Case Study 2
A husband is 60 and uninsurable while the wife is 50 and in overall good health. Their combined net worth is $30M.
Their substantial net worth might cause an estate tax issue upon their death. They are also concerned about liquidity for their children as their assets are tied in real estate and their business. Bearing in mind that upon the death of both spouses estate taxes are due within 9 months often causing a “fire sale” of assets and businesses.
The cost of purchasing a $10M life insurance policy on the wife’s life is $500k annually for 10 years in a limited pay whole life design or $110k per year for life in a traditional whole life plan. The clients do not want to sell any of their real estate holdings to purchase this insurance policy as there is a current real estate downturn and they prefer to retain their cash for other investments or for business expansions.
- A split case design is illustrated and a financed life insurance strategy is tested to withstand an exit strategy (making sure that if the loan is paid from the cash value, the policy will not lapse prematurely).
- The wife starts the life insurance underwriting process to qualify her for coverage.
- The bank qualifies the clients for a loan and banks are being competed against each other to seek the most attractive interest rates and additional terms.
- The clients create an irrevocable life insurance trust (ILIT).
- The ILIT borrows $500k annually of premium from a bank at a fixed rate of 4.75% for 5 years and a spread for the remaining 5 years.
- A split life insurance policy is purchased: $5M in death benefit as a whole life policy and another $5M as an index Universal Life policy (this is done to reduce the volatility by increasing diversification among life insurance contracts).
- The policy cash value is guaranteed to be a minimum of $2.5M after 10 years with a conservative estimate that it will be $6.1M after 10 years.
- The clients pay the annual interest on the loan each year.
- After 10 years the client pulls funds from the life insurance cash value (a combination of a loan and withdrawals) and repays the loan principal of $5M.
The client remains with paid-up policies with a combined death benefit of $7.3M that will satisfy both their projected estate taxes and their liquidity needs.