AWHILE BACK I wrote a column about cutting premium costs yet increasing life insurance benefits. I received a flood of faxes, phone calls and even e-mails from readers.
The following policy analyses from four readers are typical of what I received. Even more interesting is what my colleagues and I were able to do in all four cases — raise the death benefits. What about premium costs? They stayed the same, were substantially reduced or out-of-pocket premium costs were even eliminated. Chances are, at least one of the cases will cause you to ask, “Can I do that too?”
About the examples that follow: In one case the person insured is only Joe; in another case, only Mary. If second-to-die insurance is involved, both Joe and Mary are insured. In all cases, Joe is married to Mary. Net worth is for the combined assets (excluding insurance) of Joe and Mary.
Case No. 1: Mary (age 73) is the insured. Joe is uninsurable. Net worth: $1.2 million. Mary’s original policy had an annual premium of $12,036 for a $350,000 death benefit. The cash surrender value (CSV) was $11,294.
Our network insurance consultant discovered that a subsidiary insurance company (of the company that carried the $350,000 policy) would issue a new policy with a death benefit of $578,897 for the same $12,036 premium. The CSV immediately went up to $32,881.
Case No. 2: Joe (71) and Mary (69) are the insureds. Net worth: $4.3 million. Joe and Mary had a second-to-die policy: death benefit of $1.1 million; annual premium of $22,645; and CSV of $268,000.
Our network insurance consultant created a premium-financing plan using the $268,000 of CSV as collateral for a loan to accomplish a four-step plan:
1) Keep the old policy;
2) Buy an additional (new) second-to-die policy;
3) Combine the old and new policies to raise the net death benefits to $1.9 million with a new annual premium cost of $55,645; but
4) Every year the premium will be paid by a loan, so the cash outlay for Joe and Mary will be zero. Interest on the loan will be paid by additional loans.
The loan will be paid in full (after both Joe and Mary die) out of the policy death benefits.
The final results: The net death benefits (after paying off the loan) will always be $1.9 million or more. And neither Joe nor Mary will ever spend one out-of-pocket penny for premiums.
Case No. 3: Joe (70) is the insured. Mary is uninsurable. Net worth: $8.4 million. Joe was paying $63,332 for a $4 million 10-year term policy with eight years left to the term.
Our network insurance consultant had us create a subtrust as part of Joe’s 401(k). We rolled a rollover IRA into Joe’s 401(k) account, which increased his account balance to $1.95 million. The subtrust bought and will pay the premiums for a $2.7 million policy on Joe’s life.
Next we created an irrevocable life insurance trust to purchase $1.8 million of additional insurance. Joe will gift the $59,040 annual premiums to the ILIT. In summary, Joe lowered his out-of-pocket premiums cost from $63,332 to $59,040, yet increased the death benefit by $500,000 to $4.5 million.
Joe also guaranteed his family $4.5 million of tax-free death benefits. If Joe would have survived the eight-year balance of the term policy, not only would the premium dollars have been wasted, but the death benefit would have become zero.
Case No. 4: Joe (50) is the insured. Also Joe and Mary (44) are the insured for a second-to-die-policy. Net worth: $13.5 million (including a $5.5 million business that enjoys 10% to 15% growth per year). Joe had a portfolio (six policies) of insurance on his life: Total death benefit of $1.7 million; CSV of $187,000; and an annual premium cost of $19,800.
Our network insurance consultant’s tactic is called “new-policy premium financing.” Joe had the necessary collateral (cash, stocks and bonds) to do the following:
1) An irrevocable life insurance trust bought $4 million of insurance on Joe’s life;
2) A separate ILIT bought a $14 million second-to-die policy on Mary and Joe;
3) With adequate collateral (the stock and bond portfolio already owned by Joe and Mary) all the premiums on both policies would always be paid by loans;
4) Interest on the loans would be paid by additional loans; and
5) All loans would be paid when the insureds died.
The magical results: No out-of-pocket premium costs for Joe or Mary and a tax-free death benefit to their children in the amount of $18 million ($4 million plus $14 million). A little added bonus: Joe cancelled the old policies and pocketed the $187,000 CSV (tax-free).
Caution: This space does not permit every fact, detail and nuance in these four cases.
Having your insurance analyzed works. But a pattern developed that could help most of you if you are lucky enough to be in any one of these specific categories:
1) You have $100,000 or more of CSV;
2) You have $200,000 or more in a qualified plan, such as a 401(k) or an IRA; or
3) You are worth $5 million or more.
Depreciation tax break
Here’s the happy news: You can deduct as much as $57,440 of depreciation in the first year for $100,000 of new tangible personal property or software. You must place the property in service after Sept. 10, 2001, and before Sept. 11, 2004.
Just follow these three easy steps:
1) Start with a Section 179 deduction (up to $24,000 per year if you did not place more than $200,000 of tangible personal property in service for the year);
2) Take an additional 30% of the reduced adjusted basis; and
3) Take regular depreciation for the first year based on the further reduced adjusted basis.
Any taxpayer — individual, partnership or corporation (C or S) — can play this new depreciation game.
Here’s an example: Success Co. placed $100,000 of new computers in service on Feb. 7, 2002. Success Co. placed no other tangible personal property in service during 2002.
The table above shows the 2002 depreciation for the computers.
Tax planning point: Plan your fixed asset and software purchases (actually placing in service) between now and Sept. 11, 2004, to take advantage of these nice new depreciation rules.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 300 S. Riverside Plaza, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected] bkbcpa.com.