.
The advisor had led her to believe that in 10 payments of roughly 100k each, that the cash in the policy would support the insurance forever. I'm not excited about giving her the 'good news'.
Thanks again.
Posted: Thu Jul 01, 2010 07:05 pm Post Subject:
Yes, those premiums would have to be paid each year. She could do a limited pay option such as a 10-pay, 20-pay, or single pay also. However, a single pay option can be harder to work with when an ILIT is involved because if you're talking about a $1 million gift to the trust, there's always the chance the beneficiaries could decide to just take the $1M and not use it for the insurance. It probably wouldn't happen, but it is possible. Having the premiums paid annually limits the chance of that happening.
You should also keep in mind that the more money you pay up front, the less "insurance" you are really getting if she died in the early policy years. You can pay an $80k premium and if she dies in year two, you get paid out $5M. You can pay a $150k 10-pay premium and if she dies in year two, you just paid twice as much for the same $5M. You get the idea.
Many agents will lead clients to believe their policies will be fully paid up after a certain amount of time based on specific assumptions. While those assumptions may come to fruition, many times they do not and the policy would require more premium payments to keep it going. I like working on guarantees, especially when you're talking about a $5M policy.
Posted: Thu Jul 01, 2010 11:37 pm Post Subject:
The advisor had led her to believe that in 10 payments of roughly 100k each, that the cash in the policy would support the insurance forever. I'm not excited about giving her the 'good news'.
It's possible that in 10 years there would be enough money to cover insurance costs without paying a premium, and the growth in investments in the cash would build up a sizable yield to cover insurance costs. The issue is it's not guaranteed. VUL's vary quite a bit on assumptions. Most VUL's also don't have much of a guaranteed fixed option, usually a variable 1 year rate, meaning it changes every year with interest rates with either a very low, or no guaranteed minimum. Also, the insurance cost on a VUL is quite high especially in later years, second only to something known as indexed universal life insurance.
As dgoldenz has brought up, SGUL which has speccifically been structured to require payments for a certain number of years and then is guaranteed to pay a death benefit with no further payments. You'd also find that an SGUL paid until mom is say age 100 will likely be considerably cheaper (probably close to half) than the $100k going into the policy now, this assumes she can get a standard rating. I bring this up because if you're going to be stuck paying for that long, might as well do it as cheaply as possible.
Ultimately if I were you I'd look into an SGUL with a shorter payment period with the 1035 in mind, you might find the cash in the VUL could be very helpful in reducing required payments to the policy. By which I mean, shortening the number of years to pay even more.
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