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Trust Restructures Life Insurance Policy for Guarantees

As part of an estate asset allocation strategy, the estate acquired life insurance in 1994 to deliver tax-efficient wealth accumulation while providing investment flexibility to allocate among various investment accounts. The policy insures the patriarch and matriarch.

Challenge

The separate account (variable) life insurance policy acquired in 1994 was experiencing significant volatility in light of the market downturn that started in 2000 and accelerated in 2002. The impact was significant, and although the market recovered by the mid 2000s, the Trust was interested in reducing risk and avoiding future volatility with respect to the life insurance policy.

Solution

Upon completion of Private Underwriting, we were able to obtain a compelling underwriting offer allowing the Trust to execute a tax-free exchange from the current separate account (variable) policy into a new indexed policy with death benefit guarantees.

  • IRC Section 1035 allowed for the tax-free exchange of the policy cash surrender valuer
     

  • Indexed policy chassis provided for a 0% floor while providing enhanced earnings, subject to a cap, based on the performance of the S&P Index
     

  • Policy provided a guarantee on the death benefit through the younger insureds age 108 which gave the Trust desired guaranteed returns from the insurance company

1035 Exchange Policy

Male Age 72

Female Age 70

Acquired $20,000,000 of guaranteed life insurance to pay the death benefit at the second death (guaranteed to younger age 108)

Guaranteed Internal Rate of Return

  • Death at Age 75 = 32.36%

  • Death at Age 85 =   9.80%

  • Death at Age 95 =   5.77%

Results

  • $20,000,000 policy acquired with a tax-free 1035 exchange with no future premiums

  • Underlying cash value growth is tied to an Index rate subject to 0% floor

  • Guaranteed death benefit, subject to carrier solvency, to the younger insured's age 108

The above client case study is based on the economic results for one of TRC Financial's clients. The economics associated with each individual client are unique and impacted by the insurance product acquired, the performance of the life insurance policy, timing of premium payments, medical underwriting for the insured(s), and the actual life expectancy of the insured(s). The client case study is not intended to be opinion or advice on legal, tax, accounting or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.