I wrote an estate life insurance case 6 or so years ago that if you put a pencil to the numbers you would swear that the company had made a huge mistake. There was simply no feasible way for them to make a profit.
The case was with Protective Life who, for a while, was simply blowing everyone away with their no lapse guarantee universal life products. Being at the top of the leader board in no lapse guarantee rates is a lot like leading the race in term insurance rates. It doesn’t necessarily mean you’ve got it wrong. It just means you are temporarily in the lead.
Protective felt well positioned with the product. It was competitive in all of the demographics they wanted it to be, but not inordinately so. What someone had failed to do was research one area. I presented them with an 80 year old client in preferred health who did purchase a $5 million no lapse guarantee policy and did a 1035 exchange of $1.3 million. Her annual premiums are $32,000 and end at age 100 with coverage guaranteed to 121. The maximum she could ever pay in was $1,940,000 if she lived to be 100. Admittedly the company could have made a profit if they did great every one of those 20 years, but this policy was purchased in 2005. Bad timing for them.
That was before the economic collapse and the low interest environment that has followed. That product is no longer available, but there are still some outrageously good deals out there. At least right now. The industry as a whole is going to raise the rates on this type of policy. It’s already started and some really great deals have slipped away. Best estimates are that the last of the great deals will be gone by late spring.
I’ve talked in very recent posts about the opportunities available to high net worth individuals and families created by the temporary increase in the lifetime gift exemption to $5 million for individuals, $10 million per couple. So, knowing that these great deals are there and knowing that very soon they won’t be, how can a person or couple find out just how good it gets without any risk?
I would tell you that it is as simple as applying, but obviously there needs to be some plan, right? Ideally, yes! But if it means catching the best deal before it gets away, the answer is NO! I can hear the screams now. Hinerman says you should apply for huge life insurance policies without a plan in mind. Make a good headline wouldn’t it?
Listen. The plan is to use gift tax free money to dramatically increase the estate tax free wealth for your heirs through the purchase of life insurance in an Irrevocable Life Insurance Trust. You don’t have to bring together a meeting of attorneys, estate planners and accountants and come to some consensus about this before you apply. The application simply locks in the opportunity to accept the great deal. It doesn’t lock you in to accepting it.
What’s going to be so bad if say you and your wife apply for a second to die policy without consulting all of those high paid folks? You know you have an idea of your estate liquidity. High net worth people are like that. You more than likely have some sense of what you will need in your lifetime and what you are planning on passing along to your heirs. You know what is liquid and you also know by now that for the next two years you can gift up to $10 million of that per couple gift tax free.
So, come up with a figure you know you could live with if the end product is a screaming good deal for your family. Apply for the best possible deal you can find and while the application is being processed, which will take a month or more, go talk with those other folks and tell them what you did. Explain to them that you are not locked in, but you believe it might be a good deal to consider it.
Why would I suggest this maverick approach? First and very importantly, it doesn’t lock you into anything, but it does lock in life insurance deals that create tax free wealth for your heirs. Second, the application period gives you plenty of time to change or tweak the idea. Even after the policy is approved you can change the amount of insurance and the amount you intend to gift. But the real why. If you do the master plan first, you will leave millions on the table because the rates will no longer be available.
Bottom line. This is no time to be caught sitting on your hands or sitting on money that you can build wealth with estate tax and gift tax free. Want more information? Do you think I’m crazy but you would like to believe I’m not? Would you like to take advantage of this huge loophole and great products before they both go away? Shoot me an email! Call!