Success Story: Salvaging Loss in a Life Insurance Policy

October 6th, 2016 No comments

An attorney brought a case to me which was typical in many respects.  There was a portfolio of policies on multiple family members.  Some policies had recently failed and, among the balance of them, some were holding their own and others were rapidly falling apart.

I want to focus on the two policies on Dad.  One policy was projected to lapse in a year and the other in about 5 years.  Thsuccess-stories-logoey are currently burning through roughly $5,000 a month in cash value.  If only I had been brought in a couple of years earlier I could have saved them six figures in lost dollars.  None-the-less, late is better than never.  One policy has surrender value of $157,000 and a basis of $14,000 so the gain is  $143,000.  Another has a surrender value of $46,000 but a basis of $167,000 so there is a “loss” of $121,000.

Dad is uninsurable though expected to far outlive the policies and there is no interest in pouring the required amount of money into these policies to keep them alive, if even possible.  If the two contracts are surrendered today before they burn through what’s left of the cash value, there is a $143,000 taxable gain and the $121,000 “loss” is wasted.  However, that’s not the end of the story.

What we are doing is a 1035 tax free exchange of the two policies into a single annuity.  I don’t care if it is an immediate annuity or a deferred annuity, a fixed annuity or a variable annuity… Whatever best fits their situation is fine and it doesn’t matter much for tax purposes.  When this is done, the basis of both contracts transfers over and we now have a basis of $181,000 and an annuity value of $203,000.  We can’t turn around and immediately surrender the annuity but we’ve saved ordinary income taxes on $121,000.  On this guy’s tax return in California, we’re talking a meaningful number.  In addition, when they do access the money, the inevitable taxation has been deferred significantly.  (This is just one of the benefits they are realizing for their modest consulting fee!)

I have cumulatively saved policy owners vast amount of taxes with this strategy.  Just think of how many policies are surrendered around the country which waste this opportunity.  I have no doubt it is many millions of dollars in unnecessary taxes.

What if you don’t own multiple policies to play against each other like this?  I’ve done even more of those.  A real case involved an older couple with a failing policy with $33,000 of cash value and a $101,000 basis.  Rather than surrender the contract, we 1035’d it into a deferred annuity where the value could theoretically triple with no taxes.

A more exciting case involved a very wealthy individual who had poured $700,000 into a $10,000,000 policy which was failing.  I was brought in when there was only $10,000 of remaining cash value.  Same principle holds but who cares about a $10,000 annuity with a $700,000 basis?  It will never grow enough to matter.  However… what if the client added $1,000,000 to the existing annuity?  (Any amount would work the same but he had the money.)  Now we have a $1,010,000 annuity with a $1,700,000 basis; the original basis plus the new deposit.  We’ve just saved taxes on $690,000 of growth at ordinary income tax rates.  That matters.  “Underwater” policies are surrendered by the truck load with wasted basis.  In fact, the chances one of your clients hasn’t done so is minimal.

The final point is that we don’t have to always limit tax saving to gains inside the annuity.  Since life insurance policies and annuities have different rules relative to taking advantage of realized loss on surrender, within certain parameters the annuity in a loss position can be surrendered with the realized loss productively utilized.  But what about irrevocable trusts with no other assets other than the original life insurance contract and where your client doesn’t want to contribute additional assets to the trust to take advantage of this?  If their trust is a grantor trust they may be in luck.  Straight from the website we find “An irrevocable trust can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Code §§ 671, 673, 674, 675, 676, or 677 are met. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.”  This means that a trust owned policy in a loss position may be useful for personal tax planning as presumably tax losses roll uphill the same as gains. This would open the door to a substantively wider audience.

In summary, don’t allow this to become a lost opportunity and lose the chance to take maximum advantage of loss.  Lost losses would make your client a loser.  Only you can prevent the losing proposition of not utilizing otherwise losable losses.


This material is for informational purposes only and should not be considered tax or legal advice.  Any person needing tax or legal assistance should contact their respective advisors.

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Success Story: Managing Life Insurance – What does that mean?

September 21st, 2016 No comments

Sometimes people ask me what I mean when I say life insurance needs to be managed over the duration of the contract.  Most think that means making sure the premiums are paid but, while obviously important, that’s not really it.

Making sure contributions to a policy are sufficient given a decades long reduction in the interest market is something I talk about incessantly but there is so much more to it.  Here is a very simple example:success-stories-logo

An advisor I work with brought me the policy on his own life. It turned out to be a traditional whole life contract with a well-known carrier.  There was no issue with the company but the policy was deteriorating due to the loan it was carrying.  I don’t recall if the loan was a result of actually pulling money out of the contract or if the loan was created by the policy “auto loaning” itself money to pay premiums which weren’t paid out of pocket.  It doesn’t really matter.  We can even assume the policy owner funded the contract as originally proposed and a sales ledgers might have even shown he could withdraw money with no ill effect. For full post, click here…

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Skyrocketing Premiums

September 7th, 2016 No comments

Recently I read the August 13, 2016 New York Times on-line article “Why Some Life Insurance Premiums are Skyrocketing”. It sounded sensational enough to get my attention and there was a glint of a good message and it made a number of valid points but, based on what I understand about the market, it was also somewhat misleading. The misleading aspect of it centers on the purported cause of the skyrocketing premium increases. For full post, click here…

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Oh, the Humanity…

August 11th, 2016 No comments

It’s time for another telling of an old story. Over the course of my career I have seen an evolution in awareness relative to issues with life insurance policies. Even though life insurance policies have been “under performing” since the interest rates started falling in the eighties, during presentations a decade or more ago (twenty years into sinking interest rate markets and dividends) when I asked an audience of professionals how many of them had dealt with clients facing these issues, very few hands went up, often times none. Of course their clients’ policies were suffering but they and the policy owners simply weren’t aware of it at that point. For full post, click here…

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Recent Ruling Underscores Old Issue

July 7th, 2016 No comments

In my never ending attempt to convince people of facts regarding life insurance products and management, I do not hesitate to pull in firepower from those more recognized and influential than me. Recently I received an update from Leimberg Information Services which opened with the following quote from Howard Zaritsky, lead author of Zaritsky and Leimberg – Tax Planning with Life Insurance: Analysis and Forms 2nd Edition, (800 950 1216):

“This issue keeps coming before the courts; there are numerous cases in which the insured has surrendered or cancelled an insurance policy or it has been terminated by the insurer, and the difference between the insured’s investment in the contract and the amount of the discharged loans has been realized as income. For full post, click here…

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Sleight of Hand?

June 24th, 2016 No comments

A love / hate relationship.  That’s basically how I describe my relationship with the life insurance industry.  One day I witness the unduplicable benefits of a well designed and astutely managed life insurance portfolio and the next I’m called in to salvage what I can of the most recent train wreck my advisor network has stumbled across.

In an industry which has struggled for years to gain a sense of trust and credibility, I get frustrated that it continues to shoot itself in the foot on a regular basis.  Here’s a quick example of something which isn’t new but is simply what came across my desk today. For full post, click here…

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Not an Expert on Life Insurance? Call One!

June 2nd, 2016 No comments

Through experience, an accountant relationship of mine has learned to pass just about anything related to life insurance by me when he sees any clients dealing with something.  Usually this is initially a simple phone call on a generic basis but sometimes includes shooting me documents with client information redacted.

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He had one older business owner who was in the process of selling out to other shareholders and a couple million of term insurance policy owned by the company was being transferred out to him.  His plan was to convert $500,000 and gift the policy to a charity.  He intended to let the remaining $1,500,000 lapse.

There is only one thing that should come to mind in a scenario like this: Life Settlement.  I had no idea if he would be interested but why would one ever choose to not pick up the phone to make a call to discuss? For full post, click here…

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StressTesting a Premium Financing Deal

May 10th, 2016 No comments

I have to admit I am sometimes cynical of the strategy du jour in the life insurance sales and marketing world. While the industry is incredibly innovative regarding ideas and strategies and brings amazing opportunity to many consumers, sometimes the original, sound idea is bastardized into something which bears little likeness to its namesake.

This is especially frustrating for those in the market who play on the straight & narrow, even those on the cutting edge who have their client’s best interests at heart. None-the-less, it is not difficult to understand the temptation to push an idea to its limits and to over market and even misposture what it is and can accomplish. For full post, click here…

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Life Insurance and Fidelity Charitable

April 14th, 2016 No comments

As is often the case, we learn the most when something goes wrong. Recently, I was working with an advisor who has a client with a foundation, or at least that is what we thought. The foundation is for all of the same purposes as most people who have a foundation; to further the goals of non-profit and charitable interests of the donor(s). For full post, click here…

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Success Story: “Shooting from the Hip” – Hit or Miss

April 5th, 2016 No comments

An attorney member of the Wealth Council posted a question on the list serve asking for referrals to a fee-based life insurance advisor.  Another member directed him to me and I ended up in an engagement with his client.

It turns out a woman in her eighties had recently lost her husband and someone had advised her and her family that the $1,500,000 of insurance in force on her life was “garbage” and they should get rid of it.

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Fortunately, the attorney recommended an independent analysis before any action was  taken.  It ended up that there were two policies, one for $500,000 and one for $1,000,000.  One was originally a survivor life policy.  The $500,000 policy was a well-funded Guaranteed UL policy with a highly rated and well respected carrier.  The $1,000,000 was with another decent carrier and was a current assumption UL contract which was modestly underfunded. For full post, click here…

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