Published 11/21/2011

Help Your CPA Help You

In theory, CPAs’ jobs are simple: They must use their knowledge to help you maintain and improve your economic and tax health.

Irvine Blackman, Brian I. Whitlock

Any CPA’s ability to help you is more a matter of experience than knowledge. However, no matter how knowledgeable or experienced, none of them know it all. Like it or not, specific strategies, methods or concepts that can help clients sometimes fall through the cracks unnoticed. This column is about a simple strategy that few CPAs (or lawyers or other professionals) know exists. This strategy can provide clients and their families with a huge, tax-free increase in wealth.

I have helped implement this strategy hundreds of times. What guides me? Not much knowledge, but my years of experience. You see, in this case, my job is to recognize the opportunity and then call in an expert who can implement the strategy with ease. The client is always delighted.

Let’s introduce the strategy by starting with some basic facts, based on my experience. First, 70 percent of life insurance policies are outdated. This means that these policies are 10 years old or older and are simply not capable of performing like the new policies available in the current marketplace.

Here’s what makes the strategy a financial bonanza: 90 percent of clients who replace their old policy with a new one wind up with a significantly increased death benefit. Also, there is no increase in out-of-pocket cash for premiums. Every dollar of those death benefits are tax-free. No income tax. No estate tax.

Aha! Taxes—legally avoiding them—are in the CPA’s realm of expertise. But life insurance? Forget it. Almost every CPA is like a fish out of water when it comes to life insurance. Here’s the problem: Neither the client nor the CPA knows that those old life insurance policies are a treasure trove of opportunity to increase the wealth of the client’s family.

The best way to see how the strategy works is to look at some real-life examples. The following three examples show the wealth-creating power of this opportunity.

• Example 1: Joe (age 82) and his wife, Mary, (84) had a 45-year-old policy on Joe with a death benefit of $396,000 and a cash surrender value (CSV) of $355,000. Joe stopped paying premiums many years ago. My insurance consultant used the $355,000 CSV to purchase a second-to-die policy (on Joe and Mary) with a $706,000 death benefit. That’s a 78-percent increase over the original $396,000 death benefit. Also, there was no out-of-pocket cost to Joe.

• Example 2: Larry (age 58 and single) had a 15-year-old policy on his life, which included a death benefit of $788,631 and a CSV of $239,027. Larry paid a $9,000 premium annually. My insurance guru traded in the old policy (tax-free under the Internal Revenue Code) for a new policy with a $1,702,127 death benefit (a 116-percent increase). The $9,000 annual premium continued.

• Example 3: Mildred, a 71-year-old widow, owned a 26-year-old policy, which included a $10 million death benefit and a $2,880,000 CSV. Mildred’s premium was $68,000 per year, but because the CSV was large enough to self-carry the policy, her intent was to pay no more out-of-pocket premiums (instead borrowing against the CSV). My insurance consultant traded Mildred’s old policy (tax-free) for a new one with a $12,670,000 death benefit guaranteed and no further premium payments by Mildred.

Okay, so you are wondering if you can join the tax-free, wealth-building fun like Joe, Larry and Mildred. Actually, it’s easy to join. Just meet the following three requirements:

1. Are you 48 years old or older?

2. Do you have a policy that’s about 10 years old or older with a CSV of $200,000 or more?

3. Are you healthy for your age? (If you are married, is at least one person healthy?)

If you answered all questions “yes,” you should follow through with this strategy to determine how much additional tax-free wealth can be created for your family.

My guess is that there are millions of hidden policies like those in the three examples above, in which the insured will go to heaven and the insurance company will be enriched unjustly instead of the insured’s family enjoying those additional death-benefit dollars. So how do we get those millions of policies looked at and the strategy implemented?

I have a simple plan to convert those hidden policies to their largest dollar potential: Get this article to your CPA (in person or via fax, email or snail mail).

This paragraph and the next is for your CPA: Every year when you do your client’s tax return or year-end business audit, ask the three questions above to determine whether your client meets the requirements. If so, bingo! Call your favorite knowledgeable and experienced insurance consultant to review your client’s policy/policies.

Also, when doing a year-end business audit, any insurance carried to fund a buy/sell agreement, keyman insurance or other life insurance (owned or paid for by the company) should also be put through the above three-question routine.