Estate Planning & Tax-Efficient Insurance Strategies

Speaker 1 – 00:00
Welcome to EWA’s FinLit podcast. EWA is a fee only RIA based out of Pittsburgh, Pennsylvania. We hope all listeners
of this podcast will beneft as we deep dive into complex fnancial topics that we will make simplifed for you. And
we hope that this really serves as a catalyst so that you can make the best fnancial planning decisions for your
family and also save time. Welcome everyone on this week’s Finlit by podcast, joined here by Jameson Smith and
Jimmy Rogan and most popular podcaster on the EWA team. We’re talking all things estate planning, risk
management, specifcally for high net worth clients. You know, what are the best solutions from an insurance
perspective that are out there that can ft alongside your wealth management retirement, overall fnancial plan? So
yeah, Jimmy, why don’t you start us off?
Speaker 2 – 01:00
Well, I guess when we talk about insurance we should probably just start with, okay, what are the types? Very, very
quickly. Term insurance. The way I like to explain term insurance, it’s temporary coverage as the name suggests. We
recommend it oftentimes for clients, but it is for a short term duration or you know, we use it. If large amounts of
coverage need to be accessed and we need to be cognizant of, you know, budget, then there is whole life that can be
termed as permanent coverage. Cash value. We, we recommend that when we have situations where we have high
income earners and we’re trying to assist in a plan that allows for tax deferred accumulation and what we call safe
money because cash value life insurance, the insurance that is growing inside a life insurance policy is pretty much
plodding along.
Speaker 2 – 02:03
It’s not a grand slam, but it’s a consistent double as we like to say. And then there’s a variation of the two, which is
universal life. And I think that’s a product that I think is not understood very well in the marketplace. It’s kind of like a
hybrid of the two. It was devised in the early 80s when interest rates were really high. Since that time, interest rates
have come signifcantly down. They’re a little bit higher now, but those are products that really need to be
understood because unlike term insurance and traditional cash value permanent insurance that has signifcant
guarantees with respect to premium and death beneft, Universal life doesn’t. And so we need to monitor those
policies very closely for clients to make sure that there are no unwanted surprises down the road.
Speaker 1 – 02:54
No question. Well Jameson, what have you seen from your experience? Let’s focus in on that. Universal Life before
we talk about the structure. How often do you see policies that were sold with high expectations and now we’re 10,
20 years auditing them and it’s like you’re going to lose the coverage 20 or 30 years before you pass. How often do
you see that?
Speaker 3 – 03:17
More often than I would like to. I think that they’re unfortunately grossly. I think they still are defnitely in the past, but
grossly oversold and over promised. And you know, there’s a use case for them like Jimmy and I are working on a
client now where we need. It’s a buy sell agreement for business owners and they need an appreciating death beneft
and try to keep the cost down. And they don’t really cash value is not as important. So term insurance isn’t going to
grow with the pace of the business. So we’re looking at a universal life policy to keep up with the growth of the
business for the death beneft. So there’s a use case for them, but it’s defnitely not the way they’re sold is that you’ll
get some market like returns. In a tax deferred life insurance policy they generally underperform.
Speaker 3 – 04:07
They’re capped at a, you know, correlated to an index return, they’re capped plus expenses. So bottom line, they
usually don’t perform like they say. And they’re not. They don’t. They don’t. The performance is not what the
expectations are up front. But again there are use case for them. But a lot of times it’s not. Not what people think
they are.
Speaker 1 – 04:27
Yeah.
Speaker 2 – 04:27
You know Matt, the universal life allows for a lot of fexibility in the design. And so if you’re an advisor creating a
universal life illustration for a client and you go out of the boundaries of what should be a responsible assumption
and then you just sell it and then put it in the drawer and never look at it. Which I think collectively we would agree,
we see that all the time from other recommendations. It can be a problem.
Speaker 1 – 04:56
Yeah, no question. Yes. I would say like just from the industry as a perspective because it’s gotten a lot of black eyes
is rightfully it should have. But like I’m going to go through a couple examples. So there’s a lot of infuencers like
Dave Ramsey, Susan, they say, you know, don’t touch private insurance. Buy term insurance and invest the difference.
The issue with this is that 95% of the population maybe will buy the term insurance. Not even the right amount, but
then they’ll spend the difference and then after 20 or 30 years or by 65 when that term insurance expires and that’s a
use it or lose it. So if you die. Great. If not all the money put in there is wasted. Now they still have an insurance
insurable issue, they need to be insured.
Speaker 1 – 05:40
But at that point if they try to get term insurance, it’s astronomically expensive, their health may not allow and they’re
out of luck. Right. They don’t have the assets to self insure. That’s, that takes extreme discipline to become self
insured. When you think that and life happens, it’s like we see it like a 401k alone. If you’re a high income earner is
not going to get you self insured and you set a brokerage account, you have a kid, it gets raided. Then you refurnish
the house, it gets rated. Then you update the house, it gets rated. You buy a vacation house, it gets rated. So it just
typically we see that the self insurance route, high income, middle class, it rarely works in the quick of a fashion as
people think. Usually you need to have a layered term policy in place.
Speaker 1 – 06:20
20, 30, year 65.
Speaker 2 – 06:21
Yeah. The other thing I would add is on the off chance that we actually do see somebody who actually saved the
difference, if they follow the planning that you mentioned from Susie Orman, they could be sitting in a situation in
their 70s where they have all of their wealth tied up in qualifed plans and that’s a tax disaster. So it can be
complicated on both sides if you save the difference and if you don’t save the difference, no question.
Speaker 1 – 06:50
So I would say 95% of the population is ft to buy term insurance. You have to work with a competent advisor that’s
going to hold you accountable to invest the difference. And that’s so important. And given success, you may want to
look at other types of policies once your net worth as Jimmy you mentioned gets to a certain level. That’s term
insurance pros and cons. If you’re going to go that direction, it takes an extreme discipline. You need to accept you’re
going to be different than most of your friends. You have to save a lot more than you think to become self insured.
And the discipline factor of that not rating the money you save statistically it’s, you’re going to be, you know, top 1%
of discipline to make this right.
Speaker 2 – 07:27
And be very cognizant of asset location when you’re saving the difference.
Speaker 1 – 07:31
Absolutely, absolutely. Now whole life I would say on the fip side is most, it’s a huge industry where people will start
right out of school and they’ll try to sell it to everybody. And I Would say this is how we started. Yeah, I mean that’s.
We all started prior.
Speaker 2 – 07:45
Absolutely.
Speaker 1 – 07:46
Dealer selling insurance. And then you get your investment license and then. But the reality is like 95% of those sales
probably should be term insurance, not whole life insurance. When someone’s making 100 or 200 grand a year and
they need to get a couple million of protection, they need to focus on that in the term insurance frst. Right. So with
our clientele, you know, generally probably top 10% income earners are top 1% and like you have a couple million
dollars of your high income, you are, you’re just in a different category of what is going to be a suitable need. So
that’s where we do focus a lot in the permanent insurance given our clientele. But what a lot of people read articles
or read out there and it’s. It, it is miss sold to lower income people.
Speaker 1 – 08:31
But if you’re in a higher income, it’s extremely important to have permanent protection that’s gonna last forever. And
we’ll give reasons behind that. So going into the whole life, obviously it’s a policy that you mentioned, it stays in force
forever. We’re a big fans of certain structures where kind of super fund the premiums. It’s done in a short time frame
and that does a lot of things. And there’s a couple of changes that just happen in the tax code and some riders that
are available. So Jimmy, what’s the tax? I always mess this up. 16 something. I wasn’t even close. No. What’s the 60?
There’s some power of attorney taxing. We’re doing that. Some form. 7702 is life. All right. Two main numbers in my
head.
Speaker 1 – 09:11
So basically what this does is the government, a lot of rich people will fund in life insurance for tax reasons. So it
goes in after tax, but then it grows tax free. And you can access it tax free by recovering your basis or borrowing
against the death beneft. Then when you die, that lowers the death beneft, whatever you borrowed. Right. So lots of
tax benefts. So ultra high net worth. People say, oh, I can stuff money in here. Instead of cash being, you know, the
interest I earn in a bank or a bond gets taxed every year at the highest income rate. I can just stuff it in here and
avoid that. Sign me up. Well, the government created this rule called 7 pay where if you.
Speaker 1 – 09:49
The life insurance policy endows and under seven payments, they view it as an investment, not a life insurance
contract essentially. And then there’s Lots of tax consequences. So the quicker you get this in, it’s like paying a
mortgage off in 15 years versus 30 years. The interest you save is astronomical. Right. So in a life insurance, if you
put it the money in 10 years versus let’s say 50 years of the rest of your life, the results you’re going to see could be 2
or 3x on the growth of the cash, on the growth of the death beneft. It’s, it’s crazy. But we want to make sure that the
policy remains a life insurance policy so it stays tax free. So most of the policies we’re recommending for high
incomers, we’re sniper shotting.
Speaker 1 – 10:30
It’s like a getting it in quick, making sure it remains tax free in nature as a life insurance contract. But then that’s
going to operate as, you know, risk management that could operate as part of our estate plan and a trust that could
also operate as our safe money in cash. Because you know, investment portfolio is great if you have a long term
horizon. And so if you read out there and say, oh, I’m going to be risky while I’m young and safer when I’m old, I
always have an issue with that because when you’re risky, when you’re young, you don’t have any money. So even if
you hit the ball out of the park, it’s on a little bit of money. It really doesn’t matter.
Speaker 1 – 11:04
What if you could be risky when you’re old and you’ve accumulated a couple million that could be dramatically
impactful your net worth? Well if you have a safe pool, if the market does drop, which it always will, about every
seven years you can be 70 and see a 30% market correction. As long as you have a different pool of money you can
pull out of the year, it drops in the couple year it recovers, no issue. And that’s where this cash value, it’s not gonna
get the same rate of return but it’s gonna allow you to sustain greater returns forever on your investment portfolio.
And a lot of people compare it. Well, what if sometimes a fnancial plan is about a support system.
Speaker 1 – 11:37
It’s like the two can complement each other so well, especially for high net worth from a tax reason, from a asset
protection reason, then obviously from a supporting your investment. So that’s personally how I have my plan
structured. I Plan to be 100% equity investor for the rest of my life. Like I’m never going to have a bond allocation, but
I’m also stufng a lot of cash inside Life insurance?
Speaker 2 – 11:57
Yeah, we kind of use the analogy, it’s like a Swiss army knife. There’s a lot of different ways in which these cash
value policies can be very helpful in a plan. And another way of saying it is, it’s self completing. There’s cash. If you
live too long, there are riders that you can put on policies that allow for protection in the event of a disability or a long
term care event. And obviously there’s death beneft that can be passed on either through trust or directly to
benefciaries. So you know, our clients are looking for us to make recommendations that support their plan and are
very tax efcient and that’s where this is helpful.
Speaker 1 – 12:36
And the other thing that, I don’t know, maybe seven or eight years, I’m not sure of the exact date that the rider
became available called a long term care rider. And this is, you know, obviously an epidemic in America. So Jim, just
give us a quick background. Before long term care only existed in kind of like a term life insurance.
Speaker 2 – 12:52
Yeah. So they’re called standalone long term care policies as insurance products are considered. It’s a fairly new
insurance product, it was devised in the early 80s, but essentially you pay a premium to the insurance company and
if God forbid you are in need of any type of long term care, whether that’s in home care, assisted living or skilled
nursing, you would get a beneft paid. But if you would, for example, purchase the policy in your 50s because that
would be the time to do it. Because from a health standpoint you have to qualify. And these long term care events
generally, hopefully you don’t have one. But if you do, odds are it’ll probably be in your 80s.
Speaker 2 – 13:34
You could be in a situation where you’re paying premiums for 30 years before you even need the beneft and, or God
forbid you could have a situation where you don’t need the beneft at all, you get a diagnosis that it doesn’t allow
even for a long term care event. Clients weren’t really thrilled with that use it or lose it type of structure. And so what
the insurance companies, what the marketplace dictated was we need to make this more self completing. And so
they added a rider to these cash value policies which allow for clients, if they do need long term care, to basically
take it tax free from their death beneft while they’re still living. So again, we come back to the Swiss army knife self
completing analogy. If you have a policy that is structured properly, you’ll have cash.
Speaker 2 – 14:26
If you live too long, you’ll have a death beneft. If you die too soon and you’ll also have a death beneft available if you
need long term care. That is the direction that the marketplace has gone and that’s really what we talk to our clients
about. Because there’s not a lot of appetite for paying for a premium for decades and not knowing if you’re ever
going to need the coverage.
Speaker 1 – 14:50
Yeah, absolutely. So James, give us the example. The long term care beneft is hugely impactful for two like market
and taxes. So give us like a rundown of like in retirement why this could be so benefcial to somebody that is high net
worth. Yeah, they could self insure it, but maybe they don’t, they shouldn’t because of the market or taxes.
Speaker 3 – 15:07
As you say, a lot of times people clients work with could self insure. They could, you know, afford to pay $100,000 a
year for a long term care facility. But the two problems, exactly what you said. Number one, if the market’s down and
you have to pull from investments to pay for that could be detrimental. And the second thing is for tax efciency. So
a lot of times clients will have a lot of their money tied up in qualifed plans or Roth accounts. Roth comes out tax
free, but ideally if we can leave that to pass to kids tax free, that’s ideal qualifed plans you may have to take out, you
know, an extra 30 or 40% than what you need because of taxes. So you’re going to get pushed into higher tax
brackets. Your Medicare cost is based on taxable income.
Speaker 3 – 15:51
So now you’re paying more Medicare costs and it’s like the least tax efcient way. If you have a brokerage account
could use that which would be, could be a little bit more tax efcient. But the beneft of the long term care rider on
the life insurance is it’s not market correlated. So it’s there no matter what the market’s doing and it’s all tax free if it’s
used for long term care.
Speaker 1 – 16:08
So we’re typically designing this to like if a client has, you know, they like 3 to 5 million bucks in retirement and
they’re used to spending like their AGI is like 251 spouse goes and passes. Well now the tax bracket shrinks and now
we’ve got under 200 to go up to that 24 tax bracket. So now that surviving spouse has this money, they’re fne. If they
need a healthcare event, taking it out of their IRA or 401k, it’s gonna, they’re gonna be doing it at 32, 35, 37. Well if
they have this Rider on the life insurance, they can take it out, eat up the 10 to 24% bracket on their assets and then
take this out tax free. So now they’re paying 0% taxes that have 32, 35, 37 on the assets.
Speaker 1 – 16:46
And that just preserves a tremendous amount of wealth, you know, long term. So this, and like Jimmy said, it’s not a
use it or lose it. So I think, you know, this is how I do it. It’s how most of our clients do it. You’re, you’re one of three
things. Like you said, you use the cash, the death beneft goes to kids or you use part of the death beneft to cover
the healthcare tax free while you’re living. And the government blesses the tax code primarily because like you know,
a lot of people, percentage of the population will go on Medicaid. And that’s what the government, once you’ve lost
your assets, that the government puts that bill. But they love when someone has a plan.
Speaker 2 – 17:19
Listen, long term care, anytime the government gives you a tax break, you should probably take it and consider it in
your plan.
Speaker 1 – 17:27
Yeah, absolutely. And there’s a net worth. I mean if you’re under a million, you’re you know, having insurance. It’s case
by case, kind of the 1 to 5 million, we call it the purgatory. Like you need some insurance, like self insurance is not
guaranteed to work out. And then over 5 million, it’s like you don’t need it. You could self insure. We did this, it’s over
7 million. We fgured out you don’t need it. But you may want it if you hate taxes and like math, you know, as far as
like how the market works and yeah, so even if it’s like I could self insure, it’s like, well is it tax efcient? Is my wealth
going to truly build to the greatest if that’s the goal for intergenerational wealth if I don’t have it?
Speaker 1 – 18:08
And then we do the analysis and we can again case by case. But more often than not, this also sometimes is a need,
but it’s also a want. Because high net worth clients do not like paying taxes.
Speaker 2 – 18:20
No, they don’t. But the other thing, if we’re talking about long term care, there’s certainly a fnancial component, but
there’s also an emotional component. And you gotta think about am I purchasing this for me or am I purchasing it
for my kids? Because if I’m in a long term care situation, it’s my kids that are taking care of me. Are they local, are
they not? Is there any coordination to the care and the plan? It just, and unfortunately I went through this with my
mother a couple years ago. She was diagnosed with Alzheimer’s. Luckily we did have long term care. They were not
in a position where they could self insure. So those benefts were extremely helpful. And the coordination that came
from these policies was very helpful too.
Speaker 2 – 19:02
Because it’s one thing to go through that and have your kids see you deteriorate that way, but the other thing is if you
throw a fnancial component on top, that adds to that stress. So you have to understand who you’re actually
purchasing it for.
Speaker 1 – 19:18
No question. No question. Well, to close out. So there’s the universal life and there’s two different types of universal
life. And I’m just gonna cover these really quick. It’s the guaranteed universal life. Huge black eye in the industry.
People have said, oh, you can do this, it’s way cheaper than whole life. You’re going to get a 10%, like you said,
interest rates back in the 80s, 10% return forever. Then what happened is these policies, they’re a mix. So the
mortality and expense ratios grow. If they don’t hit the number that you built the premium structure off. If it hits 3%
instead of 10%, the thing may not last till 100 years old, it may lapse at 70 years old. And that’s what happened with
a lot of these universal life policies, is expectations were set extremely high and then the results were extremely low.
Speaker 1 – 20:01
And so there’s a lot of money wasted, a lot of commissions generated for the people selling them, a lot of money
made for the insurance companies, a lot of consumers that end up wasting money. So now there’s been some
reform and a good advisor would structure it properly so there’s guarantees back. You can do what’s called a
guaranteed universal life. Whereas if you set the premium structure, no matter what the performance is, no matter
what the expenses are, as long as you pay the agreed upon structure up front, it’s guaranteed. And we can push that
age till like 121 if we want to. The longer, a little bit more you’re going to pay. But estate planning, this can be a
cheaper option. Not going to have as much cash accumulation, sometimes it even goes to zero.
Speaker 1 – 20:42
But if we’re just doing estate planning or business planning, where we just need that death beneft when you die, not
if you die, because this would stay in force forever, that could be a proper way to do it. If we’re not worried about the
cash or the long term care rider. So from an estate planning perspective, or purely a death beneft perspective, the
gul, as long as the gul, because a lot of times we’ll see them sold as just ul. Oh, do this, it’s half the cost. And then,
well, the thing’s going to implode when you’re 85. And if you die at 90, it’s. You just wasted millions of dollars
essentially if it’s a big policy. So if you’re doing a ul, you just need to understand that the work with an advisor that
sets realistic expectations or structures the policy with those guarantees.
Speaker 1 – 21:19
And then the other, the IUL is, and there’s some great policies out there, but you have to understand the policies
work. So the iul, you know, it sounds too good to be true where it’s like, okay, we get the upside index, the S&P 500,
it’s capped at nine. And you have the downside, which is expenses. We’ll say it’s like a negative 1.8. Well, they don’t
give you the dividends. So if you look at the historical returns, we’re probably looking, and I’ve ran this through, you
know, an extensive analysis, you’re looking between four and a half and fve and a half percent most years. So great
product. Again, if you. And John Hancock specifcally has this product called a Vitality Rider where people can get
credits if they do medical screenings every year. So incredible.
Speaker 1 – 22:01
But I’ve seen other advisors illustrate these at like 10 returns. If you look at the S&P 500, it’s averaged over 10 in the
last 100 years. If you take the dividends out and last year the S&P 500 did, you know, over 20%. Well, if you’re capped
at nine and you compound that over a hundred years, it’s still a great product. But you have to design it on a realistic
return assumption up front. And as long as you do that in that, you know, four to fve and a half percent range,
awesome. But if you have someone, an agent saying, oh, you’re gonna get 10%, look at the S&P5 and they don’t even
realize the dividends are taken out or it’s capped again, that thing’s gonna implode. So great product if it’s designed
with attention to detail.
Speaker 1 – 22:46
If not, you’re going to have the same issues that we had in the 1980s, 30 years down the road. And unfortunately I’ve
seen how people sell these things and they make them look as good as possible because they just want it to earn
the commission and sell it. And I think we’re going to have a, there’s gonna be a huge black eye on Iuls. But there are
Iuls that are well designed under conservative return assumptions that are extremely good policies for older people
that again are focused on death beneft and focused on their health. They can pay a lot less to get the same results
for their families.
Speaker 2 – 23:15
Yeah. Coming back to the beginning of our conversation with universal life, there’s a lot of fexibility in how you can
design product. So if you go the frst route, which you mentioned, current assumption, universal life, where there isn’t
any guarantees, if you recommend it to a client and say this death beneft is going to cost X based on these
assumptions and if you’re not reviewing it every year and if those assumptions aren’t meeting expectations, if you
don’t go back to the client and say hey, expectations weren’t what we thought, we have to pay more, the policy is
going to implode. It might not implode, it will implode. But that’s a conversation advisors never have. So either be
responsible on how you are designing it or make sure you’re reviewing it with the client every year.
Speaker 2 – 24:05
And if more premium needs to go in, put it in.
Speaker 1 – 24:08
Absolutely.
Speaker 2 – 24:09
Because you don’t want what you just mentioned, which is a client in their mid-80s with no insurance when they
thought they had it.
Speaker 1 – 24:16
Absolutely. So you know, I think these again, every one of the products we mentioned can be on an extreme scale.
Like a term policy can be extremely bad. If you’re like not investing the difference, it can be extremely good. If you’re
a young family and you need $5 million of insurance, you can get it really cheap. A whole life policy can be extremely
bad. If you’re a young person making 100 grand and you haven’t touched your 401k and gotten the free money, you
haven’t done the Roth, you’re single and you’re like why are. Or it can be extremely good. One of the best tools as part
of your fnancial plan.
Speaker 1 – 24:46
If you’re a high income earning executive doctor making over half a million years, yeah, it should be a big, your safe
money should be your long term care, it should be your risk manager death beneft. So there are in extremes and you
have to make sure that you have an advisor that’s able to recommend the right product. And the universal life, you
have to have an advisor that if it’s guaranteed, awesome. The expectations and the assumptions are upfront are
designed correctly or you have an advisor that’s going to meet with you every year. That’s huge. So a lot of advisors
will sell this and then you’re never going to hear from them ever again.
Speaker 2 – 25:15
And that’s the biggest issue.
Speaker 1 – 25:16
And so, you know, I, again, I agree with you. I have no problem with uls as long as you have an advisor. It’s part of a
fnancial plan that you’re reviewing it every year. I mean, that may be the right thing. Maybe you’re. You, you can
throw in 50 and I, you know, if this doesn’t do that, we’re supposed to be a little bit more aggressive on the
assumptions. If this doesn’t do what we thought it was to do, 10 years, I’m worth 10 million. I can throw in, I can
catch it up. Right. And then it still may be the best product. But you have to set those expectations up front. And I
would say the same exact thing for the iul. It can be really good or really bad. So again, you have to work with an
advisor that it’s.
Speaker 1 – 25:49
It’s a good for you and it’s a good support system for your fnancial plan. But. Any other closing thoughts? I think
that’s a good overview of the landscape.
Speaker 3 – 25:58
Yeah, I think just understand the products before you make a decision.
Speaker 1 – 26:01
Absolutely. Jimmy, any closing?
Speaker 2 – 26:03
Yeah, just make it a part of your plan and make sure it’s reviewed. If you buy a policy and you don’t review it for 20
years, again, we don’t want any unwanted surprises. So it’s a part of our client’s plan and it’s reviewed the same way
we review any equity position.
Speaker 1 – 26:20
Absolutely. All right, well, thanks for joining us, everybody. We’ll catch you next week. Thanks for tuning in to our
podcast. Hopefully you found this helpful. Really hope this is as benefcial and impactful to as many people across
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