Case Studies
The following five cases are illustrations of actual clients of The Zimdars Company, Inc. and the problems associated with their life insurance. They are intended to demonstrate how we work with and for our clients, as well as outline a variety of issues associated with existing life insurance portfolios.
Example #1
A CPA and attorney asked us to review their client’s business and personal life insurance. The client was paying over $150,000/year in premiums and over $60,000/year in interest on life insurance policy loans in excess of $1,000,000.
As a result of our Life Insurance Portfolio Management Analysis™:
• approximately half of the client’s life insurance was restructured to continue without any policy loans or future premium payments.
• the other half of the client’s life insurance was replaced with new, lower premium life insurance structured to be more tax effective. The client more than doubled the after tax value of their total life insurance for their family and business.
• all other needed life insurance was restructured to continue without any policy loans or future premium payments.
• all other unneeded life insurance was eliminated, erasing all other policy loans. Even with the client’s increase in life insurance, the client’s business saved over $150,000/year in after tax cash flow.
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Example #2
An attorney asked us to evaluate a proposal for his client’s estate planning life insurance. Our report was provided on a fee-only consulting basis. Our Life Insurance Portfolio Management Analysis™ helped the client and attorney by:
• guiding them to different life insurance policies providing stronger contractual guarantees, as well as large insurance companies with stronger financial ratings.
• changing the life insurance policy design to offer more flexibility as requested by the client and their attorney.
• changing the life insurance policy design to save the client more than $100,000 in excessive commissions. This savings resulted in lower premium costs and better performing life insurance policies for the client.
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Example #3
Several clients have contacted us for help with existing estate planning life insurance policies purchased from other sources. In each case, the client wanted to continue the life insurance. There was an existing policy loan, taken out to pay premiums. The policy loan decreased the tax free death benefit, and the policy loan interest increased the effective cost of the policy. Continuing the policy loan would make the life insurance more expensive and more difficult to fix. At the same time, the client did not want to liquidate other assets to pay off the loan, but was willing to pay annual premiums for a cost effective policy. Finally, each policy was owned by an irrevocable life insurance trust, and the client did not want to use their gifting opportunities to gift cash to the trust to repay the loan. Using our unique Life Insurance Portfolio Management Analysis,™ we achieved the following outcome in each case:
• When the existing life insurance was cost effective, it was continued and restructured without any further policy loan.
• When the existing life insurance was not cost effective, it was replaced by more cost effective insurance.
• The policy loan was eliminated without adverse income tax consequences.
• The client is now gifting manageable annual premium payments for quality tax free life insurance without any interest costs and without large gift payments to repay old policy loans.
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Example #4
We were requested to evaluate ten existing universal life insurance and variable universal life insurance policies for a couple and their CPA. Both insureds had become uninsurable at a relatively young age since purchasing these policies. As a result of our Life Insurance Portfolio Management Analysis™ and ongoing Life Insurance Portfolio Management Review™, we provided the following assistance:
• Irrevocable life insurance trusts were created, and the policies were gifted to the trusts. If the insureds survive the gift by at least three years, the estate tax avoided on the life insurance policy death benefit will be in excess of $2,000,000.
• One policy was projected to lapse in ten years, even with continuing premium payments. As a result, total premium payments were increased slightly and reallocated between policies to make sure that all policies will continue for at least 20 years. (We recommended a longer duration, but the client did not want to pay the required premium payments at this time.)
• The variable universal life insurance cash value subaccount allocations were reviewed and changed to improve both projected performance and diversification, which may help extend the duration of the policies.
• We will provide updated projections on each policy every year so the client can monitor policy performance and any positive or negative changes from the preceding year.
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Example #5
We were asked by a new client and their attorney to review three estate planning policies purchased 10-15 years ago. The husband (now deceased) had worked very hard to purchase the “lowest cost” life insurance. His widow and son wanted to make sure the policies were sound. The widow has several relatives still living in their 90s. As a result of our Life Insurance Portfolio Management Analysis™, we helped the client come to the following conclusions:
• One estate planning life insurance policy is very sound, currently self-sustaining, and issued through a very strong life insurance company. This policy is being continued. However, an error in the ownership and beneficiary arrangements had to be corrected to avoid potentially major tax and legal costs at death.
• The remaining two life insurance policies are substantially underpriced. The life insurance companies will not make money unless the policies are lapsed or death occurs at the insured’s age 94 or later based upon current life insurance cost projections. However, the life insurance companies have the flexibility in the policies to increase future premiums by as much as 500%. Will the policies remain underpriced (and an excellent value) until the client’s death? Will the insurance company encounter future financial difficulties? Will the cost of the insurance increase dramatically when the insured is in her 80s or 90s and has no other choices? After carefully reviewing the life insurance companies, their size, performance and financial ratings, the client decided to continue one policy and replace the other policy (at a higher premium) with a new policy offering guaranteed premiums to age 100 and beyond from a much larger and financially strong life insurance company.