Life Insurance in Today’s Estate Tax World

March 22nd, 2018 No comments

What to do with existing policies
By Bill Boersma

As might be expected, I’m getting more calls lately from advisors, on behalf of their clients, asking what should be done about life insurance no longer needed for estate liquidity purposes.

I generally answer the same way every time; “Let’s evaluate the policy and then talk about options.”  Depending on the client situation, the first issues I discuss with the advisor is what happens when the current estate tax law sunsets, and does your client really want to bank on what the tax laws will be, 17, 28 or 42 years from today?  With life insurance, it seems many people will jump on a reason to walk away.

Your clients are big kids so if they decide to bail on a policy and that turns out to be a mistake, they can live with it.  However, it’s important that they’re making these decisions with all the data at hand they need to make an informed decision and not an emotional one.

An Objective Financial Analysis

With an in-force ledger in hand, I perform an internal rate of return (IRR) calculation to show them what they have.  Sometimes this is surprising, positively or negatively.  What I propose to provide is black and white information.  I’m going to stay agnostic relative to product style, carrier and IRR.  After all, let’s say the tax-free rate of return at actuarial life expectancy is 5 percent.  Who am I to say if that’s good or bad?  Someone who has most of his money in CDs and conservative investments might feel that’s a good use of money, while a business owner making 25 percent on her money might question why she’d ever distribute capital to fund such a vehicle.

I take the current cash surrender value and enter it as present value, the death benefit at life expectancy is future value, the number of years to life expectancy (or whatever duration is desired) and the premium payment. I calculate interest.  If the life insurance contract is one that’s designed to accumulate reasonable cash value, I also calculate the IRR on premium to future cash value so we can evaluate it as an accumulation vehicle.

Case Studies

Let’s take two recent files on my desk.  One was a relative new whole life contract.  My calculations show the IRR on premium to death benefit at life expectancy to be about 4 percent, while the IRR on cash value is two point something percent most of the time and tops out at 3 percent at age 90.  This client decided it wasn’t worth it and is going to exit the policy.

The next policy was a survivor guaranteed universal life (SGUL) on a 77-year-old couple.  It was put in force as a single pay and is guaranteed for life with no additional premiums.  Running the IRR numbers at 10, 15, 20 and 25 years, the IRR on current cash surrender value to guaranteed death benefit is 16.59 percent,10.78 percent, 7.98 percent and 6.33 percent respectively.  Mind you, that’s 87, 92, 97 and 102 years old.  At age 97, they’re looking at an 8 percent guaranteed, net, tax free return that’s a double digit tax equivalent return.  This is an unduplicable financial transaction.

Knowing the return of the transaction, the clients can now decide if there’s any useful reason to keep the contract in the absence of estate taxes.  If cash flow into a contract isn’t an issue, and it looks to be a good use of money, then the policy can be maintained as a part of a diversified estate portfolio or legacy planning or used for charitable purposes.

Tweaking Existing Contracts

Often I find many people failing to evaluate tweaking an existing contract.  If the policy needs premiums, what does the death benefit need to be reduced to for it to stay in force indefinitely with no more cash flow?  Is there a way to better use dividends or manage loans?  I’ve seen GUL contracts with little or no cash surrender value stay in force for a couple of decades with no premium paid, even when they were designed to assume premiums paid annually.


Assuming a decision is made to bail on the contract, please advise your client to not simply cash it in without further analysis.  For some, a life settlement may be a windfall.  There’s still a robust settlement market, and this potential increase in value should be evaluated if it’s in the cards.  Beyond that, virtually every contract is in a gain or a loss position.  If in a gain position, let’s evaluate ways to eliminate or mitigate the gain.  If it’s in a loss position, let’s evaluate ways to salvage the loss in the contract.  One would never take a loss on real estate or investments and not bother to share this with the accountant.  Why should life insurance be any different?

Once everything is evaluated, policy owners can take advantage of the most favorable opportunities or cut and run and put the funds into investments or dissolve the trust and distribute to the kids.  The freed up cash flow can be used for taking the grandkids to Disney or buying that boat your client has his eye on.

Life insurance should be evaluated like anything else before making decisions.  I’ll always be at a loss to understand why such a significant portion of the market chooses to treat it so differently than anything else.



How Not To Evaluate Life Insurance

February 27th, 2018 No comments

I’m a life insurance guy and I feel a properly researched, constructed and managed life insurance policy can be an exceedingly powerful financial tool. However, my daily life is spent trying to find solutions to problems policy owners are experiencing. Decreasing crediting rates and increasing expenses are obviously issues but we deal with these kinds of things in many areas of life on a regular basis. For full post, click here…

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Help Mitigate Life Insurance Fraud

February 6th, 2018 No comments

Three rules to remember for layering in a basic level of protections for your clients.

While there’s likely no way to ultimately ensure your clients won’t be victims of fraud, there are a few things to be done that may help prevent it, as well as assist in recovery efforts if they’re victims. For full post, click here…

Understanding Life Insurance Performance – Part 2

January 19th, 2018 1 comment

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Digging Into the Black Box of Life Insurance

December 19th, 2017 No comments

Referring to life insurance as a “black box” goes back a long way, but just because life insurance may seem like a black box to you or your clients doesn’t mean it has to be. Some people understand it. It may not be healthy to foster an “us versus them” mentality, but it’s most certainly not healthy to ignore reality. When individuals don’t understand something, they seek out an advocate to ensure they have the information they need to make decisions in their best interest. Life insurance shouldn’t be any different. For full post, click here…

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Rebalance Power Inequity in Life Insurance Industry

November 30th, 2017 No comments

In the news, we currently have a number of stories of bad behavior. Political shenanigans, sexual harassment, corporate malfeasance, gun violence, the media, etc. It doesn’t take much to understand what connects much of this. I’m thinking about power. Those with the power can take advantage of those without the power. It’s not complicated.

Think about a serial sexual harasser or a congressman or a corporation or the guy holding the gun or the talking head. They’re all in a position of power and, unfortunately, often go unchecked until another who gains power can level the playing field. For full post, click here…

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Are all discounts beneficial? – John Hancock Vitality Program

November 13th, 2017 No comments

Many readers may be aware of Hancock’s Vitality program. I’m not going to attempt to do the program justice but you can click here to read about it. The short story is that the program offers different levels of discounts on your clients’ life insurance premiums based on their healthy lifestyle as measured by a variety of metrics and activities. It also incorporates discounts from partner companies and allows your clients to earn a steep discount on an Apple Watch or a complimentary Fitbit to track healthy activities. For full post, click here…

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Understanding Life Insurance Performance – Part 1

October 31st, 2017 No comments
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Don’t Underrate Term Insurance

October 31st, 2017 1 comment

It can be a good, cheap solution for many clients.

A younger attorney asked me some time ago to get some term numbers for her clients. Her question was “Is this premium monthly or annual?” When I told her it was annual, her next comment was “Could you quote some term for me and my husband?”

Pretty much every statistic shows most people are meaningfully underinsured. Sure, this is easy to say when it’s someone else’s money you are spending, however, I don’t think most people understand just how cheap term insurance is. Yes, some people can’t get it, and some people just don’t have any money, but that isn’t the case in most situations. For full post, click here…

The Problem with Spreadsheeting and Commoditization

October 11th, 2017 No comments

Recently I was brought into a case by an estate-planning attorney who had relatively young clients who handed over an insurance policy and said “Tell us if this is good”.

The short story is that the policy was only a couple of years old, it was a guaranteed survivor universal life (UL) from a reputable carrier and it was doing fine. The pricing was now unduplicable, and if they keep paying the premiums on time, then the death benefit will assuredly be paid someday. For full post, click here…

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