My apologies, I have been predisposed but would like to respond to your questions.
Life insurance has purposes and I think you are misunderstanding the purpose.
How so? I've explained the ILIT was initially established to provide liquidity for estate tax purposes. While that primary purpose may have been reduced temporarily by changes in the tax code, it remains quite valid as the tax code is all but certain to reverse in 2011. Even if the need for liquidity somehow no longer becomes an issue, keeping the policy in force is entirely consistent with my desire to leave as large an estate as possible for my children. I've tried to be as clear as possible about this.
I don't know your age or the cost of insurance or the cost of this private payment for insurance, but, if it will work out, why doesn't everyone do it?
- 80 y.o.
- approx. $15k/yr for $1mil death benefit
- I don't have that 'investment' cost either, that's why I'm trying to determine what the viatical and life settlement co's consider an 'acceptable' return on their investments. I would like to compare that to the current yields on bonds and other fixed income investments.
- I agree completely that what I am asking about will not work effectively for everyone, or likely even a small percentage of policy owners. But then, I sincerely doubt my personal situation, insurance needs and policy use are exactly representative of everyone else either. One-size-fits-all type comments aren't particularly helpful, so I've provided details of both my personal situation and my insurance policy. Hopefully I will receive pertinent personalized comments at least and some possible alternatives to keep the policy in force at best. Likewise, I find an articulate explanation including the specifics supporting a position much more helpful than rhetorical questions or a blanket statement.
Why doesn't everyone get a policy and have someone else pay for it in order to give more to the ones they love? Could it be that, when the calculations are made, the insurance company thinks the amount they pay out will be less then the amount of the premiums and the amount earned on the premiums?
Clearly, calculations made by the insurance co. to determine initial premiums are done using the date, life expectancy and other variables in place at the time of application. I agree completely there is insufficient value in that calculation
at that time, to have any economically viable third-party investment value. My point is, do a new calculation at a later date with an older insured while keeping the premium cost level, and that potential investment value most definitely has the ability to change. Similar, if you will, to the change of investment return one sees in the increased yield to maturity when calculating the same principal value and interest rate over a shorter number of years for a bond. Make sense? This is why I believe at some point in time, towards the latter end of the insured's life expectancy, the policy may be able to support not only the policy cost but the added expense to involve a third party in order to continue premium payments.
Now, you have a private investor who is going to calculate and "bet" on the happy circumstance you will die before the insurance company actuaries are proven correct. Why would a private investor believe they have better actuaries than the insurance company?
Why is having one's own actuaries even necessary? If someone pays the exact same premium for the exact same death benefit on an insured's life policy that is already 2/3 of the way to original life expectancy, I believe they are assured of beating the insurance co. actuaries at their own game. Obviously, they will receive the full death benefit with an expenditure of only 1/3 the expense the insurance co. actuaries considered appropriate. Secondly, do not overlook the obvious. An investment need not be structured in such a way as to form a 'bet' on life expectancy, or pit an investor against an insurance co. and their actuarial experts. Why not simply structure an investment (i.e., loan) similar to a zero coupon or discount bond, where an investor receives and accrues a stated rate of interest on any premiums paid which, along with a full return of principal, is all paid at maturity (the death of the insured)?
Now, don't forget about taxes. The trust now has some type of income in this business arrangement. Since we're no longer talking gift, be sure to add enough money to pay for the sale of part of the insurance policy and for other things.
The trust was never over funded and has no assets other than the policy itself. There would be no tax, income or expense to the trust if the policy is simply removed from the trust, ownership changed rather than sold, and future premiums paid direct. All gifts to the trust were under the annual gift exclusion limits and crummey provision requirements were adhered to, so there would also be no taxable distribution to the beneficiaries upon termination of the trust.
I don't think you will find an investor for your plan. Before even seeking one out, talk with an estate attorney who will read the trust and make sure you are not violating the trust.
I had the trust drawn up and am intimately familiar with the terms. So long as the Trustee (who is the policy owner) is legally authorized and willing to instruct the insurance co. on a change of policy ownership, there is no violation to do so. Further, I see no conflict in a change of ownership done to provide continued benefit to the same beneficiaries. The beneficiaries themselves have given their approval, as they can not afford to fund themselves and it still allows them to receive a reduced benefit vs. none.
As to not finding an investor, why exactly? I didn't outline any specific investment plan in my earlier messages, but if an investment loan is structured to include adequate collateral, why wouldn't some investors be interested earning a premium over alternative investments? Given the negative return of stocks over the past 10 years, I would think any fixed income investment that included a guaranteed return (I am mortal, ergo the policy will pay off) wrapped in the proper legal framework and securitized with collateral many times the value of their risk capital might generate some interest to those able to evaluate the favorable risk/return.
Assuming an investor is interested in such a loan, my original question was regarding reasonable investment or loan expense. As the example in my last message pointed out, even if the expense was 10% annually for a 10-yr period (almost 3x the current risk-free treasury bond yield), over 60% of the death benefit -$600k- would still be left for my children after paying the loan interest and return of principal. That is still a substantial sum that will go a long ways toward providing the liquidity for estate taxes we desire. This is why, when you said "Better to pay the amount to Uncle Sam then to pay to both the insurance company and the bettor against the insurance company.", I have to take exception.
I am not trying to be argumentative and certainly appreciate your comments, but thinking 'outside the box' doesn't automatically make for a bad idea. This idea appears to be economically viable so I see it in very simplistic terms: When given a choice of leaving money to the IRS or their children, most will choose their own children. When given the choice of safely earning a return of 3% or 10% annually, most would chose 10%. As I said in my first message, I was looking to see if there were companies similar to viatical or life settlement companies that structured and facilitated such loan arrangements. If not, investing time to pursue a private solution before simply letting the policy lapse seems to make sense to me. Thanks again for the discussion.
