The benefits of philanthropy

Once you have created enough wealth
for your heirs to live comfortably, the
best way to utilize your estate is by giving some of it away to charity. Creating
a foundation in your own name, then giving
to charity is an excellent way to give back
to the world.

“I’ve always written about how to give to
charity so it feels good,” says Barry Kaye,
the recipient of numerous honors across
the country for his charity work over the
last 40 years. He is a professor at Florida
Atlantic University and president of Barry
Kaye Associates.

“While I’ve bought billions of dollars of
insurance to offset estate taxes and optimize assets for families, we’ve also been
able to assist people with their favorite
charities utilizing insurance concepts that
not only help the charity, but help protect
family assets,” says the winner of Lifetime
Achievement and Man of the Year awards.

Some of the charities he is involved with
are the Jewish Federation, the American
College, the Philharmonic Center for the
Arts, and the Carol and Barry Kaye
Performing Arts Auditorium at Florida
Atlantic University. Kaye personally presented the Muscular Dystrophy Association
with a $50,000 check on Jerry Lewis’s annual telethon, and he gave another $50,000 to
Hurricane Katrina relief efforts.

Smart Business asked Kaye how to create a foundation and the benefits a person
can receive from philanthropy.

How does one go about creating a foundation?

See an attorney, who then will provide
the necessary trust agreements to build a
charitable foundation for the family.
Children can even serve as trustees.

The foundation can accept cash, or in
accordance with certain limitations, appreciated stock or real estate, and in so doing
save taxes as well as benefit the new foundation and the future charities to receive
grants from the foundation.

Under the law, you must give away 5 percent of the assets each year. You can choose
any acceptable charitable organization.

We have ourselves, along with clients, purchased insurance policies that we held
for more than two years, sold and then
donated the money to the charity. Our
clients have also donated policies directly
to charities as well as making their own
contributions in accordance with their
objectives.

How much money does it take to start a foundation?

I’ve never heard of any kind of minimum.
Under the law, you have to give away 5 percent a year. If you put $100,000 away, then
each year you must give $5,000 to charity.

I would say people have started foundations with as little as $1 million. That put
them in a position to give away the
required $50,000 a year and now they have
a foundation.

Obviously you get a tax deduction, so if
you put $1 million in, it’s only costing
$650,000. But on the other hand, this is done
because someone is charitable and they’re
not looking for the tax deduction, per se.

How does starting a foundation benefit the
creator?

It’s on a gratification and satisfaction level. You come to a point in life where
you’ve been very successful and you’ve
had so many benefits that you feel like you
just want to give back.

Most people who want to give back feel
very strongly that they’ve taken so much
from society and enjoyed so much that
they want others to enjoy, too. There are
those who will give money for education or
some for religion. There are those who will
give money for health, like underwriting
research, and there are those who want to
give to the fine arts.

How can an insurance policy benefit a charity?

Say you are over 70 and purchase a $10
million policy at a cost of $250,000 for two
years. You sell the policy after two years
for at least 15 percent of the death benefit,
or approximately $1.5 million. You recover
your original $250,000 and donate to charity the balance of your approximately $1
million after taxes. The charity purchases a
last-to-die survivorship policy on you and
your spouse for a death benefit of approximately $25 million if you qualify. The cost
to you is nothing since you recovered your
original $250,000. You actually make a profit since your $1 million donation is tax-deductible and should create about
$400,000 in tax savings. Ultimately, upon
your deaths, the charity could receive up to
$25 million.

If you choose, the charity could be your
own charitable foundation. In this manner, you will create a substantial family
foundation. They would also receive the
allowable trustee fees. Everyone wins:
you, your insurance company, your insurance agent, your favorite charities, your
children, and the institution that bought
your policy.

BARRY KAYE, Ph.D., CLU, is a professor at Florida Atlantic
University. Reach him at [email protected] or (800) 343-7424.

Right or wrong?

If you don’t want your heirs to live comfortably after you’ve departed this life, there’s a simple solution. Don’t plan. Let the government take most of your hard-earned dollars.

However, there is a better way to handle life insurance and your assets. “Mistakes are made constantly,” says Barry Kaye, professor at Florida Atlantic University and author of eight books on life insurance. “Advisers with antiquated biases still do not use all the options available, and therefore many clients are ill-advised. These are very costly mistakes and can wreak havoc, devastating a lifetime’s work and estate.”

Smart Business spoke to Kaye about the number of different ways life insurance can be utilized — and the right way to do it.

What does life insurance have to do with Social Security?
You are 65 and you receive $3,000 monthly Social Security for a total of $36,000 yearly. You pay approximately $14,000 income tax for a net income of $22,000 yearly. You do not need this money to live on. Give it to charity or your own charitable foundation. There will be no income tax, since it will be offset by the charitable deduction of the gift. The charity will have the use of the full $36,000 each year, and can use it to purchase a $3.5 million last-to-die survivorship insurance policy on you and your spouse.

Wrong way: Take $24,000 a year and put it in your pocket, even though you don’t need it.

Right way: Give the full $36,000 to charity, pay no tax, and leave your heirs $3.5 million.

How can life insurance increase the value of your home?
Your home is worth $1 million. You borrow $100,000 through a home equity loan and the yearly interest is 7 percent ($7,000). You purchase a $2.5 million last-to-die survivorship life expectancy policy on you and your spouse for a single payment of $100,000, lasting to your ages 85. When you both die before age 85, your heirs will receive the $1 million home, less the $100,000 loan, plus the $2.5 million policy for a total of $3.4 million instead of the $1 million home. You have effectively more than tripled the value of your home at the cost of $7,000 a year in interest. Where else can you invest $7,000 a year, possibly tax deductible, and create an extra $2.5 million?

If you have a more expensive home of $2 million or more, you may want to borrow $1 million and buy the same type of policy. The $1 million would purchase approximately $25 million. This will produce at your deaths the same $2 million home, less the $1 million loan, plus the $25 million death benefit for a total of $26 million vs. the original $2 million home alone. This is a 13x increase, and the cost was only approximately $70,000 yearly interest, which possibly could be made tax deductible.

Wrong way: Don’t take out a mortgage.

Right way: Take a mortgage and increase your value from $2 million to $26 million.

How can life insurance recover taxes previously paid?
This program is similar to turning debts into assets.

Choose any amount of income or capital gain taxes you have spent and would like to recover. You may have made a major gain on a particular investment and paid taxes of $2 million. Borrow $200,000 at approximately 7 percent interest ($14,000 yearly). Transfer the $200,000 to an irrevocable trust. The trust purchases a $2.2 million last-to-die survivorship policy with the $200,000. At the deaths of you and your spouse, prior to age 85, your heirs receive $2.2 million tax-free. This recovers the taxes you had paid as well as the $200,00 insurance premium for only $14,000 a year. You also have the right, without requalifying, to extend the policy past age 85 with additional premium. You can adjust this up or down in accordance with your tax loss and own objectives. Obviously, a $5 million tax loss would require $500,000 to recover the taxes and the premiums.

Wrong way: Do nothing, suffer the tax loss for your family.

Right way: Recover every tax dollar paid and more.

BARRY KAYE has written eight books on life insurance and is a professor at Barry Kaye School of Finance, Insurance and Economics at Florida Atlantic University (FAU), where he received an honorary doctorate. His latest book, “You Buy, You Die, It Pays,” hits bookstores in November. Reach him at (800) 343-7424.

Right or wrong?

Choosing between right and wrong in life isn’t always as easy as it looks, but choosing the right life insurance policy can be easier than you think.

Life insurance can, in essence, insure an art collection or even guarantee a stock portfolio. All you have to do is buy, according to Barry Kaye, a professor at Florida Atlantic University and author of eight books on life insurance.

“I’ve been in the insurance business for 45 years, more than half of my life,” Kaye said. “I have led 15 different companies for the year during my career. I was a catalyst in the creation of last-to-die survivorship insurance in 1963.

“In my time, I’ve come to learn that wrong is wrong, but in some cases, wrong may represent conventional wisdom. However, the right way will always represent the more productive approach.”

Smart Business spoke to Kaye about how life insurance can, among other things, guarantee a stock portfolio and guarantee yields on a CD.

How can life insurance save an art collection?
You’ve collected art for a lifetime. It’s now worth more than $5 million. You’ve always ensured your collection for its full value. No collector would ever go without insurance. Yet at your death, half of the value of your collection will be devastated for estate taxes. You can give it away to a museum to avoid taxes or effectively lose half of the value of the art in taxes. Why wouldn’t you buy the type of insurance that would protect this from happening?

Moreover, buying life insurance can even recover the cost of the premiums as well as the taxes. Simply spend 10 percent more on premium, buy 10 percent more insurance, and all expenses will be covered. You remove one painting from the wall, sell it and use the proceeds to purchase the insurance to protect the rest of the collection.

You could also use the collection as collateral and borrow the necessary premium. This technique will only cost you interest each year, which will be way less than the annual premium.

Wrong way: Lose your art, buy only one type of insurance.

Right way: Keep your art, buy the right insurance.

How can life insurance guarantee your stock portfolio?
You have $3 million of stock. This is money for your heirs and charities since you have more than enough money to live on without it. You want to make sure the entire principal is there at your death, no matter what happens to the market. Simply take 10 percent ($300,000) from your margin account. It will probably cost you $21,000 yearly interest, which you do not have to pay since you can accrue it. The $300,000 can be used to buy a one-payment last-to-die survivorship policy on you and your spouse with a death benefit of about $3 million. This will not only guarantee any loss, but could also provide substantial additional profits at your deaths.

Wrong way: Leave your portfolio subject to loss.

Right way: Guaranteed. No loss.

How can life insurance increase your CD and muni bond yields?
You have $5 million of bonds. You make 5 percent for a yearly total of $250,000. So you purchase an immediate annuity — depending on your age — which can return up to 15 percent for a total of $750,000 yearly. This approach provides a better return because it’s based on principal and interest. This means there is nothing left for your heirs at your death. You may wish to leave them with the same $5 million you would have if you had retained your bonds, or at least $2.5 million they would have received after estate taxes.

Keep 66 percent of your 15 percent income (approximately $500,000) to effectively double your original 5 percent to 10 percent. Take the remaining 5 percent ($250,000) and buy a life insurance policy on your life for about $5 million. At your death, your heirs will receive the original $5 million back and you will have a doubled 10 percent yearly return during your lifetime. If structured properly, it is possible you will have doubled the net return for your heirs as well as yourself.

Wrong way: Continue 5 percent, $250,000 yearly return and leave your heirs $2.5 million.

Right way: Double your return to 10 percent, $500,000 return yearly and leave heirs up to $5 million.

BARRY KAYE has written eight books on life insurance and is a professor at Barry Kaye School of Finance, Insurance and Economics at Florida Atlantic University (FAU), where he received an honorary doctorate. His latest book, “You Buy, You Die, It Pays” hits bookstores in November. Reach him at (800) 343-7424.

Life insurance questions?

There comes a time when every successful person must ask him- or herself difficult questions about life insurance. The answers could mean the difference between a comfortable life for your heirs or months of red tape and a substantial loss of money in estate taxes.

Smart Business asked Barry Kaye, professor at Florida Atlantic University and author of six books on life insurance and estate planning, 15 questions regarding life insurance.

Kaye said any “no” answer means you need help, insurance or an analysis of your present programs. Five “no” responses means you are losing money, not optimizing your assets and creating huge problems for your heirs or paying too much for your insurance.

1. Have you arranged to pay your estate taxes at an effective discount using insurance?
Insurance on an annual basis or a single payment will always cost less than the actual estate tax.

2. Do you know if you are paying too much for your current life insurance?
Because of improved mortality tables, as well as a new creative product, many policies are antiquated and much money can be saved.

3. Have you analyzed whether you are paying the lowest cost for your life insurance?
Any simple analysis will prove in black and white whether you are overpaying or not.

4. Are you borrowing your premiums and paying interest, which is less than the actual premiums itself?
A simple program of borrowing and paying annual interest in many situations will be less expensive than paying the actual premium itself.

5. Have you checked whether you have any antiquated policies that you no longer need?
These policies are now saleable in the secondary market, which can pay you cash substantially in excess of the existing cash value.

6. Have you analyzed whether it would be cheaper to buy last-to-die insurance or insurance on your spouse?
You may be paying too much on your own life and it may be more reasonable to use your spouse or purchase last-to-die insurance if it will do the same job at less cost.

7. Have you analyzed whether it would be more efficient to give gifts to charity by utilizing insurance instead of your own assets?
Money given to charity at death is always subject to where your stock and real estate portfolios may be. A life insurance policy owned by a charity guarantees they will receive what you want them to and at less cost.

8. Have you analyzed whether your older policies can be improved?
Many of the older policies have substantial cash values, which can be used with new policies to bring the annual costs below the current policy’s premium.

9. Have you analyzed your IRA and pension and learned how to optimize them up to 50 times at your death?
If you do not need your IRA to support you, then you can effectively escape double taxation by making a distribution and purchasing life insurance on an income and estate tax free basis, which will produce at death a much greater return than your IRA.

10. Have you arranged to avoid the havoc at your death caused after 30 years of marriage with an unintentional antiquated prenuptial agreement no longer applicable?
Is it possible that the nature of your relationship has changed and the number of years involved would properly take your marriage to a different level to where you really wanted to take care of your spouse in a better way?

11. Have you analyzed whether you can give your unneeded social security to charity at many times its existing value?
If you don’t need social security to live on, then avoid income taxes by giving the annual money to charity, which in turn will purchase a policy on your lives to create a much greater return.

12. Do you really believe your advisors have given you the best up-to-date solution to your situation?
Have things changed since your original advice and is it possible that you can create superior approaches for your objectives?

13. Do you believe your estate plan needs a second opinion?
Most anything of importance should always require a second opinion.

14. Do you realize the time spent on your estate planning is small by comparison to the large affect on your family forever?
Whatever you do or don’t do will provide the consequences that will impact the people closest to you for a long time to come.

15. Do you really want to ruin a 30-year relationship at death by the consequences of your action or inaction?
You are so highly thought of that it is inappropriate to spoil these opinions and leave the wrong legacy behind.

BARRY KAYE, Ph.D. CLU is a professor at Florida Atlantic University. Reach him at (800) 343-7424 or [email protected].

Life insurance questions?

There comes a time when every successful person must ask him- or herself difficult questions about life insurance. The answers could mean the difference between a comfortable life for your heirs or months of red tape and a substantial loss of money in estate taxes.

Smart Business asked Barry Kaye, professor at Florida Atlantic University and author of six books on life insurance and estate planning, 15 questions regarding life insurance.

Kaye said any “no” answer means you need help, insurance or an analysis of your present programs. Five “no” responses means you are losing money, not optimizing your assets and creating huge problems for your heirs or paying too much for your insurance.

1. Have you arranged to pay your estate taxes at an effective discount using insurance?Insurance on an annual basis or a single payment will always cost less than the actual estate tax.

2. Do you know if you are paying too much for your current life insurance?
Because of improved mortality tables, as well as a new creative product, many policies are antiquated and much money can be saved.

3. Have you analyzed whether you are paying the lowest cost for your life insurance?
Any simple analysis will prove in black and white whether you are overpaying or not.

4. Are you borrowing your premiums and paying interest, which is less than the actual premiums itself?
A simple program of borrowing and paying annual interest in many situations will be less expensive than paying the actual premium itself.

5. Have you checked whether you have any antiquated policies that you no longer need?
These policies are now saleable in the secondary market, which can pay you cash substantially in excess of the existing cash value.

6. Have you analyzed whether it would be cheaper to buy last-to-die insurance or insurance on your spouse?
You may be paying too much on your own life and it may be more reasonable to use your spouse or purchase last-to-die insurance if it will do the same job at less cost.

7. Have you analyzed whether it would be more efficient to give gifts to charity by utilizing insurance instead of your own assets?
Money given to charity at death is always subject to where your stock and real estate portfolios may be. A life insurance policy owned by a charity guarantees they will receive what you want them to and at less cost.

8. Have you analyzed whether your older policies can be improved?
Many of the older policies have substantial cash values, which can be used with new policies to bring the annual costs below the current policy’s premium.

9. Have you analyzed your IRA and pension and learned how to optimize them up to 50 times at your death?
If you do not need your IRA to support you, then you can effectively escape double taxation by making a distribution and purchasing life insurance on an income and estate tax free basis, which will produce at death a much greater return than your IRA.

10. Have you arranged to avoid the havoc at your death caused after 30 years of marriage with an unintentional antiquated prenuptial agreement no longer applicable?
Is it possible that the nature of your relationship has changed and the number of years involved would properly take your marriage to a different level to where you really wanted to take care of your spouse in a better way?

11. Have you analyzed whether you can give your unneeded social security to charity at many times its existing value?
If you don’t need social security to live on, then avoid income taxes by giving the annual money to charity, which in turn will purchase a policy on your lives to create a much greater return.

12. Do you really believe your advisors have given you the best up-to-date solution to your situation?
Have things changed since your original advice and is it possible that you can create superior approaches for your objectives?

13. Do you believe your estate plan needs a second opinion?
Most anything of importance should always require a second opinion.

14. Do you realize the time spent on your estate planning is small by comparison to the large affect on your family forever?
Whatever you do or don’t do will provide the consequences that will impact the people closest to you for a long time to come.

15. Do you really want to ruin a 30-year relationship at death by the consequences of your action or inaction?
You are so highly thought of that it is inappropriate to spoil these opinions and leave the wrong legacy behind.

BARRY KAYE, Ph.D. CLU is a professor at Florida Atlantic University. Reach him at (800) 343-7424 or [email protected].

Make money with your life insurance

Life insurance used to be a waste of money for those who no longer needed a policy or could not afford it, but not anymore.

For those over the age of 70, a new market has been created — a secondary market on life insurance. Now policy holders can pay only the premiums for a multimillion-dollar policy, hold onto it for two years and turn around and sell it for a hefty profit.

“I have always felt that it was ridiculous that there was never such a market in life insurance,” says Barry Kaye, one of the original founders of the wealth creation and preservation industry and author of the two all-time bestselling books on life insurance and estate planning. “All of a sudden, it exists, making every policy possibly more valuable.”

Smart Business spoke with Kaye about life insurance policies and the growing popularity of the secondary market.

What does a secondary market mean in life insurance?

In the past, if you no longer needed a life insurance policy or you couldn’t afford it, you would drop it. You might receive a minimal amount of money from the insurance company based on the cash surrender value. With the new secondary market, you may be able to sell your policy. Assuming you’re over 70 years old, you might get 10 to 25 percent of the death benefit, depending on your age, current health and the amount of the policy.

How does a policy qualify for the secondary market?

It’s the person who qualifies, but the policy has to be on someone with the right age, the right health and the right premium. If the age is too young or the health is too good or the premium is too expensive, it won’t work. The barometers are ages 72 to 85, but the ideal age is 77 to 81. Health should be decent, and it should be a standard or preferred policy.

How can you take advantage of the new secondary market?

In many situations, people between 72 and 85 would purchase a policy. Under the law, they would have to retain it for two years and then they could sell it into the secondary market.

A perfect example would be a 75-year-old purchasing (pro rata for more or less) a $10 million policy for approximately $600,000 of premium that covers the first two years. At the end of that period, he or she could possibly receive 20 percent of the face value for $2 million. This would result in a profit of approximately $1.4 million. This could be used to recover any losses in investments or to provide a nest egg for retirement or to purchase a new life insurance policy to pay estate taxes. Obviously, you could borrow this money against your house or stock portfolio, possibly making the interest tax deductible. In that manner, it would only cost you the interest to pay the two-year premium. Also, there would be very little outlay but a tremendous profit at the end of the period.

Who buys these policies in two years?

Coventry, Berkshire Hathaway, pension funds, hedge funds and many other institutions. We never sell policies to individuals. They are then securitized and rolled up in trusts, similar to second-trust deeds.

These institutions buy these policies because they get an excellent return when they purchase them from people with a 10- to 12-year or less life expectancy.

How can this program benefit charities?

One example is a policy that was purchased for $7.5 million on a 75-year-old man. The actual premium outlay for two years was $550,000. The policy was sold at the end of two years for $2.4 million, thus returning to you the original $550,000. This left the insured with a profit of $1.85 million. After paying capital gains tax, he was able to give the amount to charity at no cost whatsoever. Furthermore, the entire contribution, based on qualifying and his tax bracket, produced an approximate tax savings of $600,000. In other words, a no-cost contribution to charity of approximately $1.6 million and a possible resulting tax savings of $600,000. Furthermore, the client didn’t even use his own $550,000 — he borrowed it, costing him only $72,000 in interest at 6 percent.

Why would a company pay $2.4 million for that policy?

The institution that purchases the policy knows that ultimately the insured must die, which guarantees their return. They pay the premium based on life expectancy, which is 85 years of age. In this case, that would be eight years plus what they paid him, and that still amounts to less than half of the $7.5 million that they will eventually receive.

BARRY KAYE is an author and industry leader on life insurance and estate planning. For more information on the secondary market for life insurance, reach him at (800) 343-7424 or [email protected].

Age 72 to 81?

Life insurance used to be a waste of money for those who no longer needed a policy or could not afford it, but not anymore.

For those over the age of 70, a new market has been created — a secondary market on life insurance. Now policy holders can pay only the premiums for a multimillion-dollar policy, hold onto it for two years and turn around and sell it for a hefty profit.

“I have always felt that it was ridiculous that there was never such a market in life insurance,” says Barry Kaye, one of the original founders of the wealth creation and preservation industry and author of the two all-time bestselling books on life insurance and estate planning. “All of a sudden, it exists, making every policy possibly more valuable.”

Smart Business spoke with Kaye about life insurance policies and the growing popularity of the secondary market.

What does a secondary market mean in life insurance?
In the past, if you no longer needed a life insurance policy or you couldn’t afford it, you would drop it. You might receive a minimal amount of money from the insurance company based on the cash surrender value. With the new secondary market, you may be able to sell your policy. Assuming you’re over 70 years old, you might get 10 to 25 percent of the death benefit, depending on your age, current health and the amount of the policy.

How does a policy qualify for the secondary market?
It’s the person who qualifies, but the policy has to be on someone with the right age, the right health and the right premium. If the age is too young or the health is too good or the premium is too expensive, it won’t work. The barometers are ages 72 to 85, but the ideal age is 77 to 81. Health should be decent, and it should be a standard or preferred policy.

How can you take advantage of the new secondary market?
In many situations, people between 72 and 85 would purchase a policy. Under the law, they would have to retain it for two years and then they could sell it into the secondary market.

A perfect example would be a 75-year-old purchasing (pro rata for more or less) a $10 million policy for approximately $600,000 of premium that covers the first two years. At the end of that period, he or she could possibly receive 20 percent of the face value for $2 million. This would result in a profit of approximately $1.4 million. This could be used to recover any losses in investments or to provide a nest egg for retirement or to purchase a new life insurance policy to pay estate taxes. Obviously, you could borrow this money against your house or stock portfolio, possibly making the interest tax deductible. In that manner, it would only cost you the interest to pay the two-year premium. Also, there would be very little outlay but a tremendous profit at the end of the period.

Who buys these policies in two years?
Coventry, Berkshire Hathaway, pension funds, hedge funds and many other institutions. We never sell policies to individuals. They are then securitized and rolled up in trusts, similar to second-trust deeds.

These institutions buy these policies because they get an excellent return when they purchase them from people with a 10- to 12-year or less life expectancy.

How can this program benefit charities?
One example is a policy that was purchased for $7.5 million on a 75-year-old man. The actual premium outlay for two years was $550,000. The policy was sold at the end of two years for $2.4 million, thus returning to you the original $550,000. This left the insured with a profit of $1.85 million. After paying capital gains tax, he was able to give the amount to charity at no cost whatsoever. Furthermore, the entire contribution, based on qualifying and his tax bracket, produced an approximate tax savings of $600,000. In other words, a no-cost contribution to charity of approximately $1.6 million and a possible resulting tax savings of $600,000. Furthermore, the client didn’t even use his own $550,000 — he borrowed it, costing him only $72,000 in interest at 6 percent.

Why would a company pay $2.4 million for that policy?
The institution that purchases the policy knows that ultimately the insured must die, which guarantees their return. They pay the premium based on life expectancy, which is 85 years of age. In this case, that would be eight years plus what they paid him, and that still amounts to less than half of the $7.5 million that they will eventually receive.

BARRY KAYE is an author and industry leader on life insurance and estate planning. For more information on the secondary market for life insurance, reach him at (800) 343-7424 or [email protected].

Discounting estate taxes

Estate taxes do not have to be so ominous anymore, now that there is a simple way to have them paid for you. And it’s done by the insurance companies. By purchasing life insurance based on life expectancy, which is 85, instead of the traditional way of paying until past the age of 100, you can buy a $20 million last-to-die life insurance policy for roughly $40,000 a year and let the insurance company – rather than your family — pay the estate tax.

“If you knew the only cost would be $40,000 a year, would you let the kids pay $20 million in taxes or would you buy the insurance and let the insurance company pay for it?” asks Barry Kaye, founder of the Wealth Creation and Preservation industry and author of the two all-time best-selling books on life insurance and estate planning. “Why let the kids pay $20 million in estate taxes when the insurance company effectively can pay it for them and all it costs you is the interest on a loan to pay a one-pay premium which is $40,000 a year, which could possibly be tax deductible?”

Smart Business spoke with Kaye about estate taxes and how life insurance policies can pay them for you.

How can life insurance become an investment alternative?
Let’s say, for example, you had an estate of $40 million. The estate tax is $20 million, so if a man wants $20 million of insurance, he should buy a last-to-die survivorship life insurance policy. In other words, you insure two people, the husband and wife, or just one person if you’re single. Now it’s cheaper to buy insurance on two people than it is on one because two people take longer to die than one person. If we buy a last-to-die policy, you can pay an annual premium. But it’s cheaper to pay a one-time premium where you pay it all at once. The next step is you borrow to pay the premium. Why borrow against it? Because the interest would be less than paying an annual premium.

How does life expectancy last-to-die differ from normal life insurance?
Most people buy insurance and pay for it so it lasts past the age of 100. Our concept is you pay for the policy based on life expectancy, which is usually 85 depending on your current age. Now some people may live to 100 and some people may die tomorrow. You cut the premiums in half if you pay all at once based on life expectancy of 85. If you pay until 100, it’s obviously more expensive than to pay to 85.

But if you live past 85, wouldn’t it be expensive to pay premiums at 85?
If your health is good and you live past 85, at some point you would pay an additional premium to offset that you are living longer.

Does that cost a lot more?
If you’re starting at age 65 and pay more at 85, and you started with $40 million of assets at 65, using simple compound interest you should be worth $80 million. Aren’t you in a better position to pay more at that time?

If you buy a car and you run out of gas, you don’t throw the car away; you put more gas in the tank. The gas for insurance policies is premiums or more money put into the policy. We should pay estate taxes with the insurance companies’ money, not our kids’. We can pay taxes at a great discount since the insurance companies pay for it and you borrow the premium to pay the policy at a great discount.

Can you give an example of this?
You and your wife are 60 and worth $40 million. The estate tax is $20 million, so you need $20 million of insurance. You buy the cheapest possible policy, which is based on life expectancy. You’ll never believe this, but one payment for $20 million at age 60 to age 85 is $800,000. If you’re a solid, conservative man at 60, by now you have no mortgage on your house and you have a substantial portfolio. The $800,000, if borrowed against your home, could possibly be tax deductible.

More important, you are paying only $40,000 a year interest. If you don’t like a mortgage, why not? It’s not gambling. No one will take the house away from you. Your insurance policy doesn’t go up or down like the stock market. LIBOR (London Interbank Offered Rate) interest is approximately 5 percent. And that’s being conservative. Now, 5 percent on $800,000 is $40,000 a year and you have $20 million of insurance.

BARRY KAYE is founder of Barry Kaye Associates, author and industry leader on life insurance and estate planning. Reach him at www.barrykaye.com.

Checking your plans

There comes a time when successful people must ask themselves difficult questions about life insurance. The answers could mean the difference between a comfortable life for your heirs or months of red tape and a substantial loss of money in estate taxes.

Smart Business asked Barry Kaye, professor at Florida Atlantic University and author of six books on life insurance and estate planning, what questions can help you determine how good your life insurance is.

He listed 15 questions to ponder. He says any “no” answer means you need help, insurance or an analysis of your present programs. Five “no” responses means you are losing money, not optimizing your assets, and creating huge problems for your heirs or paying too much for your insurance.

1. Have you arranged to pay your estate taxes at an effective discount using insurance? Insurance on an annual basis or a single payment will always cost less than the actual estate tax.

2. Do you know if you are paying too much for your current life insurance? Because of improved mortality tables as well as a new creative product, many policies are antiquated and much money can be saved.

3. Have you analyzed whether you are paying the lowest cost for your life insurance? Any simple analysis will prove in black and white whether you are overpaying.

4. Are you borrowing your premiums and paying interest, which is less than the actual premiums itself? A simple program of borrowing and paying annual interest in many situations will be less expensive than paying the actual premium itself.

5. Have you checked whether you can buy a policy and sell it within two years in order to create money to pay for your life insurance at possibly no effective cost? Many people who have used this technique have created an excellent profit that has in turn been used to pay for ongoing insurance policies.

6. Have you analyzed whether it would be cheaper to buy last-to-die insurance or insurance on your spouse? You may be paying too much on your own life. It may be more reasonable to use your spouse or purchase last-to-die insurance if it will do the same job at less cost.

7. Have you analyzed whether it would be more efficient to give gifts to charity by using insurance instead of your own assets? Money given to charity at death is always subject to where your stock and real estate portfolios may be. A life insurance policy owned by a charity guarantees it will receive what you want it to, and at less cost.

8. Have you analyzed whether your older policies can be improved? Many of the older policies have substantial cash values, which can be used with new policies to bring the annual costs below the current policy’s premium.

9. Have you analyzed your IRA and pension and learned how to optimize them up to 30 times at your death? If you do not need your IRA to support you, then you can escape double taxation by making a distribution and purchasing life insurance on an income and estate tax free basis, which will produce at death a much greater return than your IRA.

10. Have you arranged to avoid the havoc at your death caused after 30 years of marriage by an unintentional antiquated prenuptial agreement no longer applicable? Is it possible that the nature of your relationship has changed and the number of years involved would properly take your marriage to a different level to where you really wanted to take care of your spouse in a better way?

11. Have you analyzed whether you can give your unneeded Social Security to charity at many times its existing value? If you don’t need Social Security to live on, then avoid income taxes by giving the annual money to charity, which in turn will purchase a policy on your lives to create a much greater return.

12. Do you really believe your advisers have given you the best up-to-date solution to your situation? Have things changed since your original advice, and is it possible that you can create superior approaches for your objectives?

13. Do you believe your estate plan needs a second opinion? Most anything of importance should always require a second opinion.

14. Do you realize the time spent on your estate planning is small by comparison to the large affect on your family forever? Whatever you do or don’t do will provide the consequences that will impact the people closest to you for a long time to come.

15. Do you really want to ruin a 30-year relationship at death by the consequences of your action or inaction? You are so highly thought of that it is inappropriate to spoil these opinions and leave the wrong legacy behind.

BARRY KAYE is the founder of Barry Kaye Associates. Reach him at (800) 343-7424 or [email protected].

Insurance gains into the millions

Life insurance has more value than it is given credit for, at least according to industry leaders. It can be used to pay estate taxes, to make a family’s heirs live comfortably upon death, or it can be sold into a secondary market to help recoup losses from a stale portfolio.

“Life insurance is probably the most fantastic, amazing, incredible financial instrument ever created,” says Barry Kaye, author of six books on life insurance and estate planning. “It is really a shame that this is so completely misunderstood.”

Smart Business spoke with Kaye about the unknown benefits of life insurance and how a consumer can use it to his advantage.

Why do you think life insurance is the best financial instrument ever created?

By utilizing a life expectancy policy — which probably will outlast you — you can purchase the lowest-priced and most flexible policy on yourself or on you and your spouse. Instead of paying the annual premium, you would pay a single payment that really should be borrowed, thus resulting in a lower annual interest cost than the actual premium itself. In this manner, if you and your spouse were between 60 and 70, one single payment of $400,000 would purchase a $10 million policy, which could be structured gift-, income- and estate-tax-free. The only payments for this $10 million tax-free policy would be approximately $20,000 a year.

How can life insurance benefit a consumer?

Multiple ways, but here are five examples.

n If you were worth $20 million, your family would have an estate tax of $10 million to pay upon your death. Instead of them paying approximately $10 million in taxes at your deaths, you could use the $10 million policy I’ve already described, and the insurance company would effectively pay the $10 million. It would cost you only $20,000 a year (based on life expectancy). Which do you prefer: $20,000 a year while you’re alive, or $10 million upon your death?

n If you just want to optimize assets, you could utilize the same plan. Where else can you put $20,000 a year to create $10 million totally tax-free at your death? This is truly one of the best investment alternatives ever created.

n You can give your estate away twice at 200 percent of your assets versus once at the traditional 50 percent. If you are worth $10 million, your heirs will receive approximately $5 million after taxes. But if you use the plan described above, you could borrow $400,000 and buy a life expectancy last-to-die policy for $10 million. In this manner, you give your heirs 100 percent of your assets at death. They would receive $10 million in life insurance proceeds — which is no different than receiving $10 million in stock, real estate, etc. Borrowing the $400,000 at 5 percent interest is $20,000 a year. The remaining $10 million of assets in your estate could then be donated tax-free to your own charitable foundation, with the children acting as paid trustees. Charity, in this manner, would receive 100 percent of your assets ($10 million), and the children would receive $10 million from life insurance for a total of $20 million. You have increased your net assets four times, from $5 million to $20 million, and you have given away 200 percent of your estate rather than 50 percent.

n You can take your gift-tax exemption of $1 million for you and $1 million for your spouse and increase that to $100 million by purchasing a life expectancy last-to-die policy with the $2 million after it’s gifted to your children. The death benefit of $50 million is completely estate-tax-free. It could possibly pay the estate taxes on $100 million of assets (assuming you’re worth that much), meaning you effectively pay no tax on the estate. If you borrowed the $2 million to use for the gifting, it would cost you approximately $100,000 a year interest (5 percent) — considerably less than the premiums you would have paid or the $50 million.

n If you have an IRA and you do not need this money to live on, then it is really simple for your heirs or charity. Upon your deaths, a $1 million IRA will be worth approximately $300,000 after income and estate tax. If you take a distribution now of the $1 million, after income taxes you will have left approximately $650,000. You can now buy a life expectancy last-to-die insurance policy for approximately $15 million.

How can you get to this money and enjoy it during your lifetime?

If you feel like you no longer need a policy, you can sell it into the secondary market. This new market has considerably increased the asset value of your life insurance since its beginning. The market value of any policy should substantially exceed the cash value. In this manner, you could sell any policy, thus returning (in most every case) all of the money that you put into the policy and resulting in a substantial profit.

Live or die, insurance can pay off. Utilizing loans, minimal amounts of money supported by interest payments can create amazing sums of money to be utilized any way you see fit.

BARRY KAYE is the founder of Barry Kaye Associates. Reach him at (800) 343-7424 or [email protected]

Barry Kaye

Founder

Barry Kaye Associates