MKA Executive Planners Blog

Summary

The purpose of this article is to discuss the “living benefit” aspect of life insurance.  By “living benefits” I mean its use as an alternative, non-correlated, investment component of an overall investment portfolio.  My premise is that life insurance may provide a greater total lifetime return with less market risk than a portfolio that does not include life insurance, with particular emphasis on its use by Dynasty Trusts.

I was speaking with a CPA recently who is a partner in a large, successful accounting firm.  We were discussing the firm-sponsored group life insurance plan.

He was covered by a typical multiple of salary base plan and had also purchased additional supplemental insurance.  He was thinking of retiring, and we discussed whether the employer-sponsored insurance was sufficient for his needs.  This was especially important since he had some health issues and is in his late 60’s.

For most people retirement planning is about the number.  How much do I need to have invested at retirement to support my lifestyle for the balance of my life?  In most cases financial advisors will structure an investment savings program based upon five primary considerations: (1) how long before your retire, (2) how long will you live after retirement, (3) what is an appropriate assumed after tax rate of return on investments, (4) an appropriate rate of inflation, and (5) other sources of income such as social security, or pensions.  This is a daunting task with a number of important variables. 

The number one risk in retirement is longevity risk.  Once you retire, the amount of money required to cover your retirement needs increases with number of years before death.  For example, if you were to die three years after retirement, the amount you need is not significantly impacted, but the various investment risks (i.e., market risk, inflation, etc.).  If, however you live to age 85, 90 or older, the amount you need at retirement is significantly lager, and the impact of the various investment risks is significantly more.

Many foreign individuals choose to invest in the United States for a variety of good reasons such as to provide for family living here, to purchase a second home, or to take advantage of the relative security of the U.S. economic system.  Those non-citizens, whether they are classified as “non-resident aliens” or “resident aliens,” face a complex set of rules based on tax codes and international treaties for income and wealth transfers.

Estates and trusts will be subject to a surtax of 3.8% on “Net Investment Income” if: (1) they have” Net Investment Income” and (2) (a) “Modified Adjusted Gross Income” that exceeds (b) a “Threshold Amount” ($11,950 for 2013).[1]

There are a whole host of reasons why life insurance is acquired.  I think it is sufficient to note that “Americans purchased $2.9 trillion of new life insurance coverage in 2011, a .5 percent increase over 2010.  By the end of 2011, total life insurance coverage in the United States was $19.2 trillion, an increase of 4 percent from 2010.”[1]