Tax Secrets of the Wealthy: A big breakthrough - Reader-insurance-analysis test yields hard to believe positive results

About six months ago this tax column ran a long two-part article titled: “Slash premium costs, yet increase life insurance benefits.” Never in our wildest fantasy could we have anticipated the flood of interest from you, our readers. Got faxes. Phone calls. Even e-mails.

The article offered to analyze the current insurance policies of readers, and we promised to report back to you what we learned. The following four reader policy analyses are typical of what we received. Even more interesting is what we were able to do in all four cases — raise the death benefits. What about premium costs? They stayed the same, were substantially reduced, or (this is astounding) out-of-pocket premium costs were eliminated. Chances are at least one of the cases will cause you to ask, “Can I do that too?”

Here is a bit 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. Their net worth is $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’s approach 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 (instead of $11,294 for the old policy).

Case No. 2: Joe, 71, and Mary, 69, are the insureds. Their net worth is $4.3 million. Joe and Mary had a second-to-die policy with a death benefit of $1.1 million, an annual premium of $22,645, and CSV of $268,000.

Our network insurance consultant’s approach created a premium financing plan using the $268,000 of CSV as collateral for a loan to accomplish a four step plan that included keeping the old policy, buying an additional (new) second-to-die policy, and combining the old and new policies raised the net death benefits to $1.9 million with a new annual premium cost of $55,645, and 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 were the net death benefits (after paying off the loan) will always be $1.9 million or more. 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. Their net worth is $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’s approach had us create a SUBTRUST as part of Joe’s 401(k). We rolled a Rollover IRA into Joe’s 401(k) account, increasing 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 (ILIT) 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 $.5 million to $4.5 million. Of even greater importance, Joe guaranteed his family $4.5 million of tax-free death benefits. (Note: 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. Their net worth is $13.5 million (including a $5.5 business that enjoys 10 to 15 percent growth per year).

Joe had a portfolio (six policies) of insurance on his life, with a total death benefit of $1.7 million, a CSV of $187,000, and an annual premium cost of $19,800.

Our network insurance consultant’s approach included a tactic called “new-policy premium financing.” Joe had the necessary collateral (cash, stocks, and bonds) to do the following: Have an Irrevocable Life Insurance Trust (ILIT) buy $4 million of insurance on Joe’s life and have a separate ILIT buy a $14 million second-to-die policy on Mary and Joe with adequate collateral (the stock and bonds portfolio already owned by Joe and Mary). All the premiums on both policies would always be paid by loans, and the interest on the loans would be paid by additional loans. 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). And a little added bonus: Joe cancelled the old policies and pocketed the $187,000 CSV (tax-free). Caution: Space does not permit every fact, detail, and nuance in the above four cases.

In summary what we learned and want to pass on to you is having your insurance analyzed works. Even for what appears to be incapable of improvement (Case No. 1). But a pattern developed that should help most readers, if you are lucky enough to be in any one of these specific categories: have a large ($100,000 or more) amount of CSV (Case No. 2), have a large amount ($300,000 or more) in a qualified plan (like a 401(k) or IRA), or are well-to-do and worth $5 million or more (Case No. 3).

Of course because the first reader insurance test was so successful, we’re going to do it again. We’ll report back again. So if you want to be a part of the test this time, have your current insurance policies analyzed (no charge or obligation). Fax your name, address, and phone number (along with your birthday and spouse’s birthday, and a list of your policies) to 847-674-5299. Call Irv (847-674-5295), if you have any questions.

Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection. E-mail him at or call 417-9732. His Web site is

© 2009 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

  • Discuss
  • Print

Comments » 0

Be the first to post a comment!

Share your thoughts

Comments are the sole responsibility of the person posting them. You agree not to post comments that are off topic, defamatory, obscene, abusive, threatening or an invasion of privacy. Violators may be banned. Click here for our full user agreement.

Comments can be shared on Facebook and Yahoo!. Add both options by connecting your profiles.