Are You Losing 30 Percent Of Your Insurance Premiums?

Buying life insurance is the best method to legally beat estate tax laws. Here’s a typical real-life example: Joe and Mary bought a $3 million second-to-die life insurance policy, which was owned by an irrevocable life insurance trust (ILIT). After paying $1,020,590 in premiums ($30,927 per year) for 33 years, Mary dies (Joe had died five years earlier). Because Mary is the second to die, the ILIT received the $3 million death benefit. The entire profit, almost $2 million, ($3 million less the $1,020,590 of premiums paid) was income tax-free. The ILIT protected every dollar of the $3 million from the estate tax.

Involving insurance in an estate plan can be a double-edged sword. The good edge contains tax-free benefits—no income tax and no estate tax. The other edge of the sword is that you must pay premiums. We have found that, on average, 70 percent of the time the policies cost 30 percent more than they should.

How do we know this? We have insurance experts analyze our clients’ existing insurance policies. Our consultants find that approximately 70 percent of the time, they can find an insurance carrier of equal or better quality and save the policy owner 30 percent or more in annual premiums.

Over the years, we have seen many examples of well-meaning insurance consultants recommending the wrong insurance products. It’s sad but true: often, the product is too expensive for the client’s needs, or the consultant doesn’t change the coverage when the existing policy becomes obsolete or when the client’s insurance needs have changed.

What follows are three common mistakes that we frequently see repeated.

Mistake No.1—Jim (37 years old) was paying $31,430 for a $3 million death benefit. He was over-paying the early premiums so the premiums would stop after a period of time (Jim had 15 more years to pay). Remember, if you intend to keep the policy till the day you die, the best deal is to pay premiums every year until you go. If the need for insurance is temporary, then buy term insurance. Jim’s new premium is only $14,982 for his new $3 million universal life policy. He actually traded his old policy for the new one in a tax-free transaction.

If one or more of your policies is paid up and you don’t have to pay any more cash premiums, you are shooting yourself in the foot. Provided you’re still healthy, your current policy can be traded up (tax-free) for a larger death benefit without any further cash premiums.

Mistake No. 2—Joe, age 50, owned a policy with a $1.5 million death benefit, while paying a $14,941 premium per year (to be paid until age 100). The policy was purchased back in 1993 and had a cash surrender value of $246,786. Joe’s mistake (really his insurance agent’s mistake) was not checking the insurance market every few years to see what was new and available. We helped Joe trade his old policy for a $2 million death benefit ($500,000 increase) policy and future premiums of only $9,097 (also payable to age 100, but $5,844 per-year less than the old policy).

Mistake No. 3—Jack, age 61 and married to Mary, age 60, had a portfolio of policies on his life. All were owned by an irrevocable life insurance trust (ILIT) totaling $13.8 million. Premiums were $147,958 per year and the cash surrender value (CSV) was $1.5 million.

We found that Jack needed only second-to-die coverage since his three kids were grown.

With Jack’s new insurance plan, $1.5 million of CSV in the ILIT (after the old policies were terminated) was invested. Additionally, Jack has $3 million in a rollover IRA. We used a strategy called a “Retirement Plan Rescue” which allowed us to purchase new second-to-die coverage (on Jack and Mary) for $23 million.