Why finance life insurance? If you’re a HNWI or UHNWI, it can provide income and help to protect your estate. Talk to The Unger Company to learn more about this innovation.
Why in the world would a wealthy person want to finance a life insurance policy? It would seem like someone with a lot of money could just reach into his or her pocket and pay the “freight”. But using loans is really a lot more cost effective.
The Unger Company has been working with high-net-worth individuals (HNWI) and ultra-high-net-worth individuals (UHNWI) for nearly five decades. The Company has been in this business a long time, and in that time, we’ve learned how to strategize and execute planning that benefits the HNW and UHNW clients we serve. Financing insurance is one of those concepts that we’ve had tremendous success implementing for these clients.
The basics of the idea are this: If a client has an investment that is producing a nine percent yield every year, and the client can borrow at four percent to finance a policy that is designed to offset estate taxes in the future, then the client will produce a gain against the cost of a loan. For example, let’s say an insurance policy has a $100,000 annual premium. A loan on the premium would cost $4,000 in interest against $9,000 in proceeds from an investment, leaving a pre-tax profit of $5,000. That’s a noticeable number, but it’s not everything. By not liquidating assets to pay a premium, a grantor could also be avoiding paying capital gains taxes on the profit of the liquidated assets. Over many years, the profits and tax savings will really add up. As specialists working with people in the HNW and UHNW classes, The Unger Company understands that the financial legacy built by a family didn’t come through indifference with money, so these options are attractive to many of our clients.
This is just the tip of the iceberg, as this is a titanic undertaking! The grantor, the person whose life is being insured, isn’t really acquiring the policy; he/she is merely the insured. An instrument called an Irrevocable Life Insurance Trust, or ILIT, is established and this is the entity that acquires the policy to insure the life of the grantor, or if survivorship life, the lives of the grantors. An ILIT is used as part of an estate strategy that will eventually be used to offset the pain of estate taxes that come hand in hand with estates large enough to incur a tax, currently more than $12.92 million on a federal level.
The loan, like the policy, is taken out by the trust. Of course, the bank isn’t just going to loan money to a trust without collateral, so collateral must be held by the bank in an amount equal to the outstanding loan. And, over time, the policy will accumulate cash value such that any other collateral that the bank originally required can be released.
All the time that the insurance and bank loan are managed by the ILIT, our client’s money continues to work hard on his behalf. The cash flow from investments in equities or businesses continues to benefit him without any premium drain. These are often long horizon propositions, so the amount of money accumulated over what could be decades will be significant. And this is why HNW and UHNW finance life insurance policies.
Eventually, the grantor will pass, and estate taxes will be due. As the great American statesman Ben Franklin once wrote, “(I)n this world nothing can be said to be certain, except death and taxes.” [He’s been dead for 233 years, but his words live on. More on voices living on in a future article.] This is when the plan that was built using an ILIT and the life insurance policy The Unger Company tailored to your family’s needs goes to work.
First, as primary creditor, the bank loan is satisfied by the ILIT using the proceeds from the policy. The remainder of the policy proceeds remain in the ILIT, and the trust and the estate executor then negotiate methods and exchanges for the money in the ILIT to pay the estate’s heirs and beneficiaries, who may have used the estate assets to satisfy the estate tax. [We will be doing a more detailed look into ILITs in a future installment.]
The Unger Company frequently consults with the client’s legal team in establishing ILITs and arranges for the best insurance policy to meet the needs of its HNW and UHNW clients. It’s one of the most effective and efficient devices for protecting a family’s financial legacy.
For nearly 50 years, The Unger Company, Ltd. has provided high-net-worth (HNW) and ultra-high-net-worth (UHNW) clients with elegant, efficient plans to manage the estate tax burdens that would be left for loved ones. Our history of collaborating effectively with an existing legal, financial, and accounting team makes us a great addition to any high-net-worth family estate planning effort. Plus, our founder Harold Unger has always taken special care to create methods where the voice of a client will be heard by his descendants after his or her passing. Contact us through our website or call us at 212-755-4777 to learn what we can do for you.
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Harold Unger LinkedIn: https://www.linkedin.com/in/harold-m-unger-9453aa73/
The Unger Company Ltd. LinkedIn: https://www.linkedin.com/company/93617123/
