Tax Secrets: Secrets the life insurance companies don't want you to know

Irv Blackman

Why is life insurance such a powerful weapon (strategy) that it enriches my clients at the expense of the IRS? My brilliant law school professor, who taught advanced estate planning, had this answer: He said, "Life insurance – properly structured – in estate planning is the bedrock of beating up the IRS; legally.”

Unfortunately, the life insurance law is complex and if you don’t use the law properly, it will eat your lunch.

The rest of this article shows you how to take advantage of the law.

More:Tax Secrets: We win; tax court clobbers IRS

Following are three basic facts about life insurance premiums you must burn into your mind:

Premiums become significantly higher as you age. (The lesson – invest in life insurance as soon as you can afford it.)

Smokers are punished with high premiums.

Second-to-die insurance (usually on a husband and wife) is a true bargain, receiving about a 40 percent discount.

Comment: If you don’t intend to keep the policy to the day you die, don’t buy it in the first place.

We have learned that real-life examples are the best way to teach how to get a life insurance victory. As you read the examples, pick out the one (or more) that fits your personal circumstances.

That dull old stuff – life insurance – is the tax hero in every example.

Example #1. Life insurance no longer needed on husband.

Cal (59) and Cindy (55) are married. Cal has insurance on his life: death benefit of $788,000; cash surrender value (CSV) of $213,000; and an annual premium of $9,000. They are worth over $9.5 million (mostly cash or cash-like investments). Cal earns more each year than they spend: so don’t need life insurance on Cal.

My network insurance consultant used the $213,000 CSV, continuing the $9,000 annual premium to purchase a second-to-die policy with a $1.6 million death benefit; almost double the amount of the old policy. Powerful!

Example #2. Using life insurance as a tax-advantaged investment.

Wendy, a 76-year-old widow, is worth over $12 million, mostly liquid investments. Her investment income far exceeds her lifestyle costs. Following is a wealth-increasing, two-step strategy.

Step #1. Wendy paid $2 million for a single premium immediate annuity (the insurance company will pay Wendy the same dollar amount every year for as long as she lives).

Step #2. Wendy bought a $5.6 million insurance policy (actually owned by an irrevocable life insurance trust, so the death benefit will go to her kids tax-free). How are the premiums paid?

The annuity payments pay the policy premiums. We turned $2 million (which would have been subject to estate tax) into $5.6 million (tax-free); guaranteed. Awesome!

Example #3. You have an old policy and are no longer paying premiums out-of-pocket.

I saved the best for last. If you have a so called “paid-up-policy” (no longer writing checks to pay premiums), for sure you are getting ripped off... can be either a single-life policy or a second-to-die policy.

What follows is a classic example: Alfred (71) had a policy with a death benefit of $4.2 million, with a CSV of $1.7 million. He no longer pays out-of-pocket premiums because the

annual earnings on the CSV are large enough to pay the premiums. Alfred simply traded in the old policy (a tax-free transaction) for a new policy with a huge $7 million death benefit (all tax-free). Wow!

How can one or more of those insurance company secrets benefit you? I twisted my insurance guru's arm into agreeing to audit the insurance policies of readers of this column without any obligation. Or maybe you are just looking for a new policy.


Either way, send me a fax (on your letterhead if in business) at 847-227-9008 or email me ( just three bits of information for each policy – (1) name of insurance company; (2) death benefit; and cash surrender value. Include all of your phone numbers: business, cell and home. Mark “Eagle Life Insurance” on your fax or email.

Or if you have a question involving your life insurance, call me (Irv) at 847-803-7796.