Life insurance case study for katx or anyone else

katx, you are a Suse Orman fan. You seem to agree with her that any insurance other than term insurance is a mistake.

Grandma Sylvia is 75 and is in excellent health. She wants to leave her favorite niece Katx as much money as possible. Grandma has never put money in the market and does not have the stomach for risk.

Social Security + pensions give her much more money than she can possibly spend. She has no debts and an income of $8,000/month and spends less than $4,000/month. Her health insurance is covered. She has long term care insurance. She has $1,200,000 put away in guaranteed accounts. She wants to hold onto $200,000 because it makes her feel good.

Question: What can Grandma do that will leave the most money for Katx?

Insurance solution: Set up an irrevocable life insurance trust. Gift $1,000,000. Use this money to buy a single premium life insurance policy with a death benefit of $2,750,000.

At death, Katx will get $2.75 million free of income taxes and free of estate taxes.

"Insurance stinks." "Everyone should just buy term." "The insurance agent will earn a giant commission." Ok. What's better? I'm all ears.

InsuranceExpert said: katx, you are a Suse Orman fan. You seem to agree with her that any insurance other than term insurance is a mistake.

Grandma Sylvia is 75 and is in excellent health. She wants to leave her favorite niece Katx as much money as possible. Grandma has never put money in the market and does not have the stomach for risk.

Social Security + pensions give her much more money than she can possibly spend. She has no debts and an income of $8,000/month and spends less than $4,000/month. Her health insurance is covered. She has long term care insurance. She has $1,200,000 put away in guaranteed accounts. She wants to hold onto $200,000 because it makes her feel good.

Question: What can Grandma do that will leave the most money for Katx?

Insurance solution: Set up an irrevocable life insurance trust. Gift $1,000,000. Use this money to buy a single premium life insurance policy with a death benefit of $2,750,000.

At death, Katx will get $2.75 million free of income taxes and free of estate taxes.

"Insurance stinks." "Everyone should just buy term." "The insurance agent will earn a giant commission." Ok. What's better? I'm all ears.

this investment is not sufficiently diversified

we just avoided a global meltdown and the possibilty of insurance companies defaulting on their obligations were avoided so far --- people don't know just how close we got

investing too much in the insurance industry does not protect you from the possibility of a real global financial meltdown that the government can't head off

better to diversify among many types of assets

...

InsuranceExpert said:
Question: What can Grandma do that will leave the most money for Katx?
.Find a rebating insurance agent when they decide to get this single premium WL policy.

yes I know rebating commission is not permitted in many states, but For such a large policy, its worth traveling to a state that allows rebating.

that will net KATX or her grandma hundreds of thousands of dolarrs more right now, without needing granny to die.

You can buy $2.75M worth of coverage at age 75 for only $1M?

InsuranceExpert said: "Insurance stinks." "Everyone should just buy term." "The insurance agent will earn a giant commission." Ok. What's better? I'm all ears.Give katx $1,000,000 now. There will be no gift tax as long as Grandma has not used up her lifetime exclusion. Katx can have access to the money now and not at some indeterminable time in the future (she may not get the money for 20 years or more if Grandma lives to a ripe old age).

Good posts. Keep them coming! I won't be able to respond until tonight.
Does anyone have any ideas that will lead to more money for Katx?

chimeer said: really the best thing that Grandma can do for her niece is spend that extra money on hookers and blow.
On a related note, does anyone have any tips on how to get disturbing mental images out of your head?

chimeer said: InsuranceExpert said: Good posts. Keep them coming! I won't be able to respond until tonight.
Does anyone have any ideas that will lead to more money for Katx?

As other have mentioned 7% isn't a bad compounding rate, but there is a real risk of the life insurance company going under along with inflationary risks (some people think that current Govt. spending weak dollar etc.. may cause abnormally high inflation in the next 10 years or so). A diversified stock/bond mix has a more broad risk profile, and would also be hurt less by inflation. At least in theory.
Are there any differences in estate taxes depending on how the money is left to katx? As I'm nowhere near the point in time where I'll need to leave an estate, I haven't done any research on the tax issues related to inheritance/gifting.

curtisekarr said: Then granma dies in what the Insurance company considers "questionable circumstances", and they refuse to pay. Katx is left homeless and without wifi, unable to log-in to FWF and respond to tripleB's thread: "What was your biggest Financial mistake?"

or the insurance company finds TripleB's new thread "How to legally shorten Grandma's lifespan for fun and profit" and connects the dots

This is isn't technically life insurance the way that most people understand it.

There seem to be any number of reasons for insurance, all of which are somewhat related:

Income replacement: if the primary earner dies, dependents have enough money to continue their lives in some form, financially speaking.
Death bonus: if the insured dies, everyone gets money
Estate: if the insured dies, the proceeds go to the beneficiaries in a tax-free manner
Guaranteed income: annuities?

There are more, but these are the only ones that I can recognize.

This is a new one:

Maximizing payout. The scenario you described is essentially grandma wants to figure out how to leave the largest amount of money possible to someone. She can turn $1m into $2.75m by essentially taking out a policy on her life. In addition, she gets #2 (death bonus) and #3 (estate).

Question: how does the insurance company make money on this? Grandma's going to die, and they're not giving the beneficiaries $1.75m for free. What's the catch?

Question: various insurance products are created with a specific need/scenario in mind. Is there one place to go that lists these scenarios/goals? It would go a long way towards making insurance more comprehensible, and thus easier to sell.

Great thread! Good posts.

I have no issue with using irrevocable life insurance trusts as part of an overall estate planning method in some circumstances.

IE says that this is a "paid up" policy. A true paid-up policy will gurantee the death benefit for the single premium. I highly doubt a reputable insurer would issue this policy. IE would you be willing to show us an illustration from the company, with its name blacked out if necessary? My guess is that the 2.75 million in death benefit is not guranteed.

One of the posters mentioned the rate of return at 7% based on her life expectancy. Of course, if she is given the insurers best rating, then it would consider her to have a significantly longer life expectancy.

I'll go through this and address some of the points, but first let me make two general observations:

1)Nobody was able to come up with any ideas that would give a higher expected return. The reason for that is that there may not be any without a willingness to take on significantly more risk.

2)Many of the posts had legitimate reasons why this may not be a good idea. However, these really focused on the amount of money that Granny has in comparison to how much is going into the policy. I absolutely understand that viewpoint. What if instead of doing this with $1,000,000, we only take $100,000 of her money and buy a death benefit of $275,000? Would that then make this acceptable? The point that I'm trying to make with this is simply that life insurance can make a lot of sense when the purpose is to leave money behind.

SUCKISSTAPLES said: InsuranceExpert said:
Question: What can Grandma do that will leave the most money for Katx?
.Find a rebating insurance agent when they decide to get this single premium WL policy.

yes I know rebating commission is not permitted in many states, but For such a large policy, its worth traveling to a state that allows rebating.

that will net KATX or her grandma hundreds of thousands of dolarrs more right now, without needing granny to die.

There are a few issues with this:
1) I don't know if it can legally be done. There has to be a legitimate reason why a policy is being sold in the state other the resident state of the insured. Is traveling to another state for the purpose of a rebate legit? Can a rebate be given to someone who is not a resident of that state? Can companies prevent agents/brokers from giving rebates?

2)Granny isn't going to do this. She's not going to hop on a plane and go to California to cut out the agent who made the recommendation just to get money back that she'll never spend anyway. If Granny came up with this idea herself, it would be different.

3)The commission is much smaller than you think it is. There are not hundreds of thousands of dollars in commissions, thus there certainly aren't hundreds of thousands of dollars to rebate. This isn't a policy with a $1,000,000 annual premium. There would be hundreds of thousands if that was the case.

Porqin said: You can buy $2.75M worth of coverage at age 75 for only $1M?

Yes. One has to be female and have no health problems. Most 75 year olds won't be able to get this rate. As a guess, maybe 15% could get this rate. As another guess, maybe half could qualify for a classification that would give them 2.2M worth of coverage.

Of couse, 2.2M is less than 2.75M, but from an actuary standpoint, it's identical. The insurance company plans on paying less, but paying it sooner.

theman2 said: InsuranceExpert said: "Insurance stinks." "Everyone should just buy term." "The insurance agent will earn a giant commission." Ok. What's better? I'm all ears.Give katx $1,000,000 now. There will be no gift tax as long as Grandma has not used up her lifetime exclusion. Katx can have access to the money now and not at some indeterminable time in the future (she may not get the money for 20 years or more if Grandma lives to a ripe old age).

This is a pretty good idea. When possible it makes sense to use one's lifetime exclusion while living instead of waiting until death. This is exactly what we are doing by using the insurance trust.

We don't have enough facts to know which is the better idea.

What I have experienced is that when someone goes the insurance route instead of immediate gifting there are a couple of reasons.

1)They don't want to give the money now. For instance, giving $1,000,000 to niece Katx as a 25 year old may not be a very good idea.
2)By giving the money now, all future growth will be taxable. In other words, Katx invests the money and coincidentally it grows to $2.75 million at the same time that Granny dies and she sells the investment. Katx has a $1,750,000 taxable gain. We don't know future tax rates, but it's a decent guess, that she'll owe $500,000+ on taxes. The life insurance will give her $2.75 million tax free.
3)They like the idea of knowing that the beneficiary will have $2.75 million in the future instead of $1,000,000 now.

In many circumstances, your idea is a better way to go.

biomedeng said: InsuranceExpert said: She has long term care insurance.
Most long-term care insurance products I have seen cover only 1-3 years maximum of nursing home stays. Do you have access to sell long-term care insurance longer than 2 years? My personal experience has suggested there are two types of nursing home patients, those that die within 1 year and those that live there for over 5 years. Typically the people that die quickly are the ones that go in with some kind of serious health problem or illness that progresses very quickly. The ones that spend a long time in the nursing home are the people who are physically fit but develop some kind of managable condition that progresses slowly but still requries they receive care (Alzheimer's comes to mind, but I am sure there are other things).
Honestly I don't know why katx would buy (or continue to pay the premiums) long-term care insurance (especially if it has a max paout of 1-2 years) if she had 1,000,000 in the bank. Nursing homes cost approximately 5K per month, which is 120,000 over two years. With the standard long-term care insurance policies she is paying for insurance on something that she can afford to pay out of pocket.

Your post has me very confused because your experience is very different than mine. I don't know that I've ever seen a policy that is for less than 3 years. The vast majority that I have sold have lifetime benefits. Because of changes in pricing, I tend to now use 5 year benefits.

Long term care insurance is not nursing home insurance. One does not need to be in a nursing home to collect on a claim. One reason that people buy coverage is to help them stay out of nursing homes.

"Granny" bought her policy 4 years ago and she has a lifetime benefit. The daily benefit is close to $200/day. It was originally $160.

There are two types of people who buy long term care insurance. The first type are people who look at their financial situation and realize that if they don't buy coverage, they won't be able to afford the care that they want. The second type are people who are fairly well off. These people know that they could pay out of pocket for the care that they want. For them, it is simply a choice. If they can afford $60,000+ a year for care, they can certainly afford a few thousand for an insurance premium. For these people, what the insurance is really doing is protecting their assets.

It's really no different than a wealthy individual electing to buy home owners insurance. If there house burned down, the could afford to rebuild it. They'd rather have the certainty of a relatively small insurance premium instead of the uncertainty of big expense. It's personal choice.

By the way, granny is getting an absolute steal on her LTC insurance premium. The policies from a few years ago were way underpriced. It would not be a wise financial move to cancel the policy. It would cost her more than double to buy the same policy today.

PMonkeyDishwasher said: chimeer said: InsuranceExpert said: Good posts. Keep them coming! I won't be able to respond until tonight.
Does anyone have any ideas that will lead to more money for Katx?

As other have mentioned 7% isn't a bad compounding rate, but there is a real risk of the life insurance company going under along with inflationary risks (some people think that current Govt. spending weak dollar etc.. may cause abnormally high inflation in the next 10 years or so). A diversified stock/bond mix has a more broad risk profile, and would also be hurt less by inflation. At least in theory.
Are there any differences in estate taxes depending on how the money is left to katx? As I'm nowhere near the point in time where I'll need to leave an estate, I haven't done any research on the tax issues related to inheritance/gifting.

In this case, we have set up an ILIT. This is an irrevocable life insurance trust. The trust will be the owner and beneficiary of the life insurance. As such, the policy will be both free from income taxes and estate taxes. Katx will get $2.75 million tax free.

If granny owned the policy, it would be part of her estate, and as such, based upon current estate tax laws, and depending upon her state of residence, and depending upon year of death, some of this money would be taxed at rates in excess of 65%.

cga said: InsuranceExpert:

I've gotta give you credit for being persistent. Also, credit is due for keeping your cool while being, on the whole and in general, informative. Having said all that (here it comes)...I still think life insurance is one of mankind's cruelest and most devious inventions. Many older people who have life insurance don't need it and definitely don't understand their other options.

After reading your hypothetical case, it strikes me odd that you would pick someone fitting the description of Grandma Sylvia to make your point. Grandma Sylvia represents what I'm guessing is much less than 1% of the general population, and at best a tiny percentage of even our senior citizens.

For example NONE of my relatives and friends have long-term care insurance. And I am well acquainted with their financial situations. There's no doubt that long-term care insurance has a place but it's very expensive when purchased late in life. Very few potential customers over 75 who need it can comfortably afford long-term care insurance. Even though Grandma Sylvia can afford long-term care insurance, she doesn't really need it. The poor and the wealthy don't need long-term care insurance.

I'm not sure if I completely understand the policy you've described. But if you mean buying a single premium life insurance policy for $1M, I think it's a very bad idea to "give," "invest" with, call it what you will, $1M to an insurance company if $1M represents basically your entire life's savings--ESPECIALLY if you're a healthy 75 and looking forward to many more good years.

Regardless of the investment's safety, and the insurance company's strength, I for one (especially at that age) wouldn't sleep nights with that kind of arrangement. Even with benefit of a $100k annual income.

Also, I'd never consider this strategy based strictly on principle: I couldn't knowingly buy an insurance policy that benefited the salesman so handsomely, for so little work, and in most cases, for so little knowledge. I will concede, however, that InsuranceExpert's insurance knowledge does seem to be a cut above most others in his field.

Change the facts slightly and you'll see that this isn't some obscure case that fits a miniscule proportion of the population. Seniors tend to have two financial goals. 1) Live comfortably for as long as they can. 2)Leave money behind at death if it doesn't get in the way of goal #1. It's the magnitude of this case that makes it seem obscure. I'll give you a much more common example. Mr. Smith wants to leave $200,000 for his church when he dies, but he wants his assets to go to his wife. He can easily afford the $3,000 insurance premium without having any negative impact on his life. Let's change the example slightly. Mr. Smith doesn't care about leaving money for his church. He buys a $200,000 policy with his wife as beneficiary. Buying this policy allows him to spend $200,000 more without his wife inheriting a penny less.

In short, it often makes sense provided that one can pay the premiums without the premiums having any negative impact on one's lifestyle.

I've already addressed the LTCi issue.

You may be correct that $1,000,000 is more than Granny should pay. She can certainly do it for less. I'm much more concerned with the concept here than the exact dollars.

In order to make smart decisions, you need to change your thought process. This isn't just about insurance. What I mean is why would you ever care about what someone else makes instead of what you get? For instance, you can go to Morgan Stanley and buy the same policy from them instead of from me. The rep will make 1/3rd of what I'll earn on the sale. Would that make you happier? What if you go to a barber, do you not want to use the owner because he gets to keep all of the fee? Would you rather use one of his employees since she only gets half of the fee? Focus on what's in it for you and not what the other guy is or is not making.

By the way, the insurance salesman didn't put in a little bit of work. He has put in a lifetime of work. A big sale is nothing more than the cumulation of years and years of work. I didn't roll out of bed and start selling million dollar policies. Why do insurance companies pay such large commissions? It costs them less than hiring people and paying them a salary.

InsuranceExpert said: Your post has me very confused because your experience is very different than mine. I don't know that I've ever seen a policy that is for less than 3 years. The vast majority that I have sold have lifetime benefits. Because of changes in pricing, I tend to now use 5 year benefits.
Some of my relatives have investigated LTC insurance (maybe 5-10 years ago) and the policies offered to them were typically max 3 years benefit (not sure if there were some shorter than that). I have never heard of a policy with a lifetime benefit. Is such a policy currently available?
InsuranceExpert said: Long term care insurance is not nursing home insurance. One does not need to be in a nursing home to collect on a claim. One reason that people buy coverage is to help them stay out of nursing homes.
My older relatives have viewed it as nursing home insurance. It is a very fine line between being able to live on your own and needing 24 hours skilled assistance. In my personal experiences our relatives have not had a long period of time (max 1-4 months) where a part-time nurse or aid would have been sufficient, but rather they quickly progressed from doing okay on their own to a state in which we could no longer manage their care with part-time help. I think you are far more likely to collect the insurance for use to pay a nursing home than a skilled in-home worker, but perhaps I am wrong. Do you have access to any statistics on how these policies typically pay out?

InsuranceExpert said: "Granny" bought her policy 4 years ago and she has a lifetime benefit. The daily benefit is close to $200/day. It was originally $160.
How much does a lifetime LTC policy (with an inflationary-based daily benefit) cost for someone who is 70 years old? I remember some of my similar adged relatives claiming their policies would run 5,000-10,000 per year, and these were polices which were not with lifetime benefits. Keep in mind this was 5-10 years ago, so I am guessing the prices have continued to increase.

InsuranceExpert said: There are two types of people who buy long term care insurance. The first type are people who look at their financial situation and realize that if they don't buy coverage, they won't be able to afford the care that they want. The second type are people who are fairly well off. These people know that they could pay out of pocket for the care that they want. For them, it is simply a choice. If they can afford $60,000+ a year for care, they can certainly afford a few thousand for an insurance premium. For these people, what the insurance is really doing is protecting their assets.
I disagree with the protection of assets. First of all you are spending quite a bit of money to protect assets (sort of like the crowd that thinks buying a house is always financially better than renting because they can deduct interest). Another problem is that if the policy is not lifetime, then if grandma has to stay in a nursing home 10 years her assets will still be depleted. Also personally I would rather pay for something than jump through some insurance paperwork having to document my condition as medically necessary and possibly being limited to a specific company (not sure if there are limitations on which nursing homes you can use these policies at).

InsuranceExpert said: It's really no different than a wealthy individual electing to buy home owners insurance. If there house burned down, the could afford to rebuild it. They'd rather have the certainty of a relatively small insurance premium instead of the uncertainty of big expense. It's personal choice.
I am guessing wealthy people who carry home insurance don't have a $100 deductible. Are there any LTC products that say have a 1 year waiting period (or say a large deductible like $50,000), such that when you need the LTC care you pay for the first year and then it picks up the rest? This way you are mitigating the big risk that you are needing years of care, but don't need insurance to pay for the smaller things.

I'm not sure what's so troubling about the answers. You are correct that the type of insurance doesn't matter.

It is incorrect to say that the death claim will never get paid. Keep in mind that the same issues exist with social security payments. Usually after a number of years or a certain amount of time, one will be declared dead.

Also, all insurance policies have an age at which everyone is presumed to be dead regardless of whether they are alive or not. With a participating WL contract, the policy will simply keep growing every year. It may be a long time until the claim is paid, but it will be paid.

You are really bringing up a complete non-issue here.