Deconstructing a Leveraged Life Insurance Plan


In my recent article, I noted that some leveraged life insurance plans could be heading for trouble, if they haven’t already arrived. I have primarily limited my observations to shared dollar financing plans and loan-based third-party premiums that involve irrevocable life insurance trusts (ILITs). I noted how both plans are extremely sensitive to, among other things, the relationship between loan interest rates and overall policy performance. I also noted that, aside from economics, both types of plans seek to gain additional leverage from the current tax treatment of grantor trust income, gifts, and estates. Although some tax changes that would have negatively impacted the settlor’s trust were proposed last year, they did not materialize. We’ll just have to see how things reconcile in the months ahead.

What plans to review

Which plans are on hold and should be reviewed? I have been asked this question several times since the publication of the article “Borrowed Time”. While I can reasonably argue that any plan involving an ILIT backed by any form of split-premium or third-party funding is a candidate for scrutiny, that’s probably too sweeping a generalization to be practical. So what about plans involving an ILIT and one or more loans, as well as any other two-dollar plan with ILITs that have no exit strategy other than the death of the insured?

Now, of course, a great follow-up question would be, “OK, your criteria are reasonable, but who is going to identify the shots and start the conversation?” For example, who will know that a plan does not have an exit strategy? And to that I would respond, “There are at least four parties in the planning team who could speak, namely the insurance professional, the estate planning lawyer, the tax adviser who s handles tax compliance on donations for the plan and the trustee of ILIT. I nod to the insurance professional, who should have the best perspective on the plan and its direction, the most information and resources at their fingertips, and by far the most capable of engaging in conversation. In fact, I wouldn’t be surprised if the insurance professional hadn’t already tried to start this conversation, but was still put on hold. Incidentally, for (my) convenience, I will refer to the lawyers, tax advisers and the trustee as the “estate planners”.

Customer authorization

Will the client authorize (read “pay”) for the exam? Someone will need to tell the client why it is a good idea for the team to review the plan and policy. The premise and rationale for this review is woven into the article “Borrowed Time” as well as the articles listed below. I think it’s fair to tell the client that if the process is well orchestrated, it should be quite efficient and produce a worthwhile result in terms of cost/benefit. The rest of this article is about this orchestration.

Five steps

I would break down the task ahead of the planning team into these steps:

  1. A conference to evaluate the plan at a high level;
  2. Get customer buy-in to take a closer look;
  3. Meet again to refine the analysis and identify solutions to the problem that will not create new problems;
  4. Present to the customer; and
  5. Bring the plan and/or the font to the workshop for the necessary repairs.

Implementation of the steps

At the first conference, all team members should present as much information as possible about the plan, policy, insured, ILIT, trustee, and tax planning and compliance, respectively. Here are some suggestions for advanced preparation, although the particular plan may require much more comprehensive material.

    • Insurers must send documents to estate planners outlining both the specific plan and the policy.
      • They must send the carrier’s current policy statement.
      • An illustration of the current policy is helpful, but not sufficient. What the team will really need to see is an in-force illustration rendered in an integrated fashion that shows the policy and plan as a unified structure. The built-in illustration will show, column by column, year by year until the policy matures, all active parts of the given plan, i.e. cash flows, values ​​and benefits, loans and interest and tax items. Without this illustration, the team cannot “see” the plan. And if they can’t see it, they can’t tell how it’s going and if something needs to be fixed. It will also be much easier to explain things to the customer. If the carrier cannot produce this integrated illustration, insurers will have to create one themselves, which is a lot of work. in any case, I will not call this conference until the integrated illustration is ready. It is so important.

    • Estate planners should send insurers the plan’s operational documents, a summary of the ILIT and its funding, and a high-level description of how the ILIT works from a tax compliance perspective.
    • Everyone should review the materials, if any, and request any additional materials prior to the conference.

Ready to go

We are ready! Now what should we be looking for? This is the key question! Last year, Larry Brody and I offered some advice on how to review these plans. Additionally, although my article on composing a melodious life insurance presentation focuses on the plans offered, the guidelines I discuss can be adapted to the plans in place today. Again, I appoint the life insurance professional to take the lead. If this does not happen, the orchestration will descend into cacophony.

Back it up or send it off?

Once around the table or computer screen, as the case may be, there should be an in-depth “plan-fit baseline type” discussion of what the client hoped to accomplish, what their initial expectations were ( especially for out-of-pocket disbursements), what the client understands about the plan and policy today and how well the plan and policy follow those expectations. The conversation can happily conclude that all systems are working properly. If not, the team should highlight the parts of the plan or policy that are on an unsustainable path. This will make it easier for the team to move on to options for repair or, if necessary, replacement of the plan or policy. I suspect that in most cases the team will conclude that what is needed is a fix. A good example of remediation would be creating or strengthening an exit strategy by funding the ILIT with income-generating assets.

The extent to which remediation options are explored or perhaps modelled, as well as the extent to which these options should be presented in the team’s report to the client, will depend on their sense of what the client expects at this stage. . I leave that to the team. One thing I would definitely recommend is that they be prepared to ask all the questions they will need to ask to determine if a given solution is appropriate and worth pursuing.

The end game

This is the crucial and most difficult stage for the team. How do they distill all of this technically nuanced information and all of their well-informed judgments into a message that has a reasonable chance of being “heard” by a busy customer with a lot on their mind and probably only so much attention for this kind of stuff? Of course, if the plan and policy are working well, then someone can deliver a nice message and set a date for another review. But what if things don’t go well? The team will need to lay it out, with that artwork built in and a general preference for numbers and pictures over words. Assume that the customer is much less interested in the principle of the thing than in the money! After all, wouldn’t you be? So be prepared when the customer says, “How much money will it cost me to fix the problem now, and how much will it cost me (or the kids) if I wait?” The ballpark is fine. As soon as I know, I will contact you.


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