The Economy Has Changed

The September 11 tragedy has changed many things. Certainly, the economy has changed. Exactly how—and for how long—is yet to be determined.

Since September 11, I get more phone calls from readers of this column. The ways the new economic winds have impacted them are all over the map: A few enjoy the best profits ever, but most are flat or are watching their bottom line drift lower. Others are bleeding red ink.

One week after Thanksgiving, the talking heads on the TV news are using the R word: Recession.

In general, callers are more serious and more business-like. Suddenly, they are taking to heart what I write most about in this column: planning. Remember, most business owners spell P R O C R A S T I N A T O R when it comes to planning. Now, they want to start their planning yesterday! This includes basic stuff, such as a business-transfer plan, retirement plan and estate plan.

Most callers are business owners who have done all or some of their planning but now are having trouble meeting their life insurance premium payments out of current cash flow. Most plans involve insurance coverage for estate liquidity. Insurance to fund buy/sell agreements, split-dollar insurance plans and key person insurance follow in that order. Some of the callers need or want additional insurance coverage but have the cash flow shortage problem.

Okay, let's start the search for the premium dollars. Remember, the techniques and strategies that follow are just as successful in good times as in a down economy.

Analyze your existing insurance. This first step is a must. Over the years, we have analyzed thousands of life insurance portfolios for our clients. In 92 percent of the cases, we are able to buy significantly more insurance (typically 50 percent more) for the same premium dollars or buy the exact same dollar death benefit coverage for much less annual premium cost. For married couples over age 50, we usually find simply switching from single-life coverage (almost always on the husband) to second-to-die coverage (pays the death benefit after both husband and wife die) will lower your premium by about 40 percent. In a recent case, we cut the premium cash from $28,000 per year to $18,000 per year and raised the death benefit from $2 million to $2.7 million. The client loved it.

The first step defines the amount of insurance you need or want. The second step is to find the premium dollar. There are dozens of strategies, but following are the strategies that we use most often to slash the out-of-pocket cost of insurance.

1. You have $200,000 or more in your qualified plan(s): pensions, profit-sharing, 401(k), IRA and the like. The key strategy is a subtrust, which allows you to pay your premiums using the dollars in your qualified plan(s). Instead of using your precious personal dollars to pay premiums, you can use plan dollars. In effect, because of tax savings, the IRS pays about 75 percent of your premiums.

2. You have stocks, real estate or other income producing investments. Create a family limited partnership (FLIP) that winds up owning your investments. Then the FLIP pays your insurance premiums, typically using a split-dollar insurance plan.

3. You have accumulated a significant amount of cash surrender value (CSV) in your (or your company's) current insurance policies. The larger your CSV, the better (but it should be at least $50,000). You can now enter the wonderful world of premium financing. The concept is simple: You use the CSV of your existing policies as collateral for bank loans to pay for your existing and new insurance. Typically, your out-of-pocket premium costs will drop by 60 percent or more.