A full-page ad in a national weekly magazine stopped me cold. The ad’s headlines said, "Five years after you quit smoking, your risk of stroke is like someone who's never smoked." A bit below the headline were these terse words, "But right now, you're a stroke waiting to happen." The photo that takes up more than half the page is subdued, yet dramatic: you see the back of the head and shoulders of a senior male sitting alone in a wheelchair and facing a shaded window. Can't see his face, but his head is bowed. The message is clear. This is truly a powerful ad. Yet, the ad doesn't tell the whole story. As you will see, this is an important story for everyone, especially if you smoke.
I don't have statistics, but my guess is that millions of people, almost all middle age or older, in the U.S. could be impacted by the ad's poignant message. The key words are "five years." But here's something most people don't know: A similar five-year time frame can apply to you (or someone you know or love) if the disease that struck was cancer or a cardiac incident.
Your author can relate. Many years ago I struggled through two bouts of cancer — scared the hell out of my family — and celebrated after each magic five-year period. Now, I'm a young octogenarian.
So what has all of the above got to do with estate planning? Plenty!
As an estate planner, my client’s life expectancy is always front and center, a significant consideration in the planning process. This is particularly true when it comes to retirement planning and the entire area of business succession. Your age, health and smoking (or non-smoking) habit are the three most important factors in determining your life expectancy.
Never can a stroke, cancer or a heart attack be anything but bad news. But hallelujah! Survive for five years and your life expectancy statistically is probably the same as the general population of Americans.
Let's look at these three diseases one at a time. Regarding strokes, the Center for Disease Control and Prevention (COC) ran the ad described above. The purpose of the ad is simple: to educate the reader to the five-year no-smoking fact and save lives. Good job COC!
Now, what about the other two diseases? Here's an exact quote prepared by the Orchard Group (experts in life expectancy and life insurance consultants):
"Depending on the tissue of origin, grade and stage of cancer, a person who has been caner free and treatment free with no recurrences can potentially be insurable at a standard risk classification after five years. A person with a prior cardiac incident that is considered stable by their doctor post-treatment can also be potentially insurable at a standard risk classification after five years. Both conditions will be dependent on the age of onset of the cancer or cardiac incident."
Standard risk classification is a rating used by life insurance companies to determine premium costs and means your life expectancy is the same on average as other Americans the same age and sex.
Life insurance plays an important role in most estate plans. But let me say it loud and clear: No life insurance company wants your money if it doesn't think you are going to live.
But wait. Stop and think about the ad and the quote from the Orchard Group. Survive the five years and (subject to some exceptions) not only will the insurance company take your money, issue you a policy, but you'll only pay the same (lower) premiums as a healthy person your age and sex.
The sad fact is that most people (worse yet, their professional advisors) don't have a clue that the wonderful five-year rule even exists. We use the rule regularly in our estate planning practice to enhance the wealth of each client who qualifies, without losing a penny to the IRS.
It would actually take a small book with an endless stream of examples to show all the ways the five-year rule has helped clients over my 50-plus years of practice. The two examples that follow, for a married guy and a single guy, dominate what we see in real-life practice on a regular basis.
Example No 1: Second-to-die coverage (two lives insured). Joe, age 58, is a cancer survivor (free of the disease for eight years) and married to Mary (who is two months younger). Today both are healthy. They needed $2 million of insurance coverage for estate tax purposes. Since no estate tax is due until the second death of a husband and wife, second-to-die is the perfect choice. Best of all, it costs less than single coverage ($18,200 per million dollars of insurance for Joe and $16,210 for Mary, who is also a standard risk). Second-to-die, on the other hand, only cost $10,202 per million (only available because Joe is now insurable). Of course, they bought $2 million of second-to-die coverage. Bless the five-year rule.
Example No. 2: Individual coverage (one life insured). Sam, a 65-year-old widower, owns a profitable business, Success Co., which he wants to transfer to his son. Sam has two non-business children, whom he would like to treat equally. His accountant correctly told him he would need $3.5 million of insurance, together with his other assets, to reach the equalizing goal. Although Sam had suffered a heart attack in his late 40s, he passed his insurance physical. Sam used the funds in his rollover IRA to pay the premiums, $85,302 per year, on a $3.5 million life insurance policy, solving an estate planning problem he originally thought had no solutions. Once again, the five-year rule saves the day.
The five-year rule has a kiss'n cousin, the "two-year rule," that is also a big premium money saver, but few people know it exists. Let's set the scene for when this rule is used: The insured is healthy enough to be insurable, but is a smoker. Remember, insurance companies do not want your money if they don't think you are going to live. Why? Smokers die sooner, often much sooner, than nonsmokers. So the premiums for smokers are always higher … much higher.
Now here's an inside secret that even few professional advisors know: Most insurance companies will consider a rate reduction (from smoker rates to non-smoker rates) after two years of documented smoking cessation. Let's look at a real-life example.
Example No. 3: Here's an example of a smoker who quits after two years. Jack, a 42-year-old, is healthy, but he smokes. Jack needs $1.5 million in life insurance to fund a buy/sell agreement. ABC Insurance Co. rates Jack a standard risk, but charges him a smoker's rate… $18,586 per million for his new $1.5 million policy. The non-smoker's rate for Jack would have been $9,901. After two years of abstaining from any kind of nicotine products, Jack provides documented proof that he is nicotine free. ABC lowers his annual premium to $10,795, the rate for a 44-year-old non-smoking male. The usual physical necessary to buy insurance was not required.
Sadly, the interaction of economics, the way insurance companies do business and the tax law makes this area overly complex. But knowing the right strategies and someone to implement the strategies for you puts you in a position to beat up the IRS, legally, with affordable life insurance to enrich your family. The above article is just the tip of the iceberg for the insurance tricks of the trade.
One final bit of advice: Have all of your existing life insurance policies reviewed at least every two years. When you need additional life insurance always get a second opinion.
For more information on this fascinating subject browse my website: www.taxsecretsofthewealthy.com. Or if you need your current insurance portfolio reviewed or a second opinion on pending new insurance, I have twisted my insurance guru’s arm to provide this service gratis. Call me, (Irv) at 847-674-5295. I’ll point you in the right direction.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein LLP and chairman emeritus of the New Century Bank, both in Chicago. He can be reached at 847-674-5295, e-mail [email protected], or on the Web at: WWW.TAXSECRETSOFTHEWEALTHY.COM.