Legacy Planning With Life Insurance:
WEAPON OF MASS CREATION

Life insurance is often the “JR Ewing” of estate planning.  It’s the asset everybody loves to hate.  It’s viewed as an “expense” that should be minimized—a necessary evil for only one purpose:  “estate liquidity” (paying estate tax).

But limiting your view of life insurance to just paying estate tax is like looking at your luxury car with the big engine, the fancy gadgets, and the comfortable amenities as merely a way of going to and from the grocery store!  Of course, it will do that, but that misses 99% of its utility.

The purpose of this booklet is to show you, the sophisticated and successful individual, the power and leverage of life insurance to enhance and energize your legacy.  The complete picture will be provided so that you will comprehend this complex subject, and be able to make informed decisions for yourself and for your family.

Enough “red meat” will be provided so that this booklet will also be helpful to inform and educate attorneys and accountants practicing in the estate planning area.

We’ll start by briefly describing the different types of life insurance (the bricks, blocks, 2x4’s, shingles, door frames) then we’ll learn several strategies for using these various components to build your “Legacy Dream House”.
Every step of the way, we’ll be analyzing life insurance as a financial asset (an asset allocation decision) comparing it with other safe assets. 

Finally, we’ll discover how life insurance can be used, as no other asset possibly can, to maximize the result of your life’s works.  You will learn how life insurance, when combined with other strategies, is the most cost-effective, powerful weapon in the estate planning arsenal.  Life insurance is truly A weapon of mass creation!

The Very Basics:  Pure Term Insurance

A life insurance policy, at its very essence, is a contract between the owner of the policy and a multi-billion dollar insurance company.  In return for a periodic stream of payments (premiums), the company agrees to pay a lump sum upon the death of the insured.  The premiums are proportional to the risk of the insured’s death and to the face amount of the policy. 

With the purest form of insurance (term insurance), that’s all you get—plus perhaps the right to renew each year.  The premium goes up each year because the risk of death goes up.  This increased risk of death is due to two factors: 
1.  The insured is one year older

2.  The insured is one year further away from when the insurance company reviewed medical records and lab reports, and drew their conclusions about the insured’s health and life expectancy.

The problem with term insurance is that the premium continues to increase at an increasingly rapid rate.  By the time the insured is close to their final years, the premium is totally unaffordable.  That’s why a very, very small percentage of term policies ever result in the payment of a death benefit.

Level Premium Term Insurance

In the last several decades, insurance companies developed “level term” in which the premium is guaranteed level (or in some cases only projected to be level) over a 10, 15, 20, or even 30-year period.  This means that the owner “overpays” in the early years for the right to “underpay” in the later years.  This can be an improvement over annually renewable term insurance. 

Fierce competition has driven the premiums for these policies down.    However, it’s not possible to buy a level term policy with affordable premiums which will cover the insured’s likely life expectancy.  Again, the problem is that as an insured approaches life expectancy, the risk of them dying in a particular year is so high, that the premium becomes unaffordable.

Both types of term insurance premiums are a pure non-recoverable cost.    It’s just like your car insurance or fire insurance—you hope you never need or get any of the benefits that you’ve paid for.  You’ve simply shifted risk away from you for the term.  In fact, the full economic cost of term insurance is actually the total of the premiums paid plus what could have been earned in an investment asset had these premiums been invested instead (lost opportunity cost).

Paradigm Shift:  Permanent Life Insurance As A Financial Asset

It’s now time for you to open your mind to a major shift in thinking.

You have been brain washed all of your life.

Your life experiences have taught you that any financial product with the word “insurance” in it is a cost—an expense—something to be minimized.

The reason for this is simple:  this “cost” or insurance premium did one and only one job for you.  It shifted the risk of an unlikely, but financially catastrophic event away from you to a great, big insurance company for a fixed period of time, usually one year.  If the year went by and the catastrophe didn’t occur, you were out the money—period.

In fact, the only time you got any “return” at all for those premiums you paid was in the unlikely event of a catastrophe.  So without a hurricane, flood, disability, terrible lawsuit, serious illness, or premature death—you’re just out that money.

Don’t get me wrong, insurance is necessary and prudent, and I wouldn’t want to be without any of it.  But the way most insurance works has helped to form a mind-set that all insurance is a necessary “evil” and should be minimized to reduce costs.

The problem with this mind-set is that it does not really apply to, or accurately describe, permanent life insurance (PLI).  In reality, this mind-set can result in very costly, bad financial decisions.

Permanent Life Insurance (PLI):  Two Important Jobs

Just like its poor third cousin, term life insurance, PLI also shifts the financial risk of a premature death to an insurance company.  However, in addition, primarily and most importantly, it serves as a permanent financial asset, that [if held to maturity according to its terms] produces a return—just like any other safe asset.

In the examples that follow, we’ll show this over and over again.  I am not suggesting that you take this on faith—only that you be open to the concept, so that you can process this information objectively and decide for yourself based on the facts.

Bottom line:  PLI is not an expense item.  It is an asset that can diversify a portfolio in a way that no other asset can.  Many large corporations and financial institutions own boat loads of PLI as an integral part of their portfolio of financial assets.

Permanent Life Insurance:  Great Variety, Certain Commonality

We will be learning about several types of PLI.  However, all of them have several things in common:

• PLI is designed to remain in force until the death of the insured, and at that time, pay the death benefit.

• The premium is much higher for PLI than a term insurance premium would be in that first year for the same face amount of insurance.

• The additional premium builds a cash value (and/or an insurance company reserve) that makes it possible for the policy to remain in force until death with affordable premiums that make good financial sense.

• PLI has both guaranteed and non-guaranteed elements.

• PLI can be designed to create significant benefits during the life of the insured in addition to the payment of the death benefit.

The Good, Old Original:  Whole Life

The original (and still very powerful) form of PLI is Whole Life.  In exchange for a guaranteed level annual premium, the insurance company guarantees a level death benefit, and a schedule of increasing guaranteed cash values. 

In addition, participating whole life policies, issued by a mutual life insurance company, enjoy potential dividends.  Dividends represent the distribution back to the policy holder of better than guaranteed investment, mortality, and expense results (i.e., “surplus”) in proportion to the contribution each policy made to that surplus.  This surplus often includes the company’s profits from its other lines of business.  While dividends are not guaranteed in advance, once a dividend is credited, it is guaranteed.  Dividends are often a significant portion of the actual performance of the policy over time.  The Guardian Life Insurance Company, as an example, has paid dividends to policyholders for almost 150 years!

Whole life premiums are much higher than term premiums for obvious reasons.  A whole life policy is designed to remain in force until the death of the insured, and therefore it is designed to always pay the death benefit.  In addition, whole life has a cash surrender value which can be accessed in several ways during the lifetime of the insured.

Sometimes whole life policies are blended with “term riders” to reduce the annual premium requirement.  This is often advantageous, however it also lowers the rate at which cash value accumulates, and it makes it more sensitive to future fluctuations in the dividend rate.  Sometimes the cash value is as important to us as the death benefit.  Sometimes it’s not.  These and other considerations determine the ultimate policy design.

Instead of blending with term to reduce premiums, we can go in the other direction and pay a higher premium by buying “paid-up additions”.  These are like little single premium life insurance policies that attach to the whole life policy.  They increase both the cash value and the death benefit of the policy.  Dividends are often applied to the purchase of paid-up additions.  This accelerates the compound growth of the cash value and the increase of the death benefit.

Single premium whole life is so powerful and tax-effective that the tax laws were changed in 1987 to eliminate some of its lifetime tax advantages only.   But it’s still OK to fund a whole life policy fairly rapidly using paid-up additions, within a certain limit.  This limit is called the “7-pay test”.  It’s complicated, but it limits how much and how fast cash can be paid into a policy.  If the limit is exceeded, the policy becomes a “modified endowment contract” or MEC.

The death benefit of a MEC retains all of the tax advantages of any other life insurance policy.  However, living benefits of a MEC are taxed approximately like those of an annuity (not nearly as good as life insurance).  So in most cases we want to avoid a MEC.  All PLI is subject to these limits.

All PLI is subject to this 7-pay or MEC limit.

The New Kid On The Block:  Universal Life

Universal life (UL) is a flexible form of PLI.  While it lacks some of the guarantees found in whole life, you get greater premium flexibility, and sometimes lower required annual premiums.  This flexibility can be a two-edged sword—there are many universal life policies in force which are not performing as originally illustrated. 

Often the owner is blissfully unaware that the policy may ultimately lapse (because of changing interest rates, mortality costs, etc) without the payment of any living or death benefit.  In other words, universal life must be monitored and maintained very carefully in order to be effective.  Unfortunately, there is no mechanism in place to insure that this close, periodic scrutiny takes place (other than the practices and services of your life insurance agent).  Sometimes the first clear indication of a problem is a 30-day lapse notice.

Some universal life policies have so-called “secondary guarantees”.  These policies function as if they were “term insurance to age 100 or beyond” policies.  They often have little or no cash value.  However, the company guarantees that if the level annual premium is paid on time every single year, then the death benefit will be paid upon the death of the insured—no matter what happens to interest rates, mortality experience, or expense experience.  This is called “Secondary Guarantee Universal Life” (SGUL). 

These policies can be very effective in estate planning contexts. However, with virtually no cash value, the policy must be kept in force till the death of the insured in order to receive any return on the premiums paid.

Who is Insured?  One Person Or Two?

A life insurance policy can insure a single life, and upon the death of that insured pay the death benefit.  A policy can also insure the lives of two individuals, paying a death benefit upon the death of the second-to-die of those two individuals.  This is frequently helpful in estate planning contexts.  Under current law, it is possible for a married couple to delay the imposition of any estate tax until the second death.  Thus, second-to-die insurance seems perfect for providing “liquidity” to pay estate tax. 

Sometimes this approach is taken in a somewhat knee-jerk fashion.  The disadvantage of second-to-die insurance is that it delays the delivery of significant wealth for what could be decades.  Further, all growth in the spouse’s share of the estate over that period of time from the first death to the second death will be subject to estate tax.  While second-to-die estate planning is often appropriate for all or a portion of an estate, it is sometimes automatically chosen without consideration of the big picture, and may not be the best choice for maximum after-tax wealth transfer.

Is The Stock Market In Your Insurance Policy?

The cash value of most PLI is a fixed income asset (an obligation of the company, backed by its mostly fixed income financial portfolio).  I call these “fixed policies” because your cash value cannot go down due to fluctuations in any financial market.  The insurance company has assumed that risk.  You have the guarantees.  In addition once a non-guaranteed element, such as a dividend, is credited to the policy, it is guaranteed.

In contrast, there is a type of insurance policy, in which the cash values are invested in one or more mutual fund-like investments called separate accounts.  These are called “Variable Policies”.  The policy owner bears the market risk in a variable policy.  The expense factors are usually higher in a variable policy to pay for the investment management and additional administration of the separate accounts.

There are various arguments, pro and con, regarding variable policies, which are beyond the scope of this booklet.  In my opinion, variable policies are inappropriate in most estate planning applications.  We are using life insurance for its guarantees and its consistency. 

I say leave stock market risk in your stock portfolio, and don’t put it into your life insurance.  For this reason we will only consider fixed policies in this booklet.

Disclaimers, Notifications, Alerts, and CYA’s…

•  We will be discussing various tax and legal strategies in an academic and hypothetical context.  This is not legal or tax advice.  Your attorney and CPA should be the sources of this advice.  This discussion will help you understand what they’re saying.  Nothing in this booklet should be taken as tax or legal advice.

• We will use various life insurance examples throughout these hypothetical discussions, and we will identify the policy we are using in each instance.  However, none of these is valid for any purpose without a full current illustration.  Copies of these illustrations can be obtained from my office upon request.  Bear in mind that the insurability and underwriting classification of any person is based on their unique circumstances, and though we’re using numbers from actual policy illustrations, they are being used only for educational purposes.

• We are going to compare the various life insurance strategies to fixed income assets.  At the time this booklet is written, quality, intermediate term tax-free bonds are yielding about 3%.  The Ten-year Treasury is yielding about 4%.  In a 35% tax bracket, that nets 2.6%.  All of this is before management or transaction costs.  For these discussions, we will use a comparison rate of 3% net.  If you disagree, feel free to use your own rate in your thinking process.  The results will be similar.

Let The Mass Creation Begin…!

We’ll begin the legacy planning with simple strategies and then build to more complex strategies.  In some cases, we’ll combine certain life insurance products with other strategies to multiply the effects of both.

Case Study #1:  Secondary Guarantee UL In An Irrevocable Life Insurance Trust

Example: 65 year old male “Bob”
Preferred non-smoker
$5,000,000 death benefit
Premium $103,591 per year¹

In this classic case, an irrevocable life insurance trust is the applicant, owner, and beneficiary of the policy.  The purpose of this is to keep the death benefit from being subject to estate tax.  The premiums must get into the trust in order to pay them to the insurance company.  Usually, this is accomplished by making gifts to the trust.

These gifts are usually made to the trust using so-called “Crummey” provisions.  Simply put, Bob has the right to gift $12,000 per year to as many people as he chooses without paying gift tax or using his so-called lifetime exemption.  This is called his gift tax annual exclusion.  The only catch:  each donee must have a present interest in the gift—and a beneficial interest in most trusts doesn’t qualify.

This problem is solved by giving each beneficiary an unconditional right (known as a “Crummey Power”) to take the $12,000 allocated to them for 30 days.  Most beneficiaries know that it is not in their best interests to take the money, so it remains in the trust, available to pay the premium.

If Bob is married and Bob’s wife signs his gift tax return (no gift tax required) then $24,000 per beneficiary can be gifted to the trust.  This is called “gift splitting”.

Let’s look at the financial consequence of this decision to allocate $103,591 per year to life insurance instead of other fixed assets.  We’ll look at the fixed asset accumulation versus the death benefit at various ages.

Here’s the result:

As you can see in this example, the life insurance death benefit beats other fixed assets even if Bob makes it to age 94.   Just as importantly, life insurance shifts the financial risk of premature death from you to the insurance company.

As good as that may seem, it gets even better…

We are all creatures of habit.  Without the annual premium/gifting structure that we set up in this example, many people with taxable estates will fail to utilize their gift tax annual exclusions.  For each dollar of annual exclusion wasted, there will be a 45% estate tax on that dollar—plus all it earns in the interim.

Assuminga 20-year life expectancy, wasting one $12,000 annual exclusion every year costs $149,453 in future estate tax! (3% net rate of growth, 20 years, 45% estate tax rate)

Thus the power of this strategy is the combined, multiplied, leveraged effect of the life insurance plus the habitual and systematic use of the annual exclusions.

Case Study #2:  Second-to-Die, Secondary Guarantee UL In An Irrevocable Life Insurance Trust

If we used the second-to-die version of secondary guarantee UL in the above example, the premium would be $59,0002, for the same $5,000,000 death benefit.  That makes the numbers even more exciting.  But remember—there is no free lunch. 

The death benefit is not payable until the second death.  This could be many years after the first death, and there is a lost opportunity cost of waiting many more years for the same death benefit.  However, this product is an important part of many estate plans.  The rates of return are still extraordinary.  Even if the second death were not until age 100, the death benefit would beat the hypothetical bond portfolio by 1,375,315!

Case Study #3:  Whole Life, No Irrevocable Life Insurance Trust

Often, people don’t want to put anything into an irrevocable trust, because in fact, it is irrevocable.  The only benefit of putting life insurance into an irrevocable trust is that the death benefit is not subject to estate tax upon the death of the insured.  The tax advantage is the only advantage over a revocable trust—nothing else!

Depending upon the use for which the life insurance is purchased, estate tax might not matter, or the estate may not be large enough to subject it to estate tax.  Even if the estate is large enough to be subject it to estate tax, usually no tax will be due until both the insured and his or her spouse are both deceased.  If a trust is not used, the surviving spouse will have the use of all of the proceeds during his or her lifetime.

Let’s now examine the case of a whole life policy that is used instead of another fixed income asset.  We’ll assume that it is owned and controlled by the insured, just like the other fixed income asset would be.

Example: 65 year old male “Bob”
Preferred non-smoker
$1 million whole life policy
Premium $60,000 per year3

This policy is constructed with “extra premium” to purchase paid-up additional insurance riders so that the total annual premium will be $60,0003.  We will plan on paying these premiums for 20 years through age 84.

The following chart compares the cash value and the death benefit of the life insurance policy to the value of a bond portfolio with the same input growing at 3% net.

Notice that the death benefit is always substantially in excess of the hypothetical bond portfolio, and beginning at approximately year 19, even the cash value exceeds the value of the hypothetical bond portfolio.    

Yes, the death benefit is subject to estate tax if the estate exceeds the exemption.  So what?  So would the hypothetical bond portfolio.  However, in every single year, the net amount of wealth transferred to the family exceeds what would have been the case if the premium amount were merely invested in hypothetical bond portfolio. 

This strategy is contrarian in nature in two ways:

First, the conventional wisdom is that insurance is an expense, not an asset.  As you can see, the insurance policy outperforms a more conventional safe asset.

Second, the conventional wisdom is that most life insurance should be held in an irrevocable trust.  That’s true only if estate tax minimization at the second death is your number one priority.  If retention of control and access to your asset during your lifetime and/or your spouse’s lifetime is your priority, then own the policy yourself, understanding that what’s there at your spouse’s death will be subject to estate tax based on the rates and exemptions in existence at that time.

You Can Have Your Cake And Eat It Too!

Let’s consider more closely the rate of return on life insurance relative to the timing of the death of the insured.   In the event of a premature death, the rate of return is huge.  In contrast, as you’ve seen, at or beyond life expectancy, it’s about the same (perhaps a little better) than other safe assets.

Getting an asset out of your taxable estate has a cost associated with it.  We must use annual gift tax exclusions ($12,000 per year, per donee) or the so-called lifetime exemption (currently $1 million per person for lifetime gifts).

Common sense tells us that we want to use these limited exemptions and exclusions to get the highest rate of return assets, i.e. those with the highest future values, out of the estate.  That is to say, we want the most “bang for our buck”.  We want the life insurance out of the estate if death is premature,  and other assets have not greatly appreciated.  However,  we want to have gotten assets with great appreciation potential out of the estate if the insured lives to a ripe old age.

The problem is that we can’t know a person’s precise date of death in advance.  If we knew for sure that the insured will die prematurely, then we would jump through “hoops of fire” to get the life insurance policies out of the estate.  On the other hand, if we knew for certain that the insured will live to a very ripe, old age—we would prefer not to use exemptions and exclusions to remove the life insurance from the estate.   Instead, we would prefer to use those resources to move the higher rate of return assets (e.g., business assets with an expected 20% return) out of the estate.

Wouldn’t it be perfect if there were a way to have most of the life insurance death benefit out of the estate in the event of a premature death, yet be able to use all of the gift tax exclusions and exemptions for the high rate of return, rapidly growing assets? 

In fact, we can do this with the following strategy:

• We use all our available exemptions and exclusions to remove the rapidly growing, rapidly appreciating, high rate of return assets into a trust or other entity that is not part of the taxable estate.

• We create a new irrevocable life insurance trust which will be the applicant, owner, and beneficiary of the life insurance.

• The annual premiums will be borrowed by the insurance trust, perhaps from the insured’s estate, family, or business entity, and repaid at death (or earlier if advantageous).  This strategy is sometimes called “loan regime split dollar”.

There are sections of the federal tax code that require a minimum rate of interest to be charged on these loans.  The rates specified are quite favorable compared to commercial interest rates. This minimum rate is called the applicable federal rate, or AFR.  

At the time this is being written, the long-term AFR is 4.6%.  The risk of this strategy is that the interest rates may go up over time.   You can lock in the long-term rate for that year’s premium—so the risk pertains to loans for premiums in the ensuing years.

Bear in mind, that you’re not locked into the strategy.  Future premiums can be funded from other sources, such as those high return assets for which we used our exemptions to remove from the taxable estate.  It’s very flexible.

Case Study #4:  Secondary Guarantee UL – Loan Regime Split Dollar – Level Death Benefit

Example: 65 year old male “Bob”
Preferred non-smoker
$5,000,000 death benefit
Premium $103,591 per year1
Average AFR of 5%

Death at Age 70: 
Loan Balance: $601,026
Excluded from Estate:  $4,398,974

Death at Age 85:
Loan Balance:  $3,596,602
Excluded from Estate:  $1,403,398

Death at Age 89:
Loan Balance:  $4,840,507  
Excluded from Estate: $159,493

What this effectively means is that the more premature the insured’s death, the greater the portion of the death benefit that is excluded from the estate.  The loan balance isn’t lost, it’s still owned by the insured’s business or family, so the benefits end up going to the heirs.  It’s just included in the estate (for estate tax purposes) exactly like the bonds would have been, had the money been invested in bonds instead of being loaned to the irrevocable insurance trust.

Remember that we used “loan regime split dollar” so that we could use all of our exemptions and exclusions to remove high return assets from the estate.  If our insured lives to age 89, those assets will have compounded in value at their high rate of return for 24 years, completely free of any estate tax. 

This permits the same $103,591 per year worth of exclusions to be used to give away business assets, compounding without estate tax liability, instead of being needed to gift premiums to the trust.   At 12% net, that $103,591 of business assets would be worth $13,708,598!

So…we have our cake and can eat it too!  We have a way to use PLI such that most of the death benefit is excluded on premature death, yet we are using all of our available exclusions and exemptions to exclude the high rate of return, rapidly growing assets from the taxable estate.

Now let’s make it even better…

The Icing On The Cake

Some companies issue secondary guarantee UL policies with a “return of premium rider”.  This means that the total death benefit paid will be the original face amount plus the sum of all premiums that have been paid into the policy.  Of course, the premium will be greater with “return of premium rider” than without, because the ultimate death benefit will be higher.  However, this product configuration lends itself very well to the loan regime split dollar we described.

Case Study #5:  Secondary Guarantee UL – Loan Regime Split Dollar – Return Of Premium Rider

Example: 65 year old male “Bob”
Preferred non-smoker
$5,000,000 policy, with Return of Premium Rider
Premium $147,857 per year³
Average AFR of 5%

Again, using our hypothetical 65-year old male, preferred non-smoker, we can purchase a $5,000,000 policy with return of premium rider for an annual premium of $147,875.3   Upon the death of the insured, the insurance company will pay $5,000,000 plus all of the premiums that have been paid.  If we’re using loan regime split dollar, the entire principal of the loan due, plus the $5,000,000 will be paid to the trust.  Then when the trust pays the lender, only the loan interest reduces the $5,000,000 remaining in the trust and out of the estate.

Let’s look at deaths at different ages:

Death at Age 70:         Loan Balance:     $857,958     Excluded from Estate:  $4,881,417
Death at Age 85:         Loan Balance:  $5,134,109     Excluded from Estate:  $2,823,391
Death at Age 89:         Loan Balance:  $6,909,769     Excluded from Estate:  $1,639,230

Again, bear in mind that the loan balance isn’t lost.  It’s usually paid to the insured’s family member or business and is therefore simply an estate asset just like any other fixed income asset for your heirs.  So the total value delivered to the heirs is amplified even for long-lived individuals.

Ice The Cake With Second-To-Die…

Everything we described with our hypothetical individual, we can do with our hypothetical age 65 preferred non-smoker couple.  The premium per million dollars of death benefit is less, but the payment of it is delayed until the second death.

Case Study #6:  Second-to-Die, Secondary Guarantee UL – Loan Regime Split Dollar – Level Death Benefit⁶

Example: 65 year old male “Bob”
Preferred non-smoker
$5,000,000 death benefit
Premium $59,0002 per year
Average AFR of 5%

Death at Age 70:         Loan Balance:     $342,313     Excluded from Estate:  $4,657,687
Death at Age 85:         Loan Balance:  $2,048,436     Excluded from Estate:  $2,951,564
Death at Age 89:         Loan Balance:  $2,756,898     Excluded from Estate:  $2,243,101
Death at Age 95:         Loan Balance:  $4,115,887     Excluded from Estate:     $884,113

Case Study #7:  Second-to-Die, Secondary Guarantee UL – Loan Regime Split Dollar – Return Of Premium Rider⁶

Example: 65 year old male “Bob”
Preferred non-smoker
$5,000,000 policy
Premium $72,3355 per year
Average AFR of 5%

Death at Age 70:         Loan Balance:     $419,681     Excluded from Estate:  $4,941,994
Death at Age 85:         Loan Balance:  $2,511,417     Excluded from Estate:  $3,935,283
Death at Age 89:         Loan Balance:  $3,380,005     Excluded from Estate:  $3,356,035
Death at Age 95:         Loan Balance:  $5,046,147     Excluded from Estate:  $2,123,903

Enhancing the Family Dynasty

Often, we make life insurance trusts “dynastic”.  That means that we create them in such a way as to go on for several generations without being subject to estate tax at each generation.  In order to accomplish this, we must allocate GSTT exemption to all gifts made to the trust (i.e., the premiums).  We have the same issue with GSTT exemptions as we have with gift tax exclusions and exemptions.  We only have so much, and we want to use them all on high return assets, if possible.  Also, it is more difficult to use the GSTT annual exclusion, so we often must use lifetime GSTT exemptions.

In loan regime split dollar, we are not gifting the premiums, we are loaning them.  Therefore, the trust can be dynastic, without there being a “cost” to that in GSTT exemption.  This makes the strategy even more powerful.   We can now leverage value out of several generations of estate taxation without using precious exemptions or exclusions.

How Far We Have Come

We have learned a lot in this brief presentation:

• We have demonstrated that PLI—permanent life insurance—is not a cost or expense, but a very versatile and valuable asset.

• We have quantitatively analyzed the return of PLI compared to the hypothetical return of other safe, fixed income assets, and determined that shifting the financial risk of premature death does not “cost” any reduction in the net estate transfer, even if the insured lives to a ripe old age.

• We have seen how to leverage an estate with large quantities of PLI without using gift tax exclusions or exemptions, preserving their use for rapidly appreciating assets.

As powerful as these are, we are merely scratching the surface of what PLI can do for us.  The possibilities are limitless.  It is important to think about this resource in the correct mindset.  If not, we may be using a gold brick as a paperweight and wondering why our office supplies are so expensive. 
Properly used, Permanent Life Insurance is surely a Weapon of Mass Creation!