8 May 2014 0 Comments

The Case of the Unecessary ILIT

shutterstock_160877807A few years ago you may have established an Irrevocable Life Insurance Trust (ILIT) in order to provide liquidity for estate taxes.  At the time, the per-person exemption was only $1,000,000 but now the exemption is north of $5,000,000 and due to rise with the CPI.  The life insurance in that ILIT is no longer necessary since your net taxable estate doesn’t approach that number.  You’ve decided you want to eliminate the annual gift that you have been making to the ILIT required to pay the premium.  What are your options?

First ask your current life insurance company what death benefit could be continued if premiums were stopped and cash values left intact.  If the current ILIT policy is whole life you will have two options: reduced paid up or extended term.  The reduced paid up option guarantees a reduced amount of insurance for the duration of your life.  The extended term option provides that the original amount of insurance will be continued, but only for a specified period of time, at which time the policy will no longer be in force and there will be no way to continue it.

Normally, the reduced paid up offer will make the most sense, unless your health has deteriorated and there is no chance that you will survive beyond the extended term period, in which case the extended term option should be considered.

If your current ILIT policy is Universal Life, then you will be able to continue the full amount until the living values supporting the death benefit are used up, or you can also reduce the face amount  and continue that amount of life insurance for various periods of time (possibly with a death benefit guaranteed for life).  You’ll want to look at various scenarios and make sure you distinguish between “guaranteed” death benefit and “projected” death benefit.

Second, if you have had no significant deterioration in health since you bought the policy, see how much insurance can be guaranteed in a new policy for the balance of your life with the policy’s cash value transferring it via IRC Section 1035.  If this approach provides more guaranteed death benefit than the original policy, go for it!  Just be aware that the new policy will have a new 2 year suicide and contestable period.

Recently I showed a man, age 77 how $75,000 of cash value in his current ILIT policy could be transferred to a new policy and guarantee $145,000 of death benefit for life.  Leaving the cash in the current policy would only have produced $110,000 of death benefit and it would not be guaranteed for life.

Coming up…some more examples of how to reduce current life insurance premiums.

 

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