During a review of a client’s assets, I noticed the death benefit of his whole life insurance policy was over $5 million. I asked why. Truth was, he didn’t know. It took a collaborative effort between the client’s financial adviser, a trusted insurance agent, and an estate planning attorney to put this policy to good use.

Many years before, this client and his wife purchased a whole life policy that was meant to generate a cash value to supplement their retirement income. I’ve mentioned before that when you purchase a product — whether insurance or annuity — they are useful for one purpose. A whole life policy should either build cash value or provide a death benefit. The way the client’s policy was structured it was trying to do both and failing. The client was understandably disappointed in the performance of the policy as the cash value was low compared to the total volume of premiums that had already been paid.

He did not want to continue paying the premium.

I brought in our insurance expert to explore the options of what could be done with the policy so that the client could get the most benefit out of it. Projections on the policy showed that for the next 10 years, the policy would only generate a return similar to a fixed-income investment. The first option was to convert the policy to a policy with a minimum death benefit and maximum cash value. However, we discovered during the underwriting process that the client was uninsurable for any new individual coverage.

It began to look like he was stuck with an underperforming investment that was worth more if he died — and this was a relatively healthy, active man in his mid-50s. Now, if you’ve ever watched a made- for-TV murder-mystery movie, you’ll know that being worth more dead than alive is not an ideal situation!

Our next step was to bring in an estate planning attorney to help. The attorney suggested we transfer the existing life policy to an Irrevocable Life Insurance Trust. Then we repurposed the policy into an income-generating variable annuity so that the annual distributions could fund a new survivorship policy. A survivorship life insurance policy is written on two lives where both insureds must die before paying a death benefit. Furthermore, one of the spouses can be uninsurable. In this case, the client’s wife was in perfect health, so they could get the policy. By putting the cash value of the whole life policy into a variable annuity it would generate income to pay the premium on the survivorship policy.

Furthermore, the exchanges took place within the trust, so all of the value was outside of the client’s taxable estate. The trust contains both the variable annuity, which is steadily growing, and the survivorship policy that has a death benefit worth several million. The trust will pass to their heirs outside of the estate upon the death of the second to die.

Initially, the client was facing the dilemma of continuing to pay a premium into a large whole life policy with a rate of return that was not appealing to him or cancel and lose his coverage. Before this exchange, if he had died, his whole life policy would have paid more than $5 million in death benefit, and would eventually create an estate tax problem for his heirs once the surviving spouse died.

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.

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