ILITs and 2nd to Die Variable Universal Life Insurance

[gcgang]

An agent is pitching me on using a 2nd to Die Variable Universal Life Insurance Policy within an Irrevocable Life Insuance Trust to leverage annual gifts to our daughter, avoiding Income and Estate Tax on the Death Benefit. We’d get about $1.6mm DB for $30k premiums at ages 67 & 64 w standard rating.

Agent says the Prudential Policy has guaranteed DB even if performance sucks, as long as level premiums are paid, pointing out survivor may have to use part of Unified Credit for gifts over individual annual exclusion.

As I haven’t reviewed my Estate Plan with our attorney for about 8 years, I was considering using the ILIT as motivation to review our documents.

Thoughts?

 

[OldShooter]

Run!

 

[gcgang]

Run!

Run and get it right away? After likely Fed and State Estate taxes it will probably take over $3mm to net the $1.6. I’ll get on it directly. Lol.

 

[Golden sunsets]

We had a second to die ILIT. Perhaps the plan you are considering is diffetent than the ILIT we had. You don't mention the investment component, which in theory can yield a much greater pot of money than the 1.6M. As the years go by, the portion of the annual payment used to pay for the actual insurance increases pretty dramatically. Also the costs to us to pay the trustee for the record keeping increased dramatically, which is an additional cost outside of the annual payment. There was also an end date to the policy and if the second of us had not passed by that end date, the insurance component disappeared and your estate is left with the investment value only. In theory after 15 years, the investment account was supposed to have grown sufficiently to cover the cost of the insurance premiums and we would no longer be burdened with payments. However the investment returns used in their modeling were greatly overstated (12%/yr). We dissolved the trust after fifteen years, when there were no longer any surrender fees and dispersed the proceeds of the liquidated investments to the beneficiaries (our children). Fortunately the proceeds exceeded the total premiums paid by a factor, but the return was not as great as if we had just invested the annual payments. Also taxes had to be paid on that gain, in excess of the premiums.

 

[Exchme]

Term life when you were working as a way to protect your family in case you passed and couldn't provide for them was a must. But you are past that point in life and insurance products as investment vehicles is always a terrible idea, filled with extraordinary sales commissions to the agent and then super high ongoing fees. The game is that the products will be so complicated that these costs will be hidden really well, beyond your patience to snoop them out. But rest assured the costs and fees are present and coming out of your pocket.

So forget it and just invest in low cost, broadly diversified index funds and sleep well at night.

 

[SecondCor521]

I think reviewing your estate plan after 8 years is a really good idea.

If you already have whole life policies, then the ILIT is also a really good idea.

After watching my Dad own a bunch of whole life policies for decades (he has an ILIT with a second to die policy in it, but his is with NWML), I've decided they aren't that great. The performance is always much much less than the illustrations they provide you. His second to die policy was supposed to be self sustaining after 12 years but it took about 22 years IIRC. So I'd take that $1.6M number with a big big grain of salt.

I've decided to just keep my money in investments. I think that the better return there as opposed to a whole life policy, compounded over three decades or so, will more than make up for any extra taxes owed (even at 40% or 45% estate tax rates).

I'm not a fan of Prudential personally.

 

[qwerty3656]

I assume the folks who are down on ILIT, would say the same things about long-term care insurance?

 

[ivinsfan]

I assume the folks who are down on ILIT, would say the same things about long-term care insurance?

Why do you assume that? They are completely different products for completely different problems.

 

[qwerty3656]

Why do you assume that? They are completely different products for completely different problems.

Well I've seen the same arguments against it (hidden fees, increased costs over time, better off self insuring, evil insurance companies are going to screw you, etc)

 

[OldShooter]

I don't know anything about LTC insurance, but all those arguments are pretty much spot on AFIK for variable life. I once downloaded the prospectus for a Thrivent variable policy. It was over 200 pages of fine print, hence impossible for any buyer or salesperson to understand, and a text search for the word "fee" was an amazing experience. Fees to put money in, fees to take money out, maintenance fees, other fees, etc. And the index performance reference, S&P500, was strictly nominal, ignoring the dividends that are a major factor in total return. That's a real gotcha when the product is sold to naïve buyers.

Insurance companies being "evil?" I am reminded of Woodie Guthrie's observation: "Some will rob you with a six-gun, and some with a fountain pen."

 

[RetireeRobert]

.
Insurance companies being "evil?" I am reminded of Woodie Guthrie's observation: "Some will rob you with a six-gun, and some with a fountain pen."

The subject is insurance companies, not lawyers.

 

[ncbill]

I'd never have a universal life policy again...had a couple of policies I didn't choose (but had to pay) & they both collapsed to guarantee & blew up after ~25 years...IMHO they should be banned.

 

[RetireeRobert]

I'd never have a universal life policy again...had a couple of policies I didn't choose (but had to pay) & they both collapsed to guarantee & blew up after ~25 years...IMHO they should be banned.

You had a "couple of policies you didn't choose"? Then how could you avoid having a universal life policy again, if again you are not able "to choose"?

 

[ncbill]

You had a "couple of policies you didn't choose"? Then how could you avoid having a universal life policy again, if again you are not able "to choose"?

They were for continuation purposes for a family business...but the business was sold.

 

[RetireeRobert]

They were for continuation purposes for a family business...but the business was sold.

That is understandable. But next time you would have full choice to be able to pick a good universal policy and would know how to cut through and request realistic projections to refine your choices.

 

[OldShooter]

... But next time you would have full choice to be able to pick a good universal policy and would know how to cut through and request realistic projections to refine your choices.

Just curious; what planet do you live on?

 

[RetireeRobert]

Just curious; what planet do you live on?

Earth. And you?

 

[ERD50]

Compare this to just having your daughter invest the annual combined $30,000 gift. That is tax free, and no other strings attached.

If one of you dies, the premiums are still $30,000, right? And you'd be limited to $15,000 annual gift (with some inflation boost?).

If the 64 YO makes it to 89, a $30,000 annual investment, even with no inflation boost, would have grown to over 2.5 Million (minus some for taxes on divs along the way, and income tax on the gains).

https://bit.ly/2T7Rtkb << short link to portfolio backtest

It's essentially saying you think that insurance is a better investment than a portfolio. But few here "invest" in insurance. Remember, it is the gifting that takes it out of the estate, the insurance becomes an investment decision. The sales person will try to paint a different picture.

-ERD50

 

[RetireeRobert]

Compare this to just having your daughter invest the annual combined $30,000 gift. That is tax free, and no other strings attached.

If one of you dies, the premiums are still $30,000, right? And you'd be limited to $15,000 annual gift (with some inflation boost?).

If the 64 YO makes it to 89, a $30,000 annual investment, even with no inflation boost, would have grown to over 2.5 Million (minus some for taxes on divs along the way, and income tax on the gains).

https://bit.ly/2T7Rtkb << short link to portfolio backtest

It's essentially saying you think that insurance is a better investment than a portfolio. But few here "invest" in insurance. Remember, it is the gifting that takes it out of the estate, the insurance becomes an investment decision. The sales person will try to paint a different picture.

-ERD50

And if the daughter is not "up" to and capable of investing the annual gifts? You also neglect the fact that the life insurance contractual benefit does provide some significant leverage on the accumulated premiums paid (i.e., the death benefit will in all probability be a significant multiple times the accumulated premiums). And you gloss over the income taxes paid on investment gains along the way, such taxes could be significant, either along the way or at the end. And the daughter would face some degree of risk and volatility with her own investment results vs a contractually guaranteed life insurance death benefit, which by the way passes income tax free to daughter. That said, there are both advantages and significant disadvantages to an ILIT: a nice brief primer https://www.thebalance.com/guide-to-irrevocable-life-insurance-trusts-2894256

 

[youbet]

An agent is pitching me on using a 2nd to Die Variable Universal Life Insurance Policy within an Irrevocable Life Insuance Trust to leverage annual gifts to our daughter, avoiding Income and Estate Tax on the Death Benefit.

Do you actually need to avoid estate tax? That is, has your estate planner (or your own calculations) told you that your estate will exceed the limits and will be subject to taxation? If not, there is little reason to establish an Irrevocable Life Insurance Trust, especially with a Variable Life Insurance Policy within it.

The link RetireeRobert posted contains good information and supports not using an Irrevocable Life Insurance Trust unless it's needed to avoid estate taxes.

How about an update after you review/update your estate plan with your attorney? If he/she sees that you are in fact likely going to have an estate tax problem, let us know what is recommended.

 

[pb4uski]

I'd never have a universal life policy again...had a couple of policies I didn't choose (but had to pay) & they both collapsed to guarantee & blew up after ~25 years...IMHO they should be banned.

That is common where the policyholder doesn't pay the minimum required premium, but rare where the policyholder pays the minimum required premium.

 

[Golden sunsets]

I assume the folks who are down on ILIT, would say the same things about long-term care insurance?

Not true for us. My comments on ILIT's above would probably be considered negative, but we also purchased LTC policies at the age of 60 and have kept them. We are now 72/74.

 

[ERD50]

And if the daughter is not "up" to and capable of investing the annual gifts? ...

At first, I was going to respond that "what if the daughter is not "up" to and capable of paying the insurance premium with the annual gifts", but after seeing your link (thanks), and re-reading the OP, it seems that the irrevocable trust would handle this.

... You also neglect the fact that the life insurance contractual benefit does provide some significant leverage on the accumulated premiums paid (i.e., the death benefit will in all probability be a significant multiple times the accumulated premiums). ...

Well, this is a very loaded statement. If it was true in general, then many, many posters here would be using life insurance and/or annuities to fund their retirement. It is generally accepted that life insurance is *not* a good investment.

... And you gloss over the income taxes paid on investment gains along the way, such taxes could be significant, either along the way or at the end. And the daughter would face some degree of risk and volatility with her own investment results vs a contractually guaranteed life insurance death benefit, which by the way passes income tax free to daughter. That said, there are both advantages and significant disadvantages to an ILIT: a nice brief primer https://www.thebalance.com/guide-to-irrevocable-life-insurance-trusts-2894256

I mentioned taxes, I'm not sure about "gloss over", it would take more effort than I wanted to put into that post to go into detail, and we'd need to know the tax brackets of those involved, etc. They are not insignificant, and must be considered, I agree.

And remember, the annual gifts pass tax free to the daughter, so from a $ standpoint, it does come down to whether the after tax returns on investments can be expected to exceed the insurance pay-out. And again, if this was a near slam-dunk, I would think many posters here would be "investing" in life insurance policies, regardless of Estate taxes.

And as the link points out, an irrevocable trust can't adapt to changes in tax laws or conditions. It's up to the OP to determine if it fits their needs/wants, but I'd think very, very long and hard before giving up that flexibility.

And as mentioned by others, is the OP really going to be affected by Estate Tax?

-ERD50

 

[ncbill]

That is understandable. But next time you would have full choice to be able to pick a good universal policy and would know how to cut through and request realistic projections to refine your choices.

I hope your LTC's underlying policy is plain-vanilla whole life, not universal, as I've mentioned before.

Since with any universal life policy you should expect it to collapse to the guaranteed illustration.

Never rely on the projections the salesman shows you, as they're usually at the highest projected rate of return.

Remember equity-linked life insurance policies normally cap the annual gain you receive (the insurance company keeps the rest) & they usually keep any dividends paid as well.

 

[ncbill]

That is common where the policyholder doesn't pay the minimum required premium, but rare where the policyholder pays the minimum required premium.

Which becomes impossible to pay after a couple of decades (unlike plain-vanilla whole life) since the underlying life insurance premium gets repriced every year.

So you might start out paying $X/year (and building cash value) but 20 years later the annual premium could be $5x to keep it in force.

Unfortunately, in the real world growth in cash value never compensates for the premium increases.

The investments have no chance of keeping pace with the increasing premium because of the limitations mentioned in my post above.

An ILIT should be holding whole life or term insurance instead.