Background: Client acquired a life insurance policy in 1991 with a $700,000 face amount and an annual projected premium of $5,688. Client created an Irrevocable Life Insurance Trust at the same time and named one of his children as trustee. In 1997 the client’s attorney was named the trustee. In 2010 the attorney learned at a law conference the fiduciary standards required of a trustee as regards to an Irrevocable Life Insurance Trust. The attorney knew of these standards but had just not given thought to their importance. All premiums have been paid in a proper manner and all Crummey notices have been provided.
Our Case: In 1991 the life insurance policy was expected to last indefinitely based on the $5,688 premium but the new trustee now decided to ask for an “in force” ledger to see how the policy was performing in light of the lower interest environment we are experiencing. Trustee learned that the policy with a current cash value of over $52,000 would diminish to a cash value of zero and lapse over the next 15 years. If premiums were increased to $18,788 per year the policy would again project, not be guaranteed, to last for the client’s life. Trustee, in performing his fiduciary duties, contacted Business & Estate Advisers, Inc. to do an evaluation of the options. The client is now 70 years old and, fortunately, still in good health.
Analysis: Business & Estate Advisers, Inc. approached this engagement with an analysis of the life insurance marketplace in 2012. Initial steps were to conduct a market analysis of what might be available on a “guaranteed to never lapse” policy if the existing $52,000 were transferred to a new carrier and underwriting was acceptable. Pricing varied greatly with a dozen carriers that expressed an interest. $700,000 of new life insurance could be acquired from $7,000 to $13,000 with guarantees to age 90, from $12,000 to $17,000 with guarantees to age 100 and from $13,500 to $18,000 with guarantees to age 120.
Question: Changing contracts makes sense as in all three scenarios the annual premium outlay will be less than current and coverage has a guarantee instead of a projection. So which of the three options should they choose?
The Results: Business & Estate Advisers, Inc. did a mortality study and found that about 27% of perfect health people lived beyond age 90 and about 3% of normal health people lived beyond age 100. After submitting to a private physical exam process where only a number is provided to the insurance company to obtain a solid offer before full disclosure of name and other data, the client learned he was a better than normal health individual.
Bottom Line: Client is very happy as he now has a $1,000,000 vs. $700,000 policy with an annual premium of $18,000. Trustee is very happy as by performing his fiduciary duty he was able to guarantee coverage for life and not face an unhappy family should the policy never have been reviewed.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc. Business & Estate Adviser s, Inc. and B & E Investment Advisers, Inc. are separate entities from ValMark Securities.
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