10 Ways To Reduce the Cost and Maximize the Value of Your Life Insurance
Life insurance can be a very cost effective asset to reduce family and business financial risk due to death. It can also be a very useful form of investment diversification on an after tax basis to create cash for unavoidable liabilities that occur at death or could be accelerated by death. Examples include estate taxes, business buy out obligations, bank debt, business leases, and debt guarantees.
To maximize the after tax value and minimize the cost of life insurance, life insurance policies must be reviewed and managed regularly, just like any other group of dynamic investments, to make sure you have the right life insurance to meet your current needs, both cost effectively and tax effectively.
You need to ask the right questions and obtain accurate, understandable answers, always in writing, so you can make good decisions. This is a particularly good time to review your life insurance because some policy pricing has not changed to reflect our current economy. The premiums for other policies have increased, and there may be additional premium increases in the future. If you are in good health, now is the time to evaluate your life insurance.
The following ten questions will be a helpful guide in this evaluation process.
II.OUR TOP 10 WAYS TO REDUCE THE COST AND MAXIMIZE THE VALUE OF YOUR LIFE INSURANCE
#10 Know the purpose of your life insurance today and what may be your life insurance needs in the future. These purposes may be different than the purposes that were identified five or more years ago when existing policies were purchased.
Question:What are the purposes of our business and personal life insurance today? Are there potential uses for life insurance that we may encounter in the future (e.g. estate tax planning) that we should factor into our planning today?
#9 Determine the appropriate amount of life insurance. Too much life insurance is a waste of money. Too little life insurance is inadequate protection for your family or business.
How much life insurance is needed today? Is this amount likely to go up, down or stay the same over the next few years?
#8 Determine the duration of your current and anticipated future business and personal life insurance needs. You need to determine if your life insurance is “if I die” (temporary) or “when I die” (permanent).
#7 Make sure your existing life insurance answers the questions in #8-10, or determine what changes need to be made to have the correct amount and type of life insurance consistent with your life insurance objectives and cash flow parameters.
Are our term insurance premiums guaranteed for the needed time period?
How important are guaranteed level premiums? (term insurance or universal life insurance with no lapse guarantees)
How important is cash value as an “investment” or to pay future premiums? (whole life, some universal life or some variable universal life insurance)
Is it better to pay lower premiums and have less cash value? (term insurance or universal life insurance with no lapse guarantees)
Is it better to pay the premium every year, or pay a higher premium for a shorter duration (prepay the premium)?
For estate planning purposes, is a single life or second-to-die policy better?
#6 Review your life insurance periodically to make sure it is cost effective for your present life insurance purposes.
Is my life insurance with a cost effective and financially strong life insurance company?
Does this life insurance company offer the type of life insurance I need more cost effectively than other good companies?
Has the policy been issued with the best available insurability category to obtain the best value?
rated vs. non-rated
smoker vs. nonsmoker
impact of height/weight tables and family health history
#5 Make sure your life insurance is tax effective and that the ever-changing tax rules are being followed correctly.
Do we have the proper ownership and beneficiary provisions to meet today’s objectives?
Do the business life insurance beneficiary designations avoid income tax traps?
Does the business own life insurance on a controlling shareholder that will place the life insurance in the shareholder’s estate for estate tax purposes?
Do we own life insurance personally that will be in our estate when the death benefit should be removed from the estate?
Do I have personal life insurance payable to a non-spousal beneficiary that could subject some or all of the death benefit to estate taxes at my death?
Are we reporting any business-owned life insurance implemented after August 17, 2006 on IRS Form 8925 with the business tax return?
#4 Make sure that you are making maximum use of potential life insurance policy guarantees for future policy flexibility and predictability.
Is my term insurance guaranteed convertible to permanent insurance with no health questions or other insurability questions?
Is it convertible for the full level term period (usually 10, 15 or 20 years)?
What is the maximum age for conversion (usually age 65, 70 or 75)?
Does my universal life or variable universal life insurance have a guaranteed premium for a guaranteed death benefit?
If so, how long does the guarantee last and what needs to be done to maintain the guarantee so I do not outlive the guarantee?
If not, is it cost effective and desirable to rewrite non-guaranteed insurance to a guaranteed death benefit, either with the policy paid-up now or with future guaranteed premium payments?
Family business owners have a net worth of approximately $30 million and approximately $24 million in the family business. The business is growing in value with further expansion anticipated. There is a need for approximately $14 million of estate tax liquidity today, $6 million of key person term insurance in the business to meet lender requirements, and the desire for maximum future flexibility because the estate tax liability is expected to increase with business growth. The senior generation members in the family business are in their 50s and not ready to transfer ownership of the business for some time.
$8 million second-to-die life insurance$44,900 guaranteed annual premium owned in a trust outside the estate
$6 million term life insurance$ 3,400 guaranteed annual premium insuring wife, owned in the same trust
$6 million term life insurance$ 9,700 guaranteed annual premium insuring husband, owned in the business
The two term insurance policies are with the same insurance company, and are guaranteed convertible for the next 10 years for up to $12 million total second‑to‑die insurance with no insurability requirements.
The contractual wording for this unique guaranteed policy conversion option, without future evidence of insurability, is included in the boxes on the following page.
#3 In some situations, life insurance may be a good after tax investment on a multigenerational basis.
What is the after tax internal rate of return at death at various ages of the insured?
Does this make sense as a multigenerational investment, and is it affordable by the children, a trust, or as part of a parental gifting strategy?
Insured – Female, age 77 (1993)
Life Insurance Death Benefit – $150,000 plus the total premiums paid
Annual Premium – $14,886
Total Death Benefit in 2006 after 13 years (age 90) – $343,518
Approximate After Tax Internal Rate of Return on the Premiums Paid – 7.9%/year
#2 Life insurance can be a multigenerational investment to help maximize investment diversification, help match assets with potential future liabilities, and create liquidity at the insured’s death without market timing issues.
Query: If someone died on February 15, 2008 with a taxable estate of $5 million in marketable securities, what would be their approximate estate tax cost and when would this bill be payable in full?
How would you like to be the family member to determine which of your family assets to sell under these circumstances?
Is it your desire to pass assets to children, grandchildren, or heirs in future generations?
Could you have an estate tax liability? If so, can you estimate how much this tax liability is likely to be, both now and closer to life expectancy?
Does it make sense to have some small portion of your total assets in an investment that does not correlate with the U.S. stock or bond market?
Does it make sense to have an investment that will be completely liquid (cash) and completely tax free at your death without any market timing issues, especially if cash could be needed to offset estate taxes and other debt obligations?
If the answer to most or all of these questions is yes, we recommend that a family consider having 5-10% of its current assets allocated to permanent life insurance. This life insurance can be funded with a single premium payment or annual premium payments. If the death benefit and premiums are guaranteed by a leading life insurance company, the only variable is the date of death. Illustrations can show the internal rate of return at death in each policy year. This formula will provide a significant amount of permanent life insurance assuming the insured is in good health when the policy is issued. As the family’s assets grow over time, the life insurance will probably be a diversification of 2-5% of total family assets.
A couple 70 years of age has a net worth of $10 million. The wife is in excellent health, and the husband is in good health.
Insuring the wife alone – $2 million death benefit:
Single PremiumAnnual PremiumAfter Tax Rate of Return
GuaranteedGuaranteedon Premiums Paid
for Lifefor Lifeif Death Occurs at
$529,690$ 38,020/yearAge 85 – 14.57%
Age 90 – 8.52%
Age 95 – 5.33%
5.30% of total net worth
Insuring the husband and wife payable at the second death – $2 million death benefit:
Single PremiumAnnual PremiumAfter Tax Rate of Return
GuaranteedGuaranteedon Premiums Paid
for Lifefor Lifeif Second Death Occurs at
$429,130$ 29,222/yearAge 85 – 17.46%
Age 90 – 10.67%
Age 95 – 7.07%
4.29% of total net worth
#1 Review your life insurance with a knowledgeable life insurance advisor every 1-3 years. Life insurance advisors are generally not compensated by commissions for this review process, so you may need to initiate the review. All reviews and recommendations should be provided to you in writing and retained in your records. This makes it easy for you to refer back to prior reviews, provide information to your other advisors (CPA, attorney, financial advisor), and track the performance and trends in your life insurance portfolio.
Do you have a written summary of your business and personal life insurance policies?
Have you reviewed your life insurance needs and objectives in the last 1-3 years?
Have you reviewed the adequacy of your life insurance to meet your needs today?
Do you have a current projection (in-force illustration) on every cash value policy?
Do you understand your in-force illustration and has it been compared with prior illustrations by you or your advisor so you can see the trends in your policy performance?
Note:Every cash value policy that is non-guaranteed is under performing original and prior projections because of declining and continued very low interest rates over the past 15 years and poor stock market performance unless the policy has guaranteed premiums and a guaranteed death benefit and the no lapse guarantee requirements have been met.
What are the implications for your policies?
Will permanent life insurance policies insuring you, family members or business associates “die” before the insured dies?
Additional insurance reference information is also included on this website. If these 10 questions raise possible issues regarding your life insurance needs and your current life insurance portfolio, please contact us. Our contact information is as follows:
JOHN C. ZIMDARS, JR., CLU, ChFC
The Zimdars Company, Inc.
440 Science Drive, Suite 403
Madison, WI 53711-1064
Telephone: 608/231-2700 800/448-2927
Please also see our testimonials that will provide feedback from attorneys and CPAs who have worked with us as we have addressed these questions jointly with their clients.