I have a client(hopefully soon to be) that I've been talking to for about a year now. I have little experience in working with a client of this size and am looking for a little guidance. The client has been dragging his feet on meeting with his estate planning attorney to rework his estate. The client is worth around $20 mil and wants to put much more life insurance in force for estate taxes. My first question is, does a ILIT have to be in force first, prior to writing the insurance or can the policy be written than transferred into the ILIT?
It makes perfect sense when the cash value out performs the face value, which is the point of a long term index UL. You are not going to dip into the cash value, but the cash value can substantially increase the death benefits. If the client were more senior I would agree that going with a low premium GUL is the best way. If the client is younger, then going with PF and taking an IUL will have a much greater gain for the client in the long run; especially if the client is not paying for the premiums.
With current rates, I would be very surprised to see the cash value outperforming the face value in the future. The insurance company always has the right to raise the cost of insurance to the maximum guaranteed value, which would greatly eat into any accumulated cash value regardless of how well the index portion is performing. It sounds like a good concept in theory, but sometimes the KISS method is the best way to go. A few years down the line the client will have forgotten everything you told them anyway.
Transferring is a death sentence! The estate planning world is about 80% of my business and I know the ins and outs fairly well. You can have the ILIT "pending" issue of policy, but DO NOT have the policy active then transfer it to the ILIT. You will be subject to a 3 year look back called "Contemplation of Death," and it can cause much headache for the estate if the client dies within the first 3 years.
If your client is seriously planning on an estate planning and is looking to keep the policy long term, I can show you some ways to save the client a lot of money. If the client doing traditional Premium Financing on a index or he is going to be funding himself?
I have a client(hopefully soon to be) that I've been talking to for about a year now. I have little experience in working with a client of this size and am looking for a little guidance. The client has been dragging his feet on meeting with his estate planning attorney to rework his estate. The client is worth around $20 mil and wants to put much more life insurance in force for estate taxes. My first question is, does a ILIT have to be in force first, prior to writing the insurance or can the policy be written than transferred into the ILIT?
Good client to have.
If the ILIT is not in force prior to the policy, there is a three year contemplation of death. If they die within the three years and the policy was transferred after it was initially set up, there would be a taxable consequence. If the ILIT is set up before the policy, the 3-year contemplation of death does not apply. The IRS doesn't want you to be on your deathbed transferring assets into an ILIT to avoid taxation.
He really needs to speak with the estate planning attorney to develop his plan and decide how much coverage may be necessary. A $20 million estate could easily grow to several times that amount if he is not that old and nobody knows where the estate tax laws will end up in the future. Even at the current exemption of $3.5 million per spouse, that is still $13 million he would be taxed on if they both died tomorrow. Estate taxes are 50-55% at the highest tax bracket, so he would need a minimum of ~$7 million of coverage, and if he really wants to plan for the future, somewhere in the order of $10-20 million depending on his age.
Yea, that is what I thought about transferring a policy into an ILIT but wasn't sure. My thought was having him self fund the policy, but again, that is because my experience in the premium financing arena is zero.
Yea, that is what I thought about transferring a policy into an ILIT but wasn't sure. My thought was having him self fund the policy, but again, that is because my experience in the premium financing arena is zero.
I would stay far away from the premium financing angle, it will only complicate things and if you put too much information in front of him, he may balk at it.
Thanks dgolenz. The client is 56 and his wife is 54. They have 4 children, and haven't been gifting and haven't used there one time exclusion.
Let's say if they're in good health, life expectancy for them would be roughly age 80. We'll go conservative and say age 75, so 21 years for the wife, but we'll round that off to 20 to keep things simple. If they returned 5% interest on that $20 million for 20 years, their estate would be worth approximately $53 million at age 75. At age 80 it would be approximately $68 million.
If they earned 8% instead of 5%, those numbers would be $93 million and $136 million respectively. As you can see, they probably need much more than $7 million to pay the estate taxes with. If they have four kids, assuming they are beneficiaries, they could contribute up to $104,000 per year to the trust to pay the premiums without eating into their lifetime exemption ($13,000 per spouse times four kids). Given the size of the case, you also have to take into consideration the retention and auto-bind limits of the different insurance companies. You also have to take into consideration what the $20M estate is comprised of - some people with that size estate are property-rich and cash-poor (so to speak), and would not want their properties to be liquidated by the IRS for 50 cents on the dollar to pay the estate tax.
These types of cases can get pretty complicated, but pay very well if you know what you are doing.
I will have to disagree on the PF situation on this one. I think that PF is the perfect way to go if the client is this young. However, I also agree that someone who doesn't know what to do on a PF will destroy the case very quickly. So I will concede to the suggestion that PF may mess it it up if an agent does not know what to do!
That being said, a client at this age using traditional ILIT that is self funded should still look at an Index UL instead of a traditional UL. I would separate the estate into a Guarantee UL on one part and an index UL on another part. The client stands to gain a lot by having a good quality index as opposed to just an accumulator.
If you are going to be running across many of these cases, I suggest you learn the delicacy of legalized PF. It can be very very profitable for all involved!
I will have to disagree on the PF situation on this one. I think that PF is the perfect way to go if the client is this young. However, I also agree that someone who doesn't know what to do on a PF will destroy the case very quickly. So I will concede to the suggestion that PF may mess it it up if an agent does not know what to do!
That being said, a client at this age using traditional ILIT that is self funded should still look at an Index UL instead of a traditional UL. I would separate the estate into a Guarantee UL on one part and an index UL on another part. The client stands to gain a lot by having a good quality index as opposed to just an accumulator.
If you are going to be running across many of these cases, I suggest you learn the delicacy of legalized PF. It can be very very profitable for all involved!
If the policy is in an ILIT, the cash value makes no difference. You can't just dip your hand into the trust and pull the money out when you feel like it. On a case like this, the best thing to do is set up the maximum death benefit for the lowest level premium guaranteed for life since they will probably balk at the size of premium & face amount that they actually need. Lincoln Benefit has a free rider on their SUL policies that allows for 90% ROP in the 10th year and 100% ROP in the 15th year if you want to surrender the policy.
The Second to Die IUL would accumulate a substantial death benefit as long as the index acts appropriately. Im a little nervous with the IUL since the max isn't guaranteed correct. So typically, the base is 2% with a 14% ceiling but that celing can be lowered to 5% depending on the companies strength, market performance etc. But I do like the product. The client is worth about $5 mil liquid and the other $15 is illiquid but should turn liquid in the next year or two. Does this make a better case for PF. If I were to go that route, I have some contacts who are large producers in that arena.
If the policy is in an ILIT, the cash value makes no difference. You can't just dip your hand into the trust and pull the money out when you feel like it. On a case like this, the best thing to do is set up the maximum death benefit for the lowest level premium guaranteed for life since they will probably balk at the size of premium & face amount that they actually need. Lincoln Benefit has a free rider on their SUL policies that allows for 90% ROP in the 10th year and 100% ROP in the 15th year if you want to surrender the policy.
It makes perfect sense when the cash value out performs the face value, which is the point of a long term index UL. You are not going to dip into the cash value, but the cash value can substantially increase the death benefits. If the client were more senior I would agree that going with a low premium GUL is the best way. If the client is younger, then going with PF and taking an IUL will have a much greater gain for the client in the long run; especially if the client is not paying for the premiums.
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Originally Posted by SM3434
The Second to Die IUL would accumulate a substantial death benefit as long as the index acts appropriately. Im a little nervous with the IUL since the max isn't guaranteed correct. So typically, the base is 2% with a 14% ceiling but that celing can be lowered to 5% depending on the companies strength, market performance etc. But I do like the product. The client is worth about $5 mil liquid and the other $15 is illiquid but should turn liquid in the next year or two. Does this make a better case for PF. If I were to go that route, I have some contacts who are large producers in that arena.
You just have to make sure you do your research about the abilities and past performance of the company. Use it to do a casting of the projected data on the basic moving average of the index over a 30 year period and do a recast for future performance on a low side, high side, and moving average side. Cross compare that to a standard investment portfolio an show the client how much he has to gain by using an idex.
Then show the client that the premiums can be financed through conforming methods and leveraged against the cash value of the policy (cash value that can't be touched anyways,) and you will have a client for life. Once they understand the delicacy of the situation, the light bulb comes on. If you don't feel like your clients will understand, then just go with the path of least resistance.
Last edited by TristanTLC : 10-28-2009 at 03:01 PM.
Reason: Posts merged
I'm not sure why my prior post didn't show up, but here goes again:
Originally Posted by TristanTLC
It makes perfect sense when the cash value out performs the face value, which is the point of a long term index UL. You are not going to dip into the cash value, but the cash value can substantially increase the death benefits. If the client were more senior I would agree that going with a low premium GUL is the best way. If the client is younger, then going with PF and taking an IUL will have a much greater gain for the client in the long run; especially if the client is not paying for the premiums.
With current rates, I would be very surprised to see the cash value outperforming the face value in the future. The insurance company always has the right to raise the cost of insurance to the maximum guaranteed value, which would greatly eat into any accumulated cash value regardless of how well the index portion is performing. It sounds like a good concept in theory, but sometimes the KISS method is the best way to go. A few years down the line the client will have forgotten everything you told them anyway.
I'm not sure why my prior post didn't show up, but here goes again:
With current rates, I would be very surprised to see the cash value outperforming the face value in the future. The insurance company always has the right to raise the cost of insurance to the maximum guaranteed value, which would greatly eat into any accumulated cash value regardless of how well the index portion is performing. It sounds like a good concept in theory, but sometimes the KISS method is the best way to go. A few years down the line the client will have forgotten everything you told them anyway.
You are basing it on current rates, which is absolutely correct! Look at every economic reports and see where interest rates are going..... UP UP UP UP. With over a Trillion dollar inputed into the economy and government spending going through the roof, the interest rates HAVE to go up to prevent inflation. Interest rates cannot stay as low as they have been, it is basic economic trends. Over a period of 30 years, the market always bounces up and down, and there are always cycles. We are in a historic low interest point, and there is only one place for interest rates to go..... UP! To many people this will be a bad thing, to some people it will be a great thing!
An Index UL, tied to LIBOR or some other index stands to benefit tremendously over a increase span of the rates. There was a time where interest rates were double digits, and it will happen again. Most index UL have a cap, and the internal COI can be adjusted, but even the adjustment has a max rate per year and an overall max increase and the ROI from the index increase vs the COI increase will still yield a higher return.
I agree with you that the KISS method is correct in most cases, you will get no arguments here! However, for the savvy client who can do a long term index UL, especially on a PF case, it is an opportunity to make a small (if not large) fortune. It will take time, and there are no guarantees - but there are no real guarantees in life (other than death and taxes) anyways. You base your portfolio on what is most likely to happen and if it does then you are a genius and if it doesn't then you're an idiot. That's the chance you take on making recommendations.
I personally have advised my younger clients to take an index UL and do PF if they qualify. If they don't qualify for PF, then they take self funded. If they are older, then I take them on low premium GUL and do PF if they qualify and self fund if they don't.
Either way, different people will have different recommendations and nobody knows who is right until it happens. We can only look at what we know and project.
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Originally Posted by SM3434
For PF, I would assume that there are alot less lenders out there. Also, are the payouts on a PF case lower.
You assume correctly. If you are doing conforming PF you are limited to who you can work with to be in compliance. The payouts are not necessarily lower, just structured differently. You stand to gain much more in commission on a PF case over a period of time.
Disclaimer: I am not saying I am right and I am not arguing with Dgolden. I think his recommendations are sound and is correct in many cases. I also think it might be worth investigating into the situation as it pertains to your client, because no one methodology works in every circumstance.
Last edited by TristanTLC : 10-28-2009 at 05:44 PM.
Reason: Posts merged
Just wanted to ask a follow up question in regards to premium financing. What would be some requirements for these cases to make sense? Such as minimum net worth, income, age, etc.
Just wanted to ask a follow up question in regards to premium financing. What would be some requirements for these cases to make sense? Such as minimum net worth, income, age, etc.
With due respect, why are you trying to swim in the shark-infested water all by yourself? Let's say you make a presentation all by yourself and the client OKs it. As soon as his other "advisors" - CPAs, attorneys - get a whiff of it they will try to sabotage it and have them go with "their guy". That's the real hard part that you cannot learn from an internet thread. You need someone who can fight off the sharks for you. I would pay the split to learn some invaluable lessons on these cases. JMO
Need Help with Wealthy Client.
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