Being wealthy provides many financial advantages that only the rich can fully appreciate. But, did you know that if you are wealthy, you can reap several financial benefits of life insurance that the poor and middle class literally cannot?
… this isn’t a trick.
I’m not merely suggesting the wealthy can afford more life insurance coverage.
In this article, I’ll reveal 7 benefits of life insurance that only the wealthy can enjoy, either because the poor and middle class can’t qualify for the program or because they don’t have adequate cash flow!
Quick Article Guide to Benefits of Life Insurance That Only the Wealthy Can Enjoy
- Premium Financing
- Single Premium Payment
- How to Leverage Your Premium
- Irrevocable Life Insurance Trust
- Annual Life Insurance Premium
- Buy Higher Multiples of Coverage
- Pay Less for More Coverage
Those of you with a large estate may face cash flow or liquidity issues which can make it inconvenient to pay large life insurance premiums without having to liquidate some of your existing assets.
If you can’t presently use your assets to pay a large premium for a large life insurance policy such as a $3,000,000 or $5,000,000 policy for example, you can opt to pay the premium for the policy using what is known as a “premium financing loan.”
What is premium financing?
It simply means that instead of paying premiums out of pocket, you borrow the cost of the premiums through a 3rd party lender.
In most premium financing deals, all the borrower owes is interest on the loan. Typically when cash value plans are used for the life insurance, dividends from the policy can later offset some or all of the interest payment as well.
Using this approach, rather than borrowing a sum of money on an annual basis to cover an annual premium payment, like you might expect, you typically finance a one-time, larger amount to fund a single premium life insurance policy. The policies are typically lifetime guaranteed policies such as a Universal life insurance policy for example.
There are several financial advantages in taking this approach including:
• Is a very useful approach if you are currently experiencing a cash flow liquidity challenge
• Can utilize several tax benefits as the borrowed premium may not be subject to “gift taxes”
• Allows you to leverage your wealth and purchase a larger policy than you would be able to afford if you were to pay the premiums directly
• Avoid paying capital gains such as if you were to liquidate a current portion of your existing investments to pay for the premium
Using this strategy with a life insurance policy will provide immediate liquidity to your heirs to cover estate taxes and associated costs were you to pass away.
For example, if you were around 60 years old and had your assets tied up in your business, you might opt for a $3,000,000 Universal life insurance policy which has the additional added advantage of becoming an income producing asset.
You could use the policy itself as collateral to secure the loan.
However, many loans available for premium financing come with variable interest rates. These loans require periodic refinancing. Although currently the interest rates are very low, many financial pundits are forecasting that interest rates are going to rise significantly.
If a variable loan were to lapse, the lender may also have recourse to attach your personal assets.
Another way to overcome this potential risk is to buy a term insurance rider which allows you to increase the death benefits to cover any unforeseen increases in the loan balance along with the original cost of the policy.
Several borrowing alternatives that you might consider could include getting premium as a “home equity loan” or simply as a “personal loan” through your bank which may offer additional tax advantages.
You have to careful about which lender you use and most financial experts suggest you seek advice from a financial advisor before you take this approach as some type of loans from some lenders may not be suitable.
Another advantage available to the financially well-to-do is to be able to access significant savings that can be found simply by paying for policies with a single premium instead of annually.
By doing so you will save a significant amount of money that you would otherwise pay on an annual basis.
For example, a $2 Million dollar lifetime guaranteed policy for a 50 year old man would cost a single premium of $318,660 at one top rated carrier.
However, if he paid it annually, it would cost $16,880 per year for life. A 50 year old man in average health has a life expectancy of 29 years, according to the Social Security Actuarial table.
This means that in this example the 50 year old male would be paying $16,880 per year for the next 29 years were he to reach his full life expectancy.
How much would he save?
Annual Premium:($16,880 X 29 Years) = $489,520
Single Lifetime Premium: $318,660
Savings Difference: $170,860
A significant difference, isn’t it?
What does this mean for the wealthy?
This financial investment strategy is especially ideal if you are not only affluent but slightly advanced in years such as age 50 or older and have much of your current unneeded assets tucked away in lower income producing investments, such as CD’s and Bonds for example.
You may be living comfortably using other assets such as your retirement fund and don’t need to use or access your current investment portfolio.
You want to leave as much as you can to your heirs, but are concerned about the low interest rate you are earning in these accounts. In this scenario, it could be very advantageous to leverage your assets by investing a portion of your unneeded funds to buy a substantial life insurance policy.
By doing you could be using the money you pay for premium to significantly leverage your investment.
How would this work?
Suppose you were a 75 year old woman and bought a $500,000 lifetime guaranteed policy which cost $18,310 per year.
Using our “Wise Investment Calculator”, and were she to pass away at age 80, how much would she have to make on her investment to earn the equivalent of life insurance proceeds equal to her policy of $500,000?
By investing the annual life insurance premium she is currently paying at $18,310 over the 5 years she survived, Our “Wise Investment Calculator” reveals that she would need to earn the equivalent investment amount of 63% per year to earn $500,000!
Were the same woman survive to their full estimated life expectancy of 88, she would still need to earn a minimum rate of return of 10.10% to achieve the same financial gain her estate would derive from the $500,000 policy she purchased.
And, her heirs would immediately receive the tax free life insurance proceeds of $500,000 to cover any estate taxes and associated costs without being financially burdened.
Establishing an Irrevocable Life Insurance Trust or ILIT is another advantage that can be used by the wealthy.
For those unfamiliar with how an ILIT works, it simply means that you set up a trust which now owns your life insurance policy and distributes the funds according to the terms of the trust. An ILIT cannot be changed, altered or amended once it has been established.
ILIT Trusts are especially advantageous for several reasons.
The first is for those who have particularly large estates. The trust separates your life insurance policy and any other assets from those which have not been placed in the trust. Any assets placed in the trust would not be considered as part of the estate.
Although the current federal tax exemption amount set by theAmerican Tax Relief Act of 2013 is $5.43 million for 2015, a fair number of individuals have estates which are much larger than this exemption.
Also, you need to keep in mind that many individual states have their own tax exemption amount which can be considerably lower than the federal tax exemption. So, those individuals who have estates less than the $5.43 million could end up paying state estate taxes.
The second advantage of an ILIT is that this type of trust could be used for business purposes. Many large business owners have separate policies for their businesses and use policies for Buy/Sell agreements.
By placing such policies in an ILIT and if the Buy/Sell agreement is properly structured, the decedent’s estate receives a step up in basis for the company shares and can therefore effectively avoid paying capital gains tax.
The affluent tend to buy large life insurance policies, and even the rich like to save money.
Here’s a simple example that will illustrate this point very clearly.
I recently sold a $3 million dollar policy to a young entrepreneur whose premium was $612 per month.
That’s a nice chunk of change.
However, I wasn’t surprised at all to see that when he sent in his first payment, he elected to pay the entire annual premium of $6,990 instead.
By doing so, he will be saving himself $354 per year!
How does this work?
Here’s a very simple example:
Say for example a middle income individual who is making $60,000 per year decides to buy life insurance.
Most insurance carriers will max out his eligibility for coverage at 20 to 30 times his annual income, depending on his age.
The problem is since the poor and middle class buy life insurance for income replacement, that’s the only variable insurance companies will typically look at.
However, if you’re wealthy, you can not only apply for life insurance for income replacement, but also to pay estate taxes, and provide estate liquidity to your family.
What’s more, insurance companies won’t just factor in the current taxes your estate might owe if you passed away, but allow you to estimate your future tax liability based on the growth of your estate.
This allows some wealthy individuals to qualify for 40 times their income or more.
Ok, maybe not overall, but they do pay less per thousand.
Let’s say an average-income 40 year old individual comes to our office and buys either a 30 year term policy for $100,000 of coverage for $347 per year, or $250,000 of coverage for $690 per year.
Per thousand dollars of coverage here’s what this would cost:
$100,000 policy costs $3.47 per thousand ($347 premium /100)
$250,000 policy costs $2.76 per thousand ($690 premium /250)
However, what a lot of people don’t know is there’s something called “banding” in life insurance.
Basically, the more coverage you buy, the lower your cost per thousand dollars of life insurance coverage.
Let’s say the same 40 year old comes in our office and needs a $1 million dollar policy or $5 million dollar policy.
Here’s his cost per thousand:
$1 Million policy costs $2.37 per thousand ($2,370 premium / 1000)
$5 Million policy costs $2.32 per thousand ($11,610 premium / 5000)
Now, you can clearly see the cash savings advantages.
If you have a large personal estate, or a business and need life insurance, call us today at 877 – 443 – 9467 and we’ll help you maximize your life insurance policy for a large estate or business.
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