Esteemed industrialist and philanthropist Andrew Carnegie famously divided life into three phases. The first phase involves education and integration into the world. Phase two is spent making money and providing for oneself and their family. The final phase is for giving away all that one has made to their loved ones. If you happen to be entering Carnegie’s “phase three”, you may be considering how best to leave behind the wealth you’ve created. Life insurance can become one of the best vehicles available to you. There are two ways that life insurance provides exceptional value in this endeavor: leverage, and tax efficiency. A recent example of this was a wealthy woman that we worked with, who decided many years ago to use a variable annuity to achieve her goal of passing assets to her family. The variable annuity allowed for tax-free growth during life, but all the gain is taxed at her death to the beneficiaries. Her primary goal was to leave $1,000,000 each to her two children. Here, enclosed, is an elaboration of her story and its implications for you and your family.
To begin the story, a 78-year-old woman had accumulated over $2.2 million in a variable annuity between her successful career and building wealth with her husband. Her husband passed away several years before and she began to reconsider how best to leave her wealth to her two children. At first glance, it appeared that the value of the variable annuity would achieve her goal. However, when we, along with her other advisors, looked at her variable annuity policy details, we discovered that taxes would eat away at the money accumulated upon her death, preventing her from reaching her goal. We introduced a strategy that would use the current value of the variable annuity to purchase a life insurance policy which would definitively achieve her goal. Thanks to this decision, her goal was insured. Of course, to determine how a change of strategy would help her achieve her goal and evaluate the cost impact, there was a sequence to determine if the new strategy would be more beneficial and cost effective than her current variable annuity strategy. The first step was assessing her underwriting status for a life insurance policy. We achieved this by gathering her medical records in advance of any “formal” life insurance application. This allowed us an opportunity to gather the facts and informally shop her underwriting status among top rated insurance companies for who among them would provide the best premium to death benefit ratio. Once the carrier and policy were determined, we then turned to shopping other insurance companies for the best income generating annuity available so that the value of the current variable annuity could create the maximum annual income coupled with the greatest income tax efficiency. This annual income was used to fund the new life insurance policy. Lastly, working with her attorney, a trust was established and an annual gifting plan to house her new life insurance policy outside of her estate. This further insured that the kids would not have taxes due on the amount paid out from the life insurance proceeds. In the final analysis, there are annual taxes due from the income generating annuity, but the client was comfortable in paying those for the sake of having $2.4 million of tax-free life insurance benefits that are not part of her overall estate. The new strategy now ensures that her kids will benefit from the leverage of turning a $2.2 million variable annuity into $2.4 million of life insurance with no tax due upon her death.
How can this case study apply to you and your situation? If you are seeking the most efficient means by which you can bequeath your wealth to your heirs, considering the strategic use of a life insurance policy is of high importance. While Carnegie’s wealth is on one scale, each person can benefit from finding the improved leverage and tax efficiencies of life insurance and it is worth the effort. Acru Insurance, LLC is a capable resource to help guide you through this journey. If you have questions about the benefits of a life insurance policy and would like more information about unique strategies like this, the experts at Acru Insurance, LLC will be glad to help.
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