Blog #128: Leveraged Executive Bonus Plan with
Bank-Funding of the Income Tax (Part 2 of 3)

(Updated March 7, 2016)

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(Presentations in this blog were created using the InsMark Illustration System.)

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Editor’s Note:  Blog #128 (Part 2) may be easier to follow if you take the time to review Blog #127 ( Part 1) assuming you haven’t already done so.

Continuing our study of the Leveraged Executive Bonus Plan for Alex Demas as described in Blog #127, let’s next examine a feature that can be added to it that could guarantee Alex’s continuing employment for at least the next 10 years.

In Blog #127 we discussed that Hawthorne Construction, Inc., decided that part of a new benefit plan for Alex will include a Leveraged Executive Bonus Plan funded with $2,875,000 of indexed universal life (IUL).  The policy is max-funded with five level premiums of $100,000 paid for with deductible bonuses by the company paid to Alex.  Alex will offset the resulting income tax liability on each bonus by way of a bank loan secured against the IUL.

This is an impressive executive benefit!  No out-of-pocket cost for Alex coupled with $4.8 million in after tax retirement cash flow, all provided by Hawthorne Construction for an after tax cost of $65,000 a year for five years.

Click here to review Alex’s Leveraged Executive Bonus Plan from the InsMark Premium Financing System.  (Pages 8 and 9 show the Summary numbers.)  We used the Income Tax Financing module in the InsMark Premium Financing System to prepare the illustration.

Controlled Executive Bonus

If a Controlled Executive Bonus feature is added to Alex’s benefit plan, it means he would be required to repay all (or, perhaps, only part of) the bonuses if he were to voluntarily terminate employment within a certain number of years.  It could also be based on a certain event like reaching retirement or achieving a specific company goal.

With this feature, Hawthorne Construction can select a certain percentage payback of the bonus (e.g., 100% in all 10 years) or schedule a variable percentage payback, e.g., 100% during year 1, declining by 10% a year over the next 9 years.

Below is an example of a Controlled Bonus repayment schedule for Alex using “voluntary termination prior to 11 years” as the duration in which a 100% repayment is required.  Please understand that Column (3) is an example of only one of many possible repayment schedules.

Possible Repayment Schedule

blog-128-img-1-repayment-schedule-for-executive

**Negatives in Column (6) are in excess of policy cash values.  The financial gain in Alex’s favor between the 10th and 11th year is in excess of $500,000 ($212,270 + $305,472), a powerful incentive to remain employed.

The typical Controlled Bonus Plan agreement provides that the repayment obligation is waived at the executive’s death if it occurs during years of a repayment obligation.

The repayment obligation could be extended longer than 10 years — perhaps until retirement.  Instead of that, I suggest it would be much more productive for Hawthorne Construction to launch a similar plan for Alex when he is age 50 assuming the firm remains anxious to retain him.

Click here for a review of the details of the bonus repayment feature from the InsMark Illustration System.

Note:  The Controlled Executive Bonus repayment feature is not currently available in the Income Tax Financing module in the InsMark Premium Financing System.  It is available in the Executive Bonus Plan and Executive Security Plan modules in the InsMark Illustration System — and that is the source I used for the screen shot above and the link in the prior paragraph.  We will be adding this feature to the Income Tax Financing module in the InsMark Premium Financing System in the near future.

Suppose Alex elects not to participate.  In this case, the company will have discovered that he may be considering alternative employment and is not interested in a benefit plan with such a short-term contingent liability.  Clearly, Alex’s decision not to participate would uncover valuable business information that might otherwise be difficult to determine, and this could allow the firm to plan accordingly.

Alternative Benefit Plans

In many ways, a Controlled Bonus is superior to loan-based split dollar and salary continuation (COLI) plans:

blog-128-img-3-Alternative-Benefit-Plans-Table-Controlled-Bonus-is-superior-to-loan-based-split-dollar

1 to employer   2 to executive   3to executive’s family   4 typically at retirement

Since the loss of equity split dollar in 2003, Executive Bonus Plans have become one of the premier go-to executive fringe benefits.  Using a bank to finance the executive’s income tax on bonus plans takes them to a new and better level.  Adding the Controlled Bonus features adds a new dimension to retention of important non-owner executives and minority shareholders.

Sarbanes-Oxley eliminates the use of Loan-Based Split Dollar for executives of public corporations; however, this does not apply to loans made by an executive where no corporate liability exists for the loan.  The Leveraged Executive Bonus Plan featured in this three-pronged Blog series should be usable by any private or public business entity.

Licensing InsMark Systems

To license the InsMark Illustration System, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
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Digital Workbook Files For This Blog

Blog128.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

After you open the workbook in your system, the prompts to use for the Controlled Bonus are on this section of the Plan Details tab shown below:

blog-128-img-2-the-prompts-for-the-controlled-bonus-are-in-the-plan-details-tab-insmark-illustration-system

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“Standard bank financing illustrations produce much in the way of great data, but it takes the InsMark Premium Financing System to really present compelling numbers; however, the integration of that data into InsMark’s comparative modules like Various Financial Alternatives and Wealthy and Wise is really what makes premium financing sizzle.”
Chris Jacob, CFP, SFI-Cadeau, St. Louis, MO, InsMark Platinum Power Producer®

“As with all of the InsMark software, InsMark’s Premium Financing System has proven to be an indispensable addition to my ability to show my clients the advantages in using bank loans to solve their financial needs.  Because of this, I was able to close three large financed cases easier and faster than ever before.  As always, InsMark has delivered again.  I encourage all who use bank financing as a solution to their clients’ needs to purchase this system.  The cost of the system is not an expense, but rather an investment in your business.”
William Moates, Jr., Trilennium Financial Alliance LLC, Fort Smith, AR, InsMark Platinum Power Producer®

“InsMark has created without question the best suite of software for our industry that has ever existed.  I personally have been using their software for almost 30 years, and it changed my career.  This unique and user friendly software will add many thousands to your income for as long as you’re in business.  InsMark makes me look good, and it will you as well.”
Simon Singer, CFP®, CAP®, RFC®, International Forum Member, InsMark Platinum Power Producer®, Encino, CA

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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More Recent Blogs:

Blog #127: Leveraged Executive Bonus Plan with
Bank-Funding of the Income Tax (Part 1 of 3)

Blog #126: The Leverage of Bank-Funded Estate Liquidity

Blog #125: Web Supported Resources for You

Blog #124: More on the Siren Song of “Buy Term and Invest the Difference”

Blog #123: The Siren Song of “Buy Term and Invest the Difference”

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #127: Leveraged Executive Bonus Plan with
Bank-Funding of the Income Tax (Part 1 of 3)

(Updated March 7, 2016)

(Click here for Blog Archive)
(Click here for Blog Index)

(Presentations in this blog were created using the Premium Financing System and Wealthy and Wise®.)

Getting Started with InsMark Training Video

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Alex and Ana Demas are both age 40.  He is the executive vice president of Hawthorne Construction, Inc., a family-based company.  Alex is not currently a shareholder in the firm.  Ana is a CPA.

Hawthorne Construction has decided that part of his new benefit plan will include a leveraged executive bonus plan funded with $2,875,000 of indexed universal life (IUL).  The policy is max-funded with five level premiums of $100,000 funded with deductible bonuses by the company paid to Alex.  Alex will offset the resulting income tax liability on each bonus by way of a bank loan secured against the IUL.

There is more than sufficient cash value in the early years of the IUL to allow Alex to accrue the loan interest with the bank rather than pay it out-of-pocket.  Including accrued loan interest, the cumulative loan never exceeds 50% of the policy’s illustrated cash surrender value during the first 10 policy years making it a relatively easy bank loan to negotiate.  Alex intends to use a participating policy loan at the beginning of year 11 to repay the bank loan.

Click here for a discussion of fixed vs. participating loans.

Using the bank loan to fund the income tax eliminates the need for a more expensive variation of an executive bonus plan in which the company “grosses up” the annual bonus to provide the funds for the premiums and the income tax on the bonus.

The goal of the compensation package is to induce Alex to remain with the company for at least 10 years — and, optimistically, until retirement.

Below is a graphic of the results:

Image 1
Costs and Benefits of
Income Tax Financing of the
Leveraged Executive Bonus Plan

blog-127-img-1-Costs-and-Benefits-of-Income-Tax-Financing-of-the-Leveraged-Executive-Bonus-Plan

1For retirement cash flow.

2The cumulative loan due the bank is repaid in year 11 by way of a policy loan.

This is an impressive executive benefit!  No out-of-pocket cost for Alex coupled with $4.8 million in after tax retirement cash flow, and all provided by Hawthorne Construction for an after tax cost of $65,000 a year for five years.

Click here to review this leveraged executive bonus plan from the InsMark Premium Financing System.  (Pages 8 and 9 show the Summary numbers.)

Alex and Ana’s Retirement Plan

The leveraged executive bonus plan provides a significant benefit for Alex and his family; however, its value can be most appreciated if it is integrated into their overall retirement plan.

Starting at age 65, Alex and Ana’s current retirement goal is to provide $200,000 a year in after tax, spendable cash flow with a 3.00% inflation adjustment.

Below is a summary of their current net worth:

Net Worth
Alex and Ana Demas

blog-127-img-table-1-Net-Worth-Alex-and-Ana-Demas

Click here for comments on Monte Carlo simulations.

Let’s first compare their current retirement plan (Strategy 1) with Strategy 2, a variation that includes values from Alex’s leveraged executive bonus plan described above.

Image 2
Net Worth Comparison
(Strategy 1 vs. Strategy 2)

blog-127-img-2-Net-Worth-Comparison-Strategy-1-vs-Strategy-2

The bonus plan increases their long-range net worth by almost 250% while maintaining their desired retirement cash flow.  There are no additional out-of-pocket costs required from Alex and Ana.

Click here for instructions on importing data from our Premium Financing System into Wealthy and Wise.

Let’s next add a Roth conversion (Strategy 3) into the mix producing the following result:

Image 3
Net Worth Comparison
(Strategy 1 vs. Strategy 3)

blog-127-img-3-Net-Worth-Comparison-Strategy-1-vs-Strategy-3

The long-range net worth has increased over Strategy 1 by slightly over 500%.

We converted the Roth in $50,000 annual increments and withdrew the resulting income tax from their asset base (which is reflected in their net worth) — so again there are no additional out-of-pocket costs required from Alex and Ana.

Below is the comparison of all three Strategies:

Image 4
Net Worth Comparison
(Strategy 1 vs. Strategy 2 vs. Strategy 3)

blog-127-img-4-Net-Worth-Comparison-Strategy-1-vs-Strategy-2-vs-Strategy-3

Wealth to heirs is also significantly impacted by Strategies 2 and 3.

Image 5
Wealth to Heirs Comparison
(Strategy 1 vs. Strategy 2 vs. Strategy 3

blog-127-img-5-Wealth-to-Heirs-Comparison-Strategy-1-vs-Strategy-2-vs-Strategy-3

Note:  Another reason to convert to a Roth is the impact of inherited Roth values for heirs.  In the forthcoming Blog #129 (Part 3 of this series), I’ll discuss how this will impact Alex and Ana’s daughter, Lexie.

The large increase in Alex and Ana’s net worth raises an inevitable question:  How about less net worth and more tax free, retirement cash flow?  Below are the results of Strategy 4 if we increase Alex and Ana’s retirement cash flow by 50% (up by $100,000 a year also indexed by 3.00%).

Image 6
Net Worth Comparison
(Strategy 2 vs. Strategy 3 vs. Strategy 4)

blog-127-img-6-Net-Worth-Comparison-Strategy-2-vs-Strategy-3-vs-Strategy-4

Note:  We deliberately dropped Strategy 1 (Current Plan) as it is the least efficient plan.  To review its results, see Images 4 and 5.

Below is the wealth to heirs analysis:

Image 7
Wealth to Heirs Comparison
(Strategy 2 vs. Strategy 3 vs. Strategy 4)

blog-127-img-7-Wealth-to-Heirs-Comparison-Strategy-2-vs-Strategy-3-vs-Strategy-4

Click here to review the 125 pages of reports from Wealthy and Wise that make up the numbers in Image 6 and Image 7.  This is a large number of reports; however, with a Wealthy and Wise evaluation, I recommend that you have all the reports for a given case with you when you are visiting with a client or client’s attorney or CPA.  Wealthy and Wise backs up every number shown, and you never know which report you’ll need to answer the inevitable question, “Where did this number come from?”  That’s why I provided all of them to you in this Blog.  Tip:  The name of each strategy appears at the bottom right of each detailed report.

Most Wealthy and Wise users select a few key illustrations for the main report and put the balance in an Appendix.  More elaborate report organization can be accomplished (Table of Contents and Section pages) through use of this prompt which I used that is available at the bottom right of the Main Workbook Window.

blog-127-img-8-Preview-or-Print-Client-Presentation

Summary of the Four Strategies

blog-127-img-table-2-Summary-of-the-Four-Strategies

Conclusion

By integrating the leveraged executive bonus plan within the retirement plan, Alex and Ana’s appreciation of the executive benefit should increase exponentially.  Hawthorne Contracting should get considerable additional credit (and loyalty) for being the sponsor of the plan that adds so much to their overall wealth.

Indexed universal life insurance is one of the stars of this Blog.  This reminds me once again of Bill Boersma’s comment in his article in the December 2014 issue of Trusts & Estates in which he discusses life insurance as an asset class: “I can only wonder if another asset with the same qualities would be implemented more frequently if it wasn’t called life insurance.”

Prospecting

Candidates for a leveraged executive bonus plan are simple to identify if you pose the following questions to the head of a business (C corporation, S corporation, LLC, Partnership — even a tax exempt organization):

“Do you have any non-owner executives or minority shareholders who are so valuable to your business that you will do whatever is economically reasonable to induce them to stay with you?”

“I’d like to show you a related concept — deductible to the firm — that easily outperforms any qualified retirement plan.  It can be used just for you — or by others you designate.  Would you like to see how it works?”

The impact of integrating executive benefits into an overall Wealthy and Wise analysis should be of great interest to companies that offer such benefits as the perception of the value is increased exponentially.

Documentation

Special documents are needed to support a Leveraged Executive Bonus Plan.  They typically consist of a standard executive bonus arrangement supplemented by an Endorsement of Policy Ownership Rights which precluding the executive from accessing any of the policy values for a predetermined number of years (or until a certain event occurs such as retirement).

The Endorsement is registered with the issuing insurance company and, as a result, the executive is unable to take any action on the policy other than that allowed by the Endorsement.  One of life’s frustrating experiences for an employer involves an executive who starts a competing business using funds from an employer’s benefit plan that were designed to provide retirement cash flow.  The Endorsement can eliminate this occurrence.

Comprehensive specimen documents for all aspects of an Executive Bonus Plan are available in Version 21.0 (and higher) of InsMark’s Cloud-Based Documents On A Disk™ in the Key Employee Benefit Plans section.  These documents, coupled with the bank financing documents, are what make up a Leveraged Executive Bonus Plan.

Note:  InsMark’s Leveraged Deferred Compensation System has a module that creates a different source of leverage whereby the employer makes the loan for the income tax liability on the bonus.  This variation is often applicable for smaller cases where bank financing is unavailable.  In general, I believe the bank-financed arrangement produces superior results.

Licensing InsMark Systems

To license the Premium Financing System or Wealthy and Wise or Cloud-Based Documents On A Disk, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog127.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“Standard bank financing illustrations produce much in the way of great data, but it takes the InsMark Premium Financing System to really present compelling numbers; however, the integration of that data into InsMark’s comparative modules like Various Financial Alternatives and Wealthy and Wise is really what makes premium financing sizzle.”
Chris Jacob, CFP, SFI-Cadeau, St. Louis, MO, InsMark Platinum Power Producer®

“As with all of the InsMark software, InsMark’s Premium Financing System has proven to be an indispensable addition to my ability to show my clients the advantages in using bank loans to solve their financial needs.  Because of this, I was able to close three large financed cases easier and faster than ever before.  As always, InsMark has delivered again.  I encourage all who use bank financing as a solution to their clients’ needs to purchase this system.  The cost of the system is not an expense, but rather an investment in your business.”
William Moates, Jr., Trilennium Financial Alliance LLC, Fort Smith, AR, InsMark Platinum Power Producer®

“InsMark has created without question the best suite of software for our industry that has ever existed.  I personally have been using their software for almost 30 years, and it changed my career.  This unique and user friendly software will add many thousands to your income for as long as you’re in business.  InsMark makes me look good, and it will you as well.”
Simon Singer, CFP®, CAP®, RFC®, International Forum Member, InsMark Platinum Power Producer®, Encino, CA

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

seperator bar

More Recent Blogs:

Blog #126: The Leverage of Bank-Funded Estate Liquidity

Blog #125: Web Supported Resources for You

Blog #124: More on the Siren Song of “Buy Term and Invest the Difference”

Blog #123: The Siren Song of “Buy Term and Invest the Difference”

Blog #122: Term Insurance for $1.00

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #126: The Leverage of Bank-Funded Estate Liquidity

(Click here for Blog Archive)
(Click here for Blog Index)

(Presentations in this blog were created using the Premium Financing System and Wealthy and Wise®.)

Getting Started with InsMark Training Video

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Editor’s Note:  Clients with significant illiquid assets will appreciate the use of premium financing featured in this Blog.

Lee and Denise Hamilton are ages 55 and 47 respectively.  They are real estate developers with a current emphasis on apartment complexes, and their inventory has a current value of $9 million.  By their joint life expectancy of 40 years, they project their commercial real estate values to be worth almost $135 million assuming annual growth averaging 7.00%.  They have indicated that the cash flow from their properties is sufficient for them to maintain their desired lifestyle.

Problem:  If they sell the properties prior to death, the capital gains will be severe.  In addition, the net proceeds from the sale will still result in significant death taxes.  If they don’t sell the properties prior to death, capital gains taxes are avoided, but the death taxes will still be severe.  This is further compounded by a severe lack of liquidity for such tax bills.

Let’s look at two liquidity evaluations for the Hamiltons from InsMark’s Wealthy and Wise®, both of which include a provision for federal and state death taxes.  The first one assumes the Hamiltons’ status quo, i.e., no additional planning.

Image 1

Blog-126-img-2-Liquidity-of-Current-Plan-image

The second liquidity graphic below shows the effect of $58 million of indexed survivor universal life (“ISUL”) covering the Hamiltons owned by an irrevocable, grantor, life insurance trust.  We used a level death benefit policy because the plan needed the TEFRA pushup of death benefit in the later years.

Image 2

Blog-126-img-3-Liquidity-of-Current-Plan-with-Trust-Owned-Life-Insurance-Added-image-2

With the Hamiltons’ liquidity currently limited to $4 million in a tax exempt account, premium financing is a very efficient way to fund the life insurance.  Premiums are $1,937,112 annually for five years funded with bank loans.  The alternative of cramming five premiums of $1,937,112 each through to the trust by way of gifts would use up a huge percentage of the Hamiltons’ combined estate tax exemption, not a good strategy if it can be avoided.

Below is a graphic from our Premium Financing System showing the cumulative gifts to the trust and the trust’s policy values net of the bank loan:

Image 3

Blog-126-img-4-Premium-Financing-Policy-image-3

Click here to view the complete premium financing illustration.  Loan interest is illustrated as 4.00% gradually increasing to 5.00% over the 10 years of the bank loan — reflecting potential interest rate hikes.  The bank loan is repaid at the beginning of year 11 using a policy loan.

Impact of Premium Financing on Overall Wealth
Wealthy and Wise Analysis

The value of any financial transaction can best be measured by comparing it to the status quo, i.e., do-it vs. don’t-do-it.  This is particularly true for those considering premium financing.  The numbers almost always look impressive — but compared to what?  Clients always make their best decisions in a comparative environment.

Below are the results of the comparison for both net worth and wealth to heirs.  Strategy 1 is their current plan.  Strategy 2 includes the imported premium financing numbers.  The loan interest for the premium financing is funded with withdrawals from their $4 million tax exempt account

Click here to learn how to import our Premium Financing data into Wealthy and Wise.

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Image 4

Blog-126-img-5-Net-Worth-image-4

Image 5

Blog-126-img-6-Wealth-to-Heirs-image-5

The “Forgotten Money”

Have we overlooked anything?  What about the cash value of the policy in the trust (net of the outstanding bank loan which is repaid at the beginning of year 11)?  So far, the cash value of the trust-owned policy has not appeared as a component of net worth, and it is clearly part of their family’s wealth prior to the deaths of Lee and Denise.

Copy of Image 3

Blog-126-img-7-Premium-Financing-Policy-Forgotten-Money-copy-of-image-3

Once the loan has been repaid to the bank at the beginning of year 11 (in this case), the trust’s policy cash values can fund distributions to beneficiaries, and many commentators believe the trust can loan money to the Hamiltons using what is known as a Wrap Trust, a term that has been copyrighted by James G. Blase, JD, LLM, of St. Louis, Missouri, as the Wealth, Retirement, and Asset Protection (WRAP) Trust.

Click here to read a report on the subject of Wrap Trusts that also includes an unusual use of limited powerholders to provide grantor access to funds in the trust.

Below is a reflection of the Hamiltons’ net worth in which the cash value of the trust’s policy is included in a category called “Family Net Worth”.  This is not double counting of cash values since only the policy death benefit appears in the reports and graphics for wealth to heirs.  Adding these values to Family Net Worth has no bearing on the wealth to heirs since, on the death of the second-to-die insured, this aspect of Family Net Worth disappears and is replaced by the tax free life insurance death benefit.

Click here to learn how to enter data for the trust’s cash value for the Family Net Worth Strategy.

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Image 6

Blog-126-img-8-Family-Net-Worth-image-6

Click here to review the Wealthy and Wise reports backing up the numbers in this graphic along with those of all the Strategies covered in this Blog.

Note:  Wealthy and Wise calculations typically include a provision for the Hamiltons’ desired cash flow throughout the analysis; however, as noted at the beginning of this Blog, they have indicated that the cash flow from their properties is sufficient for them to maintain their desired lifestyle.  As a result, this Wealthy and Wise analysis ignores this Desired Cash Flow category as well as offsetting Expected Cash Flow entries.

Underwriting a $58 Million Life Insurance Policy

A $58 million policy is not easily issued for clients with a current net worth of $13.6 million.  To do so, a careful review of the need for this level of coverage must be submitted with the application.  For the Hamiltons, the critical component would be a comprehensive analysis of the potential long-range death tax liability they are likely to experience as shown in this Wealthy and Wise evaluation — emphasized by Images #1 and #2 which are shown again below.  These images need to be backed up by the detailed reports in the entire Wealthy and Wise analysis.

Copy of Image 1

Blog-126-img-9-Liquidity-of-Current-Plan-copy-of-image-1

Copy of Image 2

Blog-126-img-10-Liquidity-of-Current-Plan-with-Trust-Owned-Life-Insurance-Added-copy-of-image-2

Conclusion

Premium financing can be an irresistible way for wealthy clients to increase wealth to heirs as well as provide tax free liquidity for death taxes at precisely the point when the need for liquidity occurs.

State Death Taxes

We recently included an enhancement to Wealthy and Wise to help you estimate state death taxes.  You can review the state death tax prompts in Wealthy and Wise when you edit or create a new scenario.  The prompts are located at the bottom of the Estate and Gift Transfer Taxes, State Death Taxes located on the Illustration Details tab.  If you don’t find them there, you need to update your Wealthy and Wise.  Click on InsMark Live Update near the bottom of the drop down menu under Help on the main toolbar.  When the Live Update menu appears, select Wealthy and Wise and click Update.

This tax is a deduction against the taxable estate (not a credit), and its results are included on the Wealth Transfer Summary and Transfer Tax Detail reports.  If you include state death taxes, a footnote with details of the tax assumptions you used appears on the bottom of the Transfer Tax Detail report.

Any state estate tax and/or state inheritance (collectively “death tax”) that appears on the Wealth Transfer Summary and Transfer Tax Details report in Wealthy and Wise is an estimate by the user and is not specifically based on the precise tax rates and/or exemptions of a particular state.  These rates change with some frequency, so be certain your clients consult with their legal and tax advisers for precise state death tax calculations.

Click here for a state-by-state analysis of the state death tax rates from Forbes magazine.

Accrued Loan Interest

On trust-owned premium financing plans, our system can illustrate loan interest gifted to the trust or accrued by the trust (or some of each).  It can also illustrate gifts for a portion of the early policy premiums thus reducing the bank loan when providing collateral outside the policy is problematic.

Retirement Cash Flow

To review how our Premium Financing System can be used to illustrate a personally-owned policy designed to enhance retirement cash flow, see Blog #96.

Licensing InsMark Systems

To license the Premium Financing System or Wealthy and Wise or Cloud-Based Documents On A Disk, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog126.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“Standard premium financing illustrations produce much in the way of great data, but it takes the InsMark Premium Financing System to really present compelling numbers; however, the integration of that data into InsMark’s comparative modules like Various Financial Alternatives and Wealthy and Wise is really what makes premium financing sizzle.”
Chris Jacob, CFP, SFI-Cadeau, St. Louis, MO, InsMark Platinum Power Producer®

“As with all of the InsMark software, InsMark’s Premium Financing System has proven to be an indispensable addition to my ability to show my clients the advantages in using a “Financed Premium” concept to solve their financial needs.  Because of this, I was able to close three large financed premium cases easier and faster than ever before.  As always, InsMark has delivered again.  I encourage all who use Premium Finance as a solution to their clients’ needs to purchase this system. The cost of the system is not an expense, but rather an investment in your business.”
William Moates, Jr., Trilennium Financial Alliance LLC, Fort Smith, AR, InsMark Platinum Power Producer®

“InsMark has created without question the best suite of software for our industry that has ever existed.  I personally have been using their software for almost 30 years, and it changed my career.  This unique and user friendly software will add many thousands to your income for as long as you’re in business.  InsMark makes me look good, and it will you as well.”
Simon Singer, CFP®, CAP®, RFC®, International Forum Member, InsMark Platinum Power Producer®, Encino, CA

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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Blog #125: Web Supported Resources for You

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Blog #123: The Siren Song of “Buy Term and Invest the Difference”

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Robert B. Ritter, Jr. Blog Archive