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Testing Financial Tolerance For Tax Deferred Annuities (Part 2) Case Study Background: Except for the inclusion of the proposed variable life policy, the analysis that follows involves the identical data contained in Part 1 of this topic. (If you have not yet reviewed Part 1, you should do so before proceeding.) The policy is a $5,000,000 (level face amount) survivor life policy assumed to be owned by an irrevocable life insurance trust. Premiums are scheduled at $20,000 a year for 20 years and will be gifted to the trust. You can review the illustration by clicking here. Strategy 3 in the InsGift graphic below shows the impact on Tony and Jennifer's Net Worth.
Strategy 1 reflects Net Worth if this couple's recent $1,000,000 inheritance is placed in an equity portfolio at 10% (9% growth and 1% dividend); Strategy 2 shows the results if the $1,000,000 is invested in the tax deferred account at 10%. Strategy 3 shows the effect if the proposed life insurance policy is integrated with Strategy 2. (With both Strategies 2 and 3, it is assumed that the death benefit guarantee option on the tax deferred account is not purchased.) As you can see from the graphic above, the impact of the life policy does reduce long-range Net Worth somewhat from Strategy 2; however, compared to Strategy 1, Strategy 3 is considerably more advantageous. At death, the value of Strategy 3 becomes quite apparent, as shown in the InsGift graphic below.
Conclusion: With an impact on long-range Net Worth of only $5,000,000 (compare Strategy 2 and Strategy 3 in the first graphic above), Strategy 3 increases Wealth to Heirs by almost $12,000,000 over Strategy 2 and almost $20,000,000 over Strategy 1. This is due to the extraordinary efficiency of both the tax deferred account (variable annuity) and the life insurance policy -- an irresistible combination in this case. Note: The spread could be further widened by increasing the size of the life policy, and some of you who are licensed for InsGift (see below) may want to tinker further with the design in the available Workbook. You can make a case for diverting far more of the dollars directed to the tax deferred account in Strategies 2 and 3 to a larger premium life policy. The tradeoff for a significant increase in Wealth to Heirs will be a reduction in Tony and Jennifer's long-range Net Worth. Illustration Comments: We used version 5.0 of InsGift -- the Wealthy and Wise System ("InsGift") for the analysis, and InsGift licensees can review all reports and related menu inputs for the estate analysis by selecting the InsGift Workbook named "MA121122.!IG" from this website. Click on Producer's Center; then on Workbook Download. Review all scenarios and the second Comparison. (This is the same Workbook associated with Part 1 of Testing Financial Tolerance for Deferred Annuities, so if you have already downloaded it in conjunction with that article, you do not need to do so again.). To download this Workbook now, click here. In case you are not licensed for InsGift, you can access a list of all the features of version 5.0 of InsGift by clicking here. Be sure to take a few minutes to look it over -- we think it shows impressive capacity. With the new IRS attack on split dollar, InsGift may be a production lifesaver for you. If you are not licensed for InsGift, please contact InsMark at 1-888-InsMark (467-6275) for licensing information, or click here. Note: Version 5.0 of InsGift can also illustrate annuity 1035 exchanges as well as show the effect of bonus interest credits. To illustrate a 1035 exchange, do one scenario with the current annuity scheduled under Liquid Assets. In a second scenario, replace the current annuity with the proposed annuity -- including any bonus interest due on the exchange. |
