Navigating a Life Insurance Funding Strategy

Transcription

1 Navigating a Life Insurance Funding Strategy A Supplemental Illustration Prepared for Valued Client Presented by Premier Producer Premier Brokerage 1 Sales Drive Anytown, USA Life insurance is issued by Symetra Life Insurance Company, th Ave NE, Suite 1200, Bellevue, WA Products are not available in all U.S. states or any U.S. territory. Symetra Life Insurance Company th Avenue NE, Suite 1200 Bellevue, WA is a flexible-premium adjustable life insurance policy with index-linked interest options. Symetra is a registered service mark of Symetra Life Insurance Company. LIM-1405 Please refer to the basic illustration for guaranteed elements and other important information. 8/17

2 Important Information About This Supplemental Illustration A complete understanding of the Premium Financing illustration shown here requires an understanding of the variables involved and the risks associated with each. This understanding will allow you to evaluate the strategy of using a third party loan to fund a life insurance policy. The life insurance application process and the premium finance process are separate transactions. The life insurance application must be approved prior to the lender starting finalizing the third-party loan arrangement. There is no guarantee that the policy will perform as illustrated or the designated beneficiaries will receive the amount of money illustrated. This supplemental illustration is not intended as investment, accounting, legal or tax advice and Symetra Life Insurance Company does not give investment, accounting, legal or tax advice. This illustration does not attempt to provide more than general U.S. tax information associated with life insurance policies. This information is written to support the promotion or marketing of life insurance issued by Symetra Life Insurance Company. You should seek advice based on your particular circumstances from an independent tax advisor. Discussions of the various strategies and issues involved in premium financing are based on our understanding of the applicable federal income, gift and estate tax laws in effect at the time of publication. However, these laws are subject to interpretation and change, and there is no assurance that the relevant tax authorities will accept our interpretations. The information presented here does not consider the impact to you of applicable state laws. Premium financing is very complex and includes market uncertainty, potential loss of collateral, and the possibility of a policy lapse. Additional out of pocket contributions may be required during the term of the loan and for the loan repayment. It is important that you consider a well planned exit strategy before entering into a premium financing arrangement. The lender in a premium financing arrangement is an independent third-party lender and is not affiliated with Symetra Life Insurance Company. The agreed upon loan terms and loan agreement are those of the third party lender and not those of Symetra Life Insurance Company. Symetra Life Insurance Company does not endorse any third party lenders. An owner must qualify for the third-party loan and meet the collateral requirements of the lender. There is a chance that the lending institution could refuse to make a loan or demand repayments before a death claim is made on the policy. Market fluctuations may affect loan interest rates and could make the strategy less attractive. You should have a planned strategy to repay the debt in the future. interest to purchase or carry life insurance is generally not tax-deductible. This Premium Financing supplemental illustration is intended to demonstrate various planning alternatives based upon the assumptions and data provided by you, the client. The accuracy of this data will enhance the value of this analysis. Please refer to the basic illustration for guaranteed elements and other important information. Page 2 of 8

3 The Premium Financing Solution Premium financing is typically arranged between a third-party lender and an individual, a business owner or an Irrevocable Life Insurance Trust (ILIT). Depending on ownership, you, a business or trustee purchases life insurance on your life or the lives of you and your spouse and finances the premiums with a third-party loan. The policyowner assigns the life insurance policy's cash value as collateral, and additional assets are assigned as collateral, if necessary. 1 interest is paid to the lender by the policyowner. interest will vary from year to year and is based on the London Interbank Offered Rate (LIBOR) or the Prime rate plus a fixed spread for the term of the loan. 2 Upon death of the insured(s), the policy pays the death benefit, which can be used to pay the lender the outstanding loan amount, and the beneficiary(ies) receives the remainder. Ideally, the loan will be repaid during the insured(s) lifetime from the policy cash value, other assets or a combination of policy cash values and other assets, and the collateral assignment and assets posted as collateral will be released by the lender. 1 Please see the discussion about MECs on page 5 of supplemental illustration. 2 The London Interbank Offered Rate (LIBOR) is the rate of interest at which banks borrow funds from other banks, and the Prime rate is a commonly used short-term interest rate in the U.S. banking system. Both rates are published daily on various financial websites. 3 Any gift to an ILIT that is intended to be a present interest and completed gift must be made to an ILIT, which contains Crummey power language. The applicable federal estate tax exclusion amount (indexed for inflation) is $5.49 million per individual in In 2017, the lifetime gift tax exemptive and generation-skipping transfer tax exemption is $5.49 million (indexed for inflation) and the maximum tax rate for both of these taxes will be 40%. (Source: Frequently Asked Questions on Gift Taxes, IRS, accessed November 2016: For current information and/or assessment of your particular situation, please consult your tax professional. Please refer to the basic illustration for guaranteed elements and other important information. Page 3 of 8

4 exit strategies An exit strategy or repayment plan is a key element to help reduce the overall risk of the premium finance arrangement. Several strategies are available: Policy cash values If the policy has value that exceeds the outstanding third party loan balance, and the lender agrees, you can withdraw and/or borrow policy cash values to repay the third party loan value. Typically, the third party lender will allow access to the policy's cash value to repay any outstanding loans. The distribution of policy cash values will reduce the death benefit and may cause the policy to lapse. 4 Retained business or other capital Business or other capital that have been retained through the borrowing of funds, or cash flow generated from the sale of assets, can be used to repay the loan. For estate planning needs: Other ILIT resources The ILIT may repay the outstanding third party loan from other trust assets. Additional gifts Over time, additional gifts can be made to the ILIT in the form of payments that fall within the annual gift tax exclusions and/or lifetime gift tax exemptions in order to repay the third party loan. 5 What are the benefits A third party financing arrangement to fund life insurance premiums can help you: Obtain needed life insurance coverage Fund or pay for significant life insurance coverage for estate planning or business succession purposes. Increase liquidity The death benefit proceeds can provide necessary liquidity for beneficiaries or businesses and, if properly structured, can be paid outside of the insured's or grantor's taxable estate. Retain capital Avoid liquidating and potentially continue growing assets in your existing portfolio. Defer income or capital gains taxes Liquidated assets may be subject to income or capital gains taxes. Borrowing funds from a third party to pay life insurance premiums may help defer the recognition of taxable gains on appreciated assets until the assets can be disposed of in a tax advantaged transaction or at death, provided a step up in basis is available. For estate planning needs properly structured outside of your estate in an ILIT: Minimize gift taxes Gift taxes on policy premiums may be minimized or eliminated when the policy is owned by an irrevocable trust, as third party loans made to the ILIT to pay premiums may not be subject to gift taxes. 6 Leverage gifts Third party loan interest due is typically lower than the annual premium during the early years of the arrangement, which may provide opportunities to use annual exclusion and lifetime gift tax exemptions to make additional gifts or transfer other assets free of gift and estate tax. 7 4 Policy loans and withdrawals are only available prior to the death of the insured(s) and will reduce the policy's death benefit and cash value. This may cause the policy to lapse and may be taxable. Withdrawals or loans on modified endowment contracts (MECs) may be subject to federal income tax and an additional 10% tax on amounts taken prior to age 59½. 5 Refer to footnote 3 on page 3 for source information. 6 See private letter ruling (PLR) The IRS found that life insurance proceeds payable to a trust were not included in the insured's estate when an ILIT created by the insured had borrowed funds from the insured to pay the premiums. IRS private letter rulings do not constitute legal precedent and can be relied on only by the taxpayers who received them. 7 Refer to footnote 3 on page 3 for source information. Please refer to the basic illustration for guaranteed elements and other important information. Page 4 of 8

5 Key Considerations and Risks interest rates Typically, loan interest rates are established by the lender on an annual basis and can increase, which could result in higher loan interest payments than originally anticipated. Life insurance policy performance A lower than anticipated policy performance may require borrowing additional amounts to fund the policy and keep it in force. Policy interest crediting rates can fluctuate, and thus require that you post additional collateral for the third party loan. Collateral Additional collateral may be required based on the performance of the policy cash value and other pledged assets. If the third party loan goes into default, the assets pledged as collateral in addition to the policy's cash value may be called by the lender and possibly lost. Interest For individuals, funds borrowed to pay life insurance premiums are generally classified as personal interest and are not deductible for income tax purposes. 8 Businesses may have different circumstances. Modified endowment contracts (MECs) Pledging a life insurance policy classified as a modified endowment contract (MEC) as collateral will be treated as a distribution from the policy, even if no actual distributions have been made. In this case, any policy cash value in excess of basis (premium paid) is taxable as ordinary income. In addition, an additional 10% tax may be imposed to the extent there is a gain in the contract if the owner of the policy is under age 59½. 9 Personal guarantee In some instances, the lender may require a personal guarantee from an individual who is also the trust grantor. The personal guarantee of the third party loan may cause gift or estate tax consequences. You should consult with your personal tax advisor for more information Interest on indebtedness to acquire or maintain a life insurance policy is generally considered personal interest and usually not deductible. Refer to IRC Section 163(h) and IRC Section 264(a). 9 Refer to Internal Revenue Code (IRC) 72(e)(10) and (IRC) 72(e)(4)(A). 10 Refer to Internal Revenue Code (IRC) and Private Letter Ruling (PLR) Please refer to the basic illustration for guaranteed elements and other important information. Page 5 of 8

6 Initial life insurance crediting rate: 6.92% Third-Party Information Premium Financing Summary Borrower Information Insurance Interest Interest Cumulative Life Insurance Cash Surrender Additional Collateral Required Net Cumulative Net EOY Retained Capital Balance Life Insurance Retained Capital Balance + Death Benefit IRR at Year Age Premium Amount Rate 11 Due Repayment Amount Value 90%¹² Outlay %¹⁴ Death Benefit Net of Death $515,806 $515, % $20,632 $0 $515,806 $418,930 $138,769 $20,632 $20,632 $0 $10,515,806 $10,000, % 2 49 $515,806 $515, % $43,844 $0 $1,031,612 $869,984 $248,626 $43,844 $64,476 $0 $11,031,612 $10,000, % 3 50 $515,806 $515, % $69,634 $0 $1,547,418 $1,314,967 $363,948 $69,634 $134,110 $0 $11,547,418 $10,000, % 4 51 $515,806 $515, % $98,003 $0 $2,063,224 $1,799,277 $443,875 $98,003 $232,113 $0 $12,063,224 $10,000, % 5 52 $515,806 $515, % $128,952 $0 $2,579,030 $2,325,577 $486,011 $128,952 $361,064 $0 $12,579,030 $10,000, % 6 53 $515,806 $515, % $162,479 $0 $3,094,836 $2,962,712 $428,395 $162,479 $523,543 $0 $13,094,836 $10,000, % 7 54 $515,806 $515, % $198,585 $0 $3,610,642 $3,719,775 $262,845 $198,585 $722,128 $0 $13,610,642 $10,000, % 8 55 $0 $0 5.75% $207,612 $0 $3,610,642 $4,004,901 $6,231 $207,612 $929,740 $0 $13,610,642 $10,000, % 9 56 $0 $0 6.00% $216,639 $0 $3,610,642 $4,303,803 $0 $216,639 $1,146,379 $0 $13,610,642 $10,000, % $0 $0 6.00% $216,639 $0 $3,610,642 $4,617,404 $0 $216,639 $1,363,017 $0 $13,610,642 $10,000, % $0 $0 6.00% $216,639 $0 $3,610,642 $4,969,052 $0 $216,639 $1,579,656 $0 $13,610,642 $10,000, % $0 $0 6.00% $216,639 $0 $3,610,642 $5,347,214 $0 $216,639 $1,796,294 $0 $13,610,642 $10,000, % $0 $0 6.00% $216,639 $0 $3,610,642 $5,754,098 $0 $216,639 $2,012,933 $0 $13,610,642 $10,000, % $0 $0 6.00% $216,639 $0 $3,610,642 $6,192,091 $0 $216,639 $2,229,571 $0 $13,610,642 $10,000, % $0 $0 6.00% $216,639 $0 $3,610,642 $6,663,901 $0 $216,639 $2,446,210 $0 $13,610,642 $10,000, % $3,610,642 $0 6.00% $0 $3,610,642 $0 $3,274,483 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $3,511,739 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $3,766,237 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $4,039,173 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $4,331,794 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $4,645,404 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $4,981,388 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $5,341,333 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $5,726,852 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $6,140,127 $0 $0 $2,446,210 $0 $10,000,000 $10,000, % $0 $0 6.00% $0 $0 $0 $6,583,827 $0 $0 $2,446,210 $0 $10,049,735 $10,049, % $0 $0 6.00% $0 $0 $0 $7,062,997 $0 $0 $2,446,210 $0 $10,543,506 $10,543, % $0 $0 6.00% $0 $0 $0 $7,577,540 $0 $0 $2,446,210 $0 $11,068,864 $11,068, % $0 $0 6.00% $0 $0 $0 $8,126,935 $0 $0 $2,446,210 $0 $11,623,369 $11,623, % $0 $0 6.00% $0 $0 $0 $8,713,272 $0 $0 $2,446,210 $0 $12,208,368 $12,208, % Totals: $0 $3,610,642 $2,446,210 $3,610,642 $2,446, interest rates will vary from year to year. Refer to footnote 2 on page 3 for more information. 12 s are required to be 100% collateralized at all times. This assumes the lender will accept an estimated 90% of the life insurance policy cash value as collateral. 13 Net Outlay is the borrower's annual out of pocket amount. 14 The End of Year (EOY) Retained Capital Balance is the Net Outlay less Interest Due accumulated at 5%. 15 The Internal Rate of Return (IRR) at Death is the annual effective after tax interest rate at which the Net Outlays must be accumulated in order to match the Retained Capital Balance plus the Death Benefit Net of at the end of a specified year. The purpose of this supplemental illustration is to demonstrate how a premium financing arrangement can be used to purchase life insurance. In addition, it shows the amount of life insurance death benefit protection and any retained capital balance, reduced by the outstanding loan. This supplemental illustration is hypothetical and is not intended to serve as a projection. Investment fees, including potential redemption charges, are not reflected in this illustration. Please refer to the basic illustration for guaranteed elements and other important information. Page 6 of 8

7 Initial life insurance crediting rate: 6.92% Third-Party Information Premium Financing Summary Borrower Information Insurance Interest Interest Cumulative Life Insurance Cash Surrender Additional Collateral Required Net Cumulative Net EOY Retained Capital Balance Life Insurance Retained Capital Balance + Death Benefit IRR at Year Age Premium Amount Rate 16 Due Repayment Amount Value 90%¹⁷ Outlay %¹⁹ Death Benefit Net of Death $0 $0 6.00% $0 $0 $0 $9,338,762 $0 $0 $2,446,210 $0 $12,826,755 $12,826, % $0 $0 6.00% $0 $0 $0 $10,005,724 $0 $0 $2,446,210 $0 $13,482,070 $13,482, % $0 $0 6.00% $0 $0 $0 $10,716,555 $0 $0 $2,446,210 $0 $14,178,062 $14,178, % $0 $0 6.00% $0 $0 $0 $11,471,710 $0 $0 $2,446,210 $0 $14,914,376 $14,914, % $0 $0 6.00% $0 $0 $0 $12,272,891 $0 $0 $2,446,210 $0 $15,694,131 $15,694, % $0 $0 6.00% $0 $0 $0 $13,121,774 $0 $0 $2,446,210 $0 $16,517,159 $16,517, % $0 $0 6.00% $0 $0 $0 $14,019,933 $0 $0 $2,446,210 $0 $17,384,324 $17,384, % $0 $0 6.00% $0 $0 $0 $14,966,978 $0 $0 $2,446,210 $0 $18,295,277 $18,295, % $0 $0 6.00% $0 $0 $0 $15,965,894 $0 $0 $2,446,210 $0 $19,254,663 $19,254, % $0 $0 6.00% $0 $0 $0 $17,017,656 $0 $0 $2,446,210 $0 $20,264,816 $20,264, % $0 $0 6.00% $0 $0 $0 $18,122,240 $0 $0 $2,446,210 $0 $21,326,701 $21,326, % $0 $0 6.00% $0 $0 $0 $19,279,299 $0 $0 $2,446,210 $0 $22,440,320 $22,440, % $0 $0 6.00% $0 $0 $0 $20,489,634 $0 $0 $2,446,210 $0 $23,606,342 $23,606, % $0 $0 6.00% $0 $0 $0 $21,752,579 $0 $0 $2,446,210 $0 $24,823,046 $24,823, % $0 $0 6.00% $0 $0 $0 $23,070,535 $0 $0 $2,446,210 $0 $26,083,896 $26,083, % $0 $0 6.00% $0 $0 $0 $24,447,436 $0 $0 $2,446,210 $0 $27,388,160 $27,388, % $0 $0 6.00% $0 $0 $0 $24,447,436 $0 $0 $2,446,210 $0 $28,739,535 $28,739, % $0 $0 6.00% $0 $0 $0 $25,893,044 $0 $0 $2,446,210 $0 $30,146,557 $30,146, % $0 $0 6.00% $0 $0 $0 $27,425,749 $0 $0 $2,446,210 $0 $31,604,455 $31,604, % $0 $0 6.00% $0 $0 $0 $29,059,888 $0 $0 $2,446,210 $0 $33,106,511 $33,106, % $0 $0 6.00% $0 $0 $0 $30,831,709 $0 $0 $2,446,210 $0 $34,646,878 $34,646, % $0 $0 6.00% $0 $0 $0 $32,796,505 $0 $0 $2,446,210 $0 $36,227,540 $36,227, % $0 $0 6.00% $0 $0 $0 $35,066,388 $0 $0 $2,446,210 $0 $37,856,851 $37,856, % Totals: $0 $3,610,642 $0 $3,610,642 $2,446, interest rates will vary from year to year. Refer to footnote 2 on page 3 for more information. 17 s are required to be 100% collateralized at all times. This assumes the lender will accept an estimated 90% of the life insurance policy cash value as collateral. 18 Net Outlay is the borrower's annual out of pocket amount. 19 The End of Year (EOY) Retained Capital Balance is the Net Outlay less Interest Due accumulated at 5%. 20 The Internal Rate of Return (IRR) at Death is the effective after tax interest rate at which the Net Outlays must be accumulated in order to match the Retained Capital Balance plus the Death Benefit Net of at the end of a referenced year. The purpose of this supplemental illustration is to demonstrate how a premium financing arrangement can be used to purchase life insurance. In addition, it shows the amount of life insurance death benefit protection and any retained capital balanced, reduced by the outstanding loan. This supplemental illustration is hypothetical and is not intended to serve as a projection. Investment fees, including potential redemption charges, are not reflected in this illustration. Please refer to the basic illustration for guaranteed elements and other important information. Page 7 of 8

8 8.22% 8.05% 7.90% 7.76% 7.64% 7.52% 7.42% 7.33% 7.25% 7.18% Premium Financing Funding Life Insurance with Premium Financing Summary Year 25 (End of Year Values) Age at Beginning of Summary Year: 72 Cumulative Premiums: $3,610,642 Cumulative Net Outlay: $2,446,210 Retained Capital Balance + Death Benefit Net of : $10,000,000 IRR at Death 8.68% Pre-tax IRR at Death (35% Tax Rate): 13.36% Rates of Return The Internal Rate of Return (IRR) is the annual effective after-tax interest rate at which the Net Outlays must accumulate in order to match the value of the Retained Capital and the Death Benefit Net of at the end of the referenced year. By the end of year 25, age 72, the Net Outlays must have earned an average annual interest rate of 8.68% after federal income taxes (13.36% before taxes) to match the Retained Capital and the life insurance policy's death benefit net of loan of $10,000, % 12.65% 12.38% 12.15% 11.94% 11.75% 11.58% 11.42% 11.28% 11.16% 11.04% 8.68% Age at Which Death Occurs Internal Rate of Return (IRR) Pre Tax IRR Please refer to the basic illustration for guaranteed elements and other important information. Page 8 of 8