How to create “Super Roths” for wealthy clients


Additionally, private placement life insurance may not provide the lowest level of insurance, according to Rembowski: “Often the COIs on private placement products are higher because private placement companies use reinsurers instead of holding the insurance themselves.

The main reason for choosing private placement is the choice of investment. You get access to private alts and hedge funds – the ugliest tax trick. However, standard VUL products will have a Bill 40 fund list as well as a lower level of insurance. Advisors can select a portfolio of assets that work well with the product. »

General Account Wallet

Life insurance companies invest premiums in a general account whose performance historically tracks the yields of mid-term corporate bonds that make up the bulk of their holdings.

In fact, the Federal Reserve estimates this life insurers hold 6% of credit market instruments in the United States. Life insurance products like whole life and universal life accumulate cash value over time that reflects the performance of the insurer’s general account.

In a presentation at the AICPA 2021 conference, I compared the relative advantage of investments held in various product structures. At today’s favorable capital gains tax rates (which aren’t guaranteed to stay low), the optimal structure for investing in passive stocks is usually an ETF. The shares also benefit from favorable tax treatment on long-term gains, an increased tax base at death and the ability to gift appreciated assets.

Bond income is taxed annually at the ordinary income rate, which can significantly reduce after-tax growth over time. This is especially true for high income investors. And high yield fixed income investments held in ETFs and mutual funds are particularly inefficient when held in taxable accounts.

A famous ad notes that Guinness beer “only has 125 calories – not on purpose.” Similarly, life insurance whose cash value is linked to the performance of the general account is exactly the type of investment that benefits the most from being held in an insurance portfolio.

The objective of the general account portfolio is to provide the highest returns on the safe investments used by insurance companies to finance medium and long-term liabilities. In other words, the insurance company engages professional investors to build a broadly diversified portfolio of bonds that captures both credit and mortality premiums for policyholders.

Ross Junge, Chartered Financial Analyst and Partner at Junge McGill Wealth Management in Clive, Iowa, is an expert in working with high net worth clients to leverage the benefits of whole life insurance products that integrate a general account portfolio.

Junge notes that Whole Life helps “enhance tax-efficient accumulation, portfolio diversification, and multigenerational estate tax planning outcomes when integrated with traditional investments for the benefit of high net worth clients.”

How does a whole life insurance policy fit into traditional investment portfolios? The policy’s cash value growth increases over time but, unlike a bond mutual fund which holds assets similar to corporate bonds over the medium term, does not decline when interest rates or credit spreads increase. This steady growth can reduce the volatility of a client’s total wealth, allowing for better optimal equity allocation, especially in taxable investment accounts.

A common criticism of whole life insurance policies is the high initial commission, but the present value of the advisor’s compensation may be lower for a commission-based product than a fee-based product when held for a long period. Agents can also structure policy costs to increase competitiveness.

Junge notes that “fiduciary financial advisors who understand the benefits of permanent life insurance (PLI), how to appropriately size the allocation to PLI compared to a traditional diversified stock and bond portfolio only of investment, and how to structure policies designed to reduce the cost of insurance and maximize tax benefits, can dramatically improve financial planning outcomes for clients.

For affluent clients, the longer-term tax-advantaged accumulation and death benefit generally outweighs the cost of insurance for the early years.

Developing a Wealth Transfer Plan

Most ultra-wealthy families have two primary goals: lifestyle and inheritance. An advisor’s job is to develop an inheritance plan that transfers the estate as efficiently as possible upon death.

Parrish recommends taking advantage of the current historically high estate and generation-skipping trust (GST) exemptions to purchase a life insurance policy below the exemption limit: “If the wealthy person has an unused estate of $12 million dollars and a GST exemption, use it to pay a single premium for a life insurance policy that can buy, say, a $28 million death benefit,” he says.

“Put it in a GST trust, and you’ve already skipped a generation, perpetuating the dynasty trust. Add in more sophisticated techniques like the private shared dollar and the generational shared dollar, and it’s possible to get more out of the gift. The bottom line is that you avoid inheritance tax over two generations with an asset that’s also income tax-free,” says Parrish.

Parrish and Junge also recommend the use of life insurance within an irrevocable life insurance trust (ILIT) for high net worth clients. According to Parrish, “The good old ILIT with Crummey Power Gifts remains one of the most powerful estate planning tools for wealthy individuals. Done correctly, you completely avoid gift tax, inheritance tax and income tax. on income on your bequest to future generations.

Junge sees ILIT as a transition to an insurance policy that initially serves to protect against premature death, but in the long term becomes a valuable part of estate planning as wealthy families shift their primary focus to estate planning.

According to Junge, “if the irrevocable trust is properly structured as a Generation Skipping Trust (GST), clients can also avoid estate tax for multiple future generations, thereby perpetuating multigenerational wealth transfer strategies.”

If estate planning strategies that involve the use of life insurance sound complicated, they are. An advisor should understand income and estate tax laws, asset location, insurance products, and how to implement a strategy without making mistakes. And advisors working with UHNW clients need to recognize when life insurance is more successful in meeting clients’ estate planning goals than traditional investments.

Many wealthy clients already use an insurance agent specializing in global wealth management who can integrate investments and insurance. There is an attractive niche for advisors investing in understanding when to use sophisticated life insurance strategies to manage wealth across generations.

Michael Finke is Professor and Frank M. Engle Chair in Economic Security at the American College of Financial Services. He can be reached at [email protected]


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