LIFE AND DISABILITY INSURANCE CURRENT CASE STUDIES

Transcription

1 9/24/2013 LIFE AND DISABILITY INSURANCE CURRENT CASE STUDIES Lee Slavutin MD, CLU Stern Slavutin 2, Inc 530 Fifth Avenue NY, NY Tel: CAVEAT: This presentatin is intended t prvide guidance t financial planners n life insurance planning and prducts. It is nt intended t prvide tax, legal, r investment advice. Clients shuld cnsult their accuntant, lawyer and investment advisr fr such advice. 2 (#) 1

2 9/24/2013 CASE 1 GUARANTEED ISSUE GROUP LIFE INSURANCE FOR A LAW FIRM Large law firm lking fr mre grup life insurance cverage. Human Life Value calculatin. Advantages f grup insurance. Types f grup insurance. 3 CASE 2 CLIENT BUYING LIFE INSURANCE FOR ADULT CHILDREN Client wants t purchase plicies fr his tw daughters and tw sns-in-law. Insurance ptins. Term Insurance Cnversin Permanent Insurance Whle life Universal life Variable life Cmparing insurance plicies. 4 (#) 2

3 9/24/2013 CASE 3 SUPPLEMENTAL DISABILITY INSURANCE FOR A LAW FIRM A firm s disability insurance is capped at $30,000 per mnth. The firm wants supplemental insurance fr partners wh earn ver $600,000 per year. The need fr disability insurance. Keeping disability insurance tax-free. Benefits f a grup insurance rate. Mandatry vs. vluntary participatin. The mechanics f supplemental plicies. Partial disability benefits. 5 CASE 4 FAMILY BUSINESS BUY/SELL 4 brthers wn family manufacturing business and the real estate where business is lcated. Buy/Sell Agreement prvisins. Guarantees the business will remain family-wned in death r disability. Life insurance plicy wnership. Best ptin is thrugh a separate partnership that can als wn the real estate. Life insurance chices fr this family. Term vs. Permanent. EOLI (Emplyer Owned Life Insurance) Rules. 6 (#) 3

4 9/24/2013 CASE 5 BUSINESS OWNER WITH A PERSONAL LIFE INSURANCE NEED Married client with high incme wants his family t be able t maintain expensive lifestyle, but wants t avid large tax liability. Term vs. Permanent- client preferred term. Estate tax avidance. Gift tax cncerns. Lifetime exclusin nt available. Annual gifting exclusin nt available. Lan nt a viable ptin in this case. QTIP electin. 7 CASE 6 INSURANCE AS PART OF A SPLIT DOLLAR ARRANGEMENT Elderly wman with $4 millin in life insurance wants t reduce premiums. Has quit smking. Husband has passed away. Reducing premiums n current plicies vs. applying fr new plicies. Split-Dllar Agreement cncerns. At age 85, gvernment Table 2001 must be used. Lan arrangement became mre viable. Peridically review a client s situatin. 8 (#) 4

5 9/24/2013 CASE 7 PRIVATE PLACEMENT VARIABLE LIFE INSURANCE Married client wants t reduce his incme tax liability as Grantr f GRATS fr his family. Private Placement Variable Life Insurance (PPVL) Premium prduct. Greater flexibility in underlying investments and management. PPVL vs. Variable Life Wrk similarly. PPVL n a larger scale. Higher plicy amunts, lwer cmmissin rates. Risks f PPVL. 9 CASE 8 LIFE INSURANCE FOR A CLIENT WITH A MEDICAL CONDITION Client whse diabetes is nt well-cntrlled wants t purchase life insurance. Unregulated medical cnditins may lead t difficulty r denial in purchasing. Obtain a client s medical recrds and wait if necessary t regulate his r her situatin. 10 (#) 5

6 9/24/ Lee Slavutin MD, CLU Stern Slavutin 2, Inc Principal agent at Stern Slavutin 2, Inc. Prvides insurance and financial planning services fr families, business wners and prfessinal service firms Over 30 years experience in the life insurance business Certified Life Insurance Agent and Chartered Life Underwriter Specialties include: life insurance prtfli review, split dllar, and life insurance/risk planning fr high net wrth families and business wners Medical qualificatins supprt his specialty f serving high net wrth individuals seeking substantial life insurance plicies His textbk published by Thmsn Reuters, A Guide t Life Insurance Strategies, is in its 14th editin Offers practical guidance abut incme, gift, and estate tax implicatins, as well as planning ideas Cmprehensive tl addresses the use f life insurance t prvide estate liquidity, child s educatin, find a buy/sell agreement and mre (#) 6

7 LIFE AND DISABILITY INSURANCE- CURRENT CASE STUDIES Lee Slavutin MD, CLU Stern Slavutin 2, Inc. 530 Fifth Avenue New Yrk, NY Tel: CRN CAVEAT: This presentatin is intended t prvide guidance t financial planners n life insurance planning and prducts. It is nt intended t prvide tax, legal r investment advice. Clients shuld cnsult their accuntant, lawyer and investment advisr fr such advice. Case # 1: Guaranteed Issue Grup Life Insurance fr a Law Firm Current Circumstances: A large law firm has ver 100 partners wh are currently cvered by a grup life insurance prgram. Gal: The law firm wants the partners t be cvered with a larger amunt f insurance. Key Pints: Determining adequate life insurance cverage. In determining the amunt f life insurance necessary fr smene in the family (typically husband, wife, children), ne r bth spuses is earning incme but there is usually ne spuse wh is the breadwinner. The family needs t be prtected in the event that the breadwinner dies prematurely. Human Life Value: This phrase riginated in the curt system, in assessing damages in litigatin when a persn was killed. Human Life Value is the value f the stream f incme that persn wuld have generated had he r she survived until retirement. T determine hw much wuld be needed t generate the same amunt f incme that the persn was earning, the calculatin must take int accunt inflatin and find the present value f all thse years f incme tday as a lump sum. That is the ideal amunt f mney yu want available t replace the lst incme fr when a persn dies prematurely. Example. 37 year ld man is married with tw children; earns $100,000 per year. His incme tax bracket is 30%, s he nets $70,000 per year in after tax incme. Assume he will retire at age 65, that his insurance investments will earn 5% after tax, and a 3% rate f inflatin. He will need a $1.53 millin life insurance plicy in rder t maintain the present value f his incme fr the next 28 years ($70,000 per year, adjusted fr inflatin). Lee Slavutin LS@sternslavutin.cm Page 1

8 Rule f Thumb. This varies accrding t the age f the persn, but is generally a multiple f times the individual s after tax earnings. The yunger the persn, the higher the multiple, because he r she has mre years t g until retirement. The lder the persn, the lwer the multiple. In the case f the large law firm, a typical breadwinner may require $3 millin t $10 millin wrth f life insurance. Advantage f Grup Life Insurance vs. Individual. In grup life insurance, an insurance cmpany is ging t insure everyne in the grup fr a certain amunt. The larger the grup, the higher the amunt they are willing t issue. Guaranteed issue basis. The partners d nt have t g thrugh a medical exam t be eligible fr the insurance as part f a grup. They nly have t answer sme questins as t whether they have been at wrk, and whether they have been sick r injured in the last 90 days. Types f Grup Insurance. Grup Term: Individuals are cvered by term insurance withut any cash value. The plicy terminates at a particular age, such as 70. Grup Universal r Variable Life: The partners in the law firm receive individual universal r variable life certificates. These plicies are prtable and can be taken by any individual wh decides t leave the firm befre retirement. This is typically nt available with term insurance. Slutin: The law firm pted t purchase a grup term plicy t btain lwer premiums and higher cverage fr its partners. Case #2: Client Buying Life Insurance fr Adult Children Current Circumstances: Male client, 65 years ld. Has tw daughters, each married. Gal: The client wants t purchase life insurance fr his tw daughters and his tw sns-in-law. Key Pints: The children are all yung and healthy, and will be eligible fr lwer premiums. They will want insurance as part f their financial planning nce they begin t have families. Insurance Optins: Term insurance: Will last fr a set number f years. Premiums may be level, typically in 10/20/30 year terms, r premiums may nt be level, typically increasing each year until age 80. Term insurance is advantageus because it is inexpensive. Yu can buy a large amunt withut a significant premium r cash expenditure. It is attractive fr yung families withut much discretinary incme. Cnversin. Term insurance may have a cnversin ptin, which allws a plicy t cnvert t permanent later n in life withut the insured having t underg a medical exam r prve insurability. Lee Slavutin LS@sternslavutin.cm Page 2

9 All Cnversin Optins Are Nt Equal. Hw lng is the cnversin ptin available? Full length f term r less? Are there restrictins n the prduct t which yu may cnvert? Mre ptins are preferable. Is it pssible t partially cnvert the plicy? Flexibility is preferred. Permanent Insurance: There are three basic types f permanent insurance. All types last fr the lifetime f the insured. All have cash value. If the persn surrenders r cancels the plicy, they receive sme cash value in return. Whle Life. Guaranteed level premium, guaranteed death benefit, guaranteed accumulatin f cash value. Mst cnservative f the permanent insurance ptins, likely purchased by smene lking fr a buildup f cash value as he r she gets lder. Whle life plicies can be structured where premium is paid every year fr life, r with a fixed number f premium payments. Universal Life. Premium is flexible, rather than guaranteed. Flexibility is preferred if a client is nt prepared t cmmit t a particular level f premium, and wants the ptin t increase/decrease dwn the rad. Des nt have the guaranteed buildup f cash value like the whle life plicy. Variable Life. Client is able t chse where the premiums can be invested (after deductin f expenses). Typically the insurance cmpany prvides a menu f different funds ( subaccunts ) that the plicy wner can select frm fr investment. Sme accunts are equity-based, where underlying investments are stcks. This plicy has the ptential f grwth in cash value and death benefit if the underlying investments d well. This is a riskier selectin verall, and its sales are regulated by FINRA. Additinal requirements fr this kind f plicy include prviding clients with a prspectus. Financial Strength f the insurer is imprtant The financial strength rating f the insurance cmpany selling the plicy can be checked with the fur majr rating agencies (A.M. Best, Mdy s, Fitch and Standard & Pr s). Example: Plicy purchased fr client s sn-in-law, a 34 year ld married man. The plicy is whle life and has a $500,000 death benefit, with an annual premium f $13,845. The client wants a fixed number f premiums, and will pay premiums fr 10 years nly. After 10 years, the plicy has a guaranteed cash value f $143,625. The prjected cash value based n dividends is $152,571, but this is nt a guaranteed number. The death benefit f the plicy is als prjected t grw frm $500,000 t $833,000 in 25 years, but this is als nt guaranteed. Lee Slavutin LS@sternslavutin.cm Page 3

10 A yung family may use the cash value as an emergency cash reserve. They may als brrw frm the plicy and use their cash as a depsit tward buying a hme, fr example. Case #3: Supplemental Disability Insurance fr a Law Firm Current Circumstances: A large law firm has partners wh have lng-term disability insurance in place. The current disability insurance cvers 60% f incme, but is capped at $30,000 per mnth. This des nt cver 60% f incme fr many f the attrneys at the firm wh earn incmes ver $600,000. Gal: T purchase supplemental disability insurance t cver excess incme fr attrneys earning ver $600,000. Key Pints: The Need fr Disability Insurance. Emplyees wh are actively at wrk need t pay special attentin t their disability cverage. Disability will prbably ccur mre frequently than death. The prper amunt f disability insurance is ideally the amunt needed t replace after tax incme fr an individual wh is unable t wrk, whether due t injury r sickness. Example. Suppse an emplyee is earning $100,000 per year and is in the 30% incme tax bracket. This individual s gal wuld be t replace $70,000 annually with disability insurance (apprximately $5,833 per mnth). Taxatin. Disability insurance shuld be tax-free. This is accmplished by paying fr the premium with after-tax dllars. It is imprtant nt t claim disability premium payments n yur tax return as a deductin in rder t ensure that disability payments stay tax-free. Benefits f a Grup Plan The grup plan typically allws an additinal $5,000-$15,000 per mnth f additinal cverage per partner. Disability insurance issued t a large grup is als ften ffered at a discunted premium. Plicies are individual plicies and remain prtable if any ne partner leaves the firm. Supplemental Plicies. The supplemental plicy wuld typically cver 60% f the excess that was nt cvered. Example: If a partner is making $800,000 a year, the first $600,000 is cvered by their grup plan, and he r she is paid $30,000 per mnth. The excess $200,000 in incme is cvered by the supplemental insurance, and the partner wuld receive an additinal $16,667 per mnth. Lee Slavutin LS@sternslavutin.cm Page 4

11 Partial Disability Benefits. A partial disability benefit rider shuld be added when a grup disability plicy is issued. It means that nt nly is smene cvered fr ttal disability, but als fr partial. If an emplyee is sick r injured and cannt wrk, he r she may have t take time ff frm wrk fr a few weeks r mnths. Ttal disability insurance will cver this time. Often when the emplyee returns t wrk, he r she is nt able t wrk at full capacity, but nly n a part-time basis. Ttal disability cverage in this instance des nt apply. The partial disability benefit rider will prvide cverage in such a case. Slutin: The law firm in this case fund a cmpany willing t issue supplemental individual disability insurance plicies t the partners f the firm. If the partners participated in a mandatry participatin, the insurance cmpany was willing t issue a substantial amunt f disability insurance withut evidence f medical insurability. They were nt required t take a medical exam, nly t disclse whether they had been regularly at wrk ver the past 90 days. Case #4: Family Business Buy/Sell Current Circumstances: Fur brthers wn a family manufacturing business inherited frm their parents. Three brthers are active in the business and ne brther is nt, but each is a 25% wner. The brthers als cllectively wn the real estate where the business is lcated, a building valued at abut $10 millin. The business is an S crpratin. Gal: Life and disability insurance prducts and a supprting buy/sell arrangement that will allw a buyut f any brther s share upn death r disability. Key Pints: Buy/Sell Agreement Prvisins. The buy/sell agreement needs t state that if a brther dies r becmes disabled, his share will be bught ut by the remaining brthers. A decedent s business interest is usually purchased frm his estate. The buy/sell agreement: Prevents the decedent s spuse frm having an wnership interest in the cmpany. Prevents a brther frm being able t sell his interest t an utsider. Example. Suppse the perating business is valued at $8 millin. Each brther is a 25% wner, s each share is wrth $2 millin. If a brther dies, his interest wuld be purchased frm his spuse (where it wuld pass under his will) fr $2 millin. This purchase is typically funded with life insurance. Lee Slavutin LS@sternslavutin.cm Page 5

12 The brther will be cvered by a life insurance plicy. The business receives the prceeds, and then buys the brther s share f the business back with the prceeds. The buy/sell agreement will als prvide a fair way f valuing the brther s interest, s there is n dispute regarding the value at the time f death. The buy/sell agreement als needs t cver the brther if he becmes disabled. The agreement shuld include a prvisin that if he becmes disabled he receives a benefit, and perhaps a prvisin t purchase his interest while he is alive. This prevents the business frm being burdened with paying a disabled brther a salary, but instead allws disability insurance t cver these csts. Life Insurance Plicy Ownership. C Crpratin. If the cmpany is a C crpratin and wns life insurance, it might be subject t alternative minimum tax. This culd trigger tax n the life insurance prceeds. Partnership. The insurance culd be wned by a partnership, even if the perating business is an S crpratin. The partnership culd wn and manage the real estate, as well as insurance plicies n the fur sharehlders. A partnership is nt subject t AMT tax. It als permits the transfer f plicies amngst the partners withut triggering the transfer fr value rule. Transfer fr Value Rule. If a life insurance plicy is transferred frm ne persn t anther fr valuable cnsideratin, then the death benefit may be subject t incme tax at death. Individual Ownership. If the plicies are wned by the individual brthers, each brther has t wn plicies n the ther three brthers. This wuld be 24 plicies ttal, which is verly cmplicated and cumbersme. S Crpratin. The S crpratin culd als wn the plicies directly. Type f Life Insurance. The type f life insurance selected depends n the desired duratin f the insurance plicies. In a typical perating business, term insurance is very ppular because the business may be sld r in a different place in 10 years. In this case, the business is a lng-running family business, with a substantial part f the value tied up in real estate. The building is unlikely t be sld, s permanent insurance is a desirable prduct at least fr part f the cverage. EOLI (Emplyer Owned Life Insurance). In 2006, EOLI rules were enacted fr Emplyer Owned Life Insurance n the life f any emplyee. The EOLI rule prvides additinal requirements that a business must meet in rder t maintain the favrable incme tax treatment (incme tax-free) f the death benefit f a plicy. The business must prvide the emplyee with prper ntice and the emplyee must give prper cnsent. Slutin: The best slutin wuld be fr the brthers t establish a partnership that can wn life insurance plicies n each f the brthers individually. The plicies wuld be sme srt f permanent life insurance r cmbinatin f permanent and term I insurance, with a death benefit that will cver the buyut f any ne brther s 25% share. In additin, the cmpany can purchase disability buy ut insurance and the brthers can btain individual disability insurance plicies. Lee Slavutin LS@sternslavutin.cm Page 6

13 Case #5: Business Owner with a Persnal Life Insurance Need Current Circumstances: The client is a married male, 68 years ld, with a yunger wife and children in their teens. He has a high incme, earning ver $1 millin per year. His family leads an expensive lifestyle and has significant liquid assets. Gal: T prvide his wife and children with supplemental life insurance prtectin in rder t maintain their lifestyle if he were t die prematurely. The client wants t purchase such a plicy withut creating large taxable gifts. Key Pints: Insurance Optins. The client examined bth term and permanent insurance. Preferred a lwer premium with a higher death benefit. Purchased a 15 year term insurance plicy with a $20 millin death benefit. The annual premium was ver $200,000 per year. Estate Tax Avidance. The plicy shuld be placed in a trust and utside the client s estate t avid estate tax. This als prvides creditr prtectin frm ptential creditrs f his spuse and/r children. Gift Tax Cncerns. Althugh placing the life insurance plicy in trust avids estate tax and prvides creditr prtectin, transfer f the $200,000 premiums annually int a trust will be cnsidered a taxable gift. The client and his spuse have each used their $5.25 millin lifetime exemptins. Their annual gifting exclusins are being used elsewhere. The transfers between the client and the trust culd be structured as a lan. Hwever, the trust wns term insurance, and if the client utlives the term plicy (past age 83), the trust wuld nt have any way f repaying the lan. Lans wrk better with permanent insurance arrangements rather than with term plicies. Slutin: Make the trust a QTIP trust s the trust wuld be includible in the wife s estate when she dies. The current transfers t the trust will then nt be cnsidered taxable gifts. Hwever, this slutin des result in an estate tax payable at the wife s death. Premium financing with a permanent plicy culd be an alternative slutin that wuld avid estate tax entirely. Lee Slavutin LS@sternslavutin.cm Page 7

14 Case #6: Insurance as Part f a Split-Dllar Agreement Current Circumstances: The client is an 86 year ld wman with $4 millin f life insurance in trust as part f her estate planning. The plicies were issued as secnd-t-die plicies, but her husband died several years ag. Her insurance is part f a split-dllar agreement between the family business and the trust wning the plicies. Gal: T review the client s situatin based n changes in her health and t reduce premiums if pssible. Key Pints: Changes in the Client s Situatin. The client had stpped smking since her plicies had been purchased, and her husband had als passed away. Upn review, it was pssible t imprve ne f the client s plicies by reducing her premiums fr the same amunt f cverage the premium was reduced frm $49,000 t $32,000. The ther tw plicies were replaced by new insurance plicies and the premium was thereby significantly lwer. Split-Dllar Agreement. Life insurance under the split-dllar agreement has premiums paid by the family business. A certain amunt f incme must be reprted by the client under the split-dllar rules. The client must als reprt a certain amunt as a gift each year under these rules. Under the split-dllar rules, the amunts that had t be reprted as incme and gifts were based n insurance cmpany tables. That table expired when the client turned 85, which meant that gvernment table 2001 had t be used instead. On a $1 millin plicy, the amunt f reprtable incme increased sharply, t $80,000 per year. Slutin: Mdify the split-dllar arrangement frm its current structure t a lan arrangement. The amunt f taxable incme that must be reprted is cmpletely altered. It is n lnger based n IRS Table 2001, but instead the interest required is calculated based n the current interest rate. At the time f mdificatin t a lan, the interest rate was 0.2%. Taxable incme f $80,000 was reduced t an interest cst f $2,000-$3,000, a dramatic savings. Caveat mdificatin f an ld split dllar agreement may trigger taxable incme if the plicy has equity (cash value exceeds the premiums advanced by the family business). In ur case there was n taxable equity. Lee Slavutin LS@sternslavutin.cm Page 8

15 Case #7: Private Placement Variable Life Insurance Current Circumstances: The client is a husband and wife, each age 51. He and his wife have a net wrth f ver $100 millin. Their estate planning includes GRATs which hld substantial funds fr the benefit f their children. Gal: The client wants t reduce his incme tax liability fr investments in the GRATs. Key Pints: Incme Tax Liability. The client is liable fr incme tax n assets in the GRATs because he is the Grantr f the trust. As a grantr fr incme tax purpses, he is liable fr incme tax n trust earnings. Fr incme tax purpses nly the trust and the grantr are treated as ne entity ( defective trust fr incme tax purpses). Fr gift and estate tax purpses they are distinct entities. Private Placement Variable Life (PPVL) Insurance. PPVL is a prduct designed fr the high net wrth client able and willing t make a much higher investment in the life insurance plicy. As in any variable insurance plicy, the client has the ability t chse the underlying investments in the insurance plicy. PPVL is regulated by FINRA, and an ffering memrandum must be prvided t the client. PPVL Insurance vs. Typical Variable Life Insurance. A PPVL plicy has a much higher annual premium, perhaps $1 millin r mre. A PPVL plicy has a much lwer cmmissin expense, perhaps 1% r less f the premium. The type f investment available in a PPVL plicy can be different frm a typical variable plicy. Rather than a menu ffered by the insurance cmpany, the client can select an utside manager t manage investments underlying the plicy. The client may nt direct the manager, as this wuld vilate investr cntrl rules. Like any cash value inside a life insurance plicy, the mney inside a PPVL plicy is prtected frm incme taxatin. Example: If a client is earning 7% n his investment and is in a 50% federal and state incme tax bracket, then 3.5% f the earnings are lst in taxes. In a PPVL plicy, there is n current incme tax, and the nly csts are sales and administrative expenses f the PPVL plicy itself (typically <1%). A savings f 2.5% f investment earnings, fr example, n a large investment is a big savings fr the client. Risks f PPVL. The investment risks are essentially equivalent t the situatin the client had befre. The client will presumably have the same kinds f investments as when he did nt have insurance, s that risk will nt be new. Lee Slavutin LS@sternslavutin.cm Page 9

16 The nly ptential dwnside is the cst f maintaining the plicy (<1%), but the alternative cst is the incme tax, s this is actually an pprtunity fr significant savings. Slutin: The client pted t invest in a PPVL plicy and thereby reduced his incme tax liability. Case #8: Life Insurance fr a Client with a Medical Cnditin Current Circumstances: The client has diabetes, and his bld sugar is nt well cntrlled. Gal: Help prperly prepare client t purchase life insurance. Key Pints: Diabetes is very cmmn, and if it is nt regulated r well-cntrlled, a client may have difficulty purchasing life insurance r may be declined altgether. Slutin: Obtain a client s medical recrds t see if a client s cnditin is well-cntrlled. If s, applicatin can prceed. If a client s cnditin is nt well-cntrlled, the client shuld return t his r her dctr and cnsult abut mdify his r her medicatins/diet/exercise. This may take several mnths, but is wrth waiting n the examinatin and applicatin in rder t get a medical situatin under cntrl. Lee Slavutin LS@sternslavutin.cm Page 10