Example #1. Second-to-die coverage (two lives insured).
Joe, age 58, is a cancer survivor (free of the disease for 8 years) and married to Mary (who is 2 months younger). Today both are healthy. They needed $2 million of insurance coverage for estate tax purposes. Since no estate tax is due until the second death of a husband and wife, second-to-die is the perfect choice. Best of all, it costs less than single coverage ($18,200 per million dollars of insurance for Joe and $16,210 for Mary, who is also a standard risk). Second-to-die, on the other hand, only cost $10,202 per million (only available because Joe is now insurable). Of course, they bought $2 million of second-to-die coverage.
Bless the 5-year rule.
Example #2. Individual coverage (one life insured)
Sam, a 65-year-old widower, owns a profitable business, Success Co., which he wants to transfer to his son. Sam has two nonbusiness children, whom he would like to treat equally. His accountant correctly told him he would need $3.5 million of insurance, together with his other assets, to reach the equalizing goal. Although Sam had suffered a heart attack in his late 40s, he passed his insurance physical. Sam used the funds in his rollover IRA to pay the premiums - $85,302 per year - on a $3.5 million life insurance policy, solving an estate planning problem he originally thought had no solutions.
Once again, the 5-year rule saves the day.
The 5-year rule has a kiss'n cousin -- the "2-year rule," that is also a big-premium money saver, but few people know it exists. Let's set the scene for when this rule is used: The insured is healthy enough to be insurable, but is a smoker. Remember, insurance companies do not want your money if they don't think you are going to live. Why?... Smokers die sooner, often much sooner, than nonsmokers. So the premiums for smokers are always higher… much higher.
Now here's an inside secret that even few professional advisors know: Most insurance companies will consider a rate reduction (from smoker rates to nonsmoker rates) after two years of documented smoking cessation. Let's look at a real-life example.
Example #3. Smoker who quits after two years.
Jack, a 42-year-old, is healthy but he smokes. Jack needs $1.5 million in life insurance to fund a buy/sell agreement. ABC Insurance Co. rates Jack a standard risk, but charges him a smoker's rate… $18,586 per million for his new $1.5 million policy. The nonsmoker's rate for Jack would have been $9,901. After two years of abstaining from any kind of nicotine products, Jack provides documented proof that he is nicotine free. ABC lowers his annual premium to $10,795, the rate for a 44-year old nonsmoking male. The usual physical necessary to buy insurance was not required.
Sadly, the interaction of economics, the way insurance companies do business and the tax law makes this area overly complex. But knowing the right strategies and someone to implement the strategies for you puts you in a position to beat up the IRS -- legally -- with affordable life insurance to enrich your family. The above article is just the tip of the iceberg for the insurance tricks of the trade.
One final bit of advice: Have all of your existing life insurance policies reviewed at least every two years. When you need additional life insurance always -- I mean ALWAYS -- get a second opinion.
For more information on this fascinating subject browse my website: www.taxsecretsofthewealthy.com. Or if you need your current insurance portfolio reviewed or a second opinion on pending new insurance, I have twisted my insurance guru's arm to provide this service gratis. Call me, (Irv) at 847-674-5295. I'll point you in the right direction.