Did you ever wonder why the rich buy so much life insurance? The answer is in the numbers: The crazy tax law allows you to multiply a small portion of your wealth into millions of tax-free dollars.


This article shows you the how, whether you are rich or just want to mimic the insurance strategies they use.

Let’s start by answering this question: How much must you earn to leave your heirs (say your kids) $1 million?. Would you believe $3,030,030?

For example, Joe is in the 45% income tax bracket. So Joe earns $3,030,030. The tax is an astounding $1,363,636 (Ouch!). Only $1,666,667 left. When Joe goes to heaven, the estate tax monster gets 40%, or $666,667. What’s left for Joe’s kids?. $1 million.

Where are we heading?. $1 million of tax-free life insurance equals over $3 million in earnings. There are at least two dozen strategies that turn lousy insurance policies—the lemon(s)—into larger death benefit policies (the lemonade) with little or no increase in premium cost.

Following are five example strategies that (1) come up often in practice or (2) create the most tax-free dollars (at little or no cost).  All strategies were used by real-life clients who came to me for tax help. All insurance information was provided by my insurance consultant (David).

Strategy #1The “short-pay” lemon

Joe (age 60) faxed me saying he had an offer to buy a $3 million policy on his life for a $66,600 premium, payable annually for 15 years. Such plans are called “short-pay” and build


cash surrender value (CSV) quickly. Caution: CSV disappears when Joe goes to heaven… so, if you intend to keep a policy (like Joe) until you are gone, the CSV has zero value to you.

What did Joe do? He bought a $3 million second-to-die policy insuring himself and Mary (also age 60) for an annual “life-pay” premium cost of only $27,900 (real lemonade).

Strategy #2Single life to second-to-die for old policies

This strategy comes up the most often in real-life practice.

Jerry (age 79) is married to Jane (77). Jerry has a portfolio of five old policies insuring only him. What are the totals of all the policies?..death benefit, $840,000; CSV, $650,000. Amazing!.. All those years of paying premiums, and Jerry only has $190,000 of insurance. Why?..Because the $650,000 CSV is really his money. Truly a pile of lemons.

Here’s the three-step strategy Jerry used: (1) cancelled the old policies, collecting the $650,000 CSV; (2) paid $90,000 in income taxes on the cancellation profit (the excess of the CSV over premiums paid) and (3) used the $650,000 to purchase $1.32 million of second-to-die insurance. Jerry and Jane will never pay another penny in premiums. More than doubled the death benefit for only $90,000. Pure lemonade.

Strategy #3Beat the double tax on qualified plan (like an IRA, 401(k) and the like) funds

Jim has $1.8 million in his 401(k). Sounds good, but let’s do the double-tax math for just $1. Jim takes $1 out of his IRA… pays 45 cents in income taxes. Only 55 cents left. The Grim Reaper gets Jim and the estate tax monster grabs 40% (or 22 cents). Only 33 cents left. The double tax is punishing. Applying that math to Jim’s $1.8 million results in $1.206 million to the tax collector and only $.594 million to Jim’s heirs. Lemons!

Sadly, Jim is uninsurable. However, we were able to use the 401(k) funds (after-tax) to buy $4.1 million of insurance on Jim’s wife Janet. The entire $4.1 million will go to their kids tax-free. Lots of lemonade.


Strategy #4The Annuity tax trap

Jay (age 68) owns an annuity that is worth $560,000. He paid $130,000 for it 22 years ago. So, he has a built in profit of $430,000. Surprise!. That $430,000 is subject to the double tax as described in Strategy #3. The tax is due when Jay takes all or part of the $430,000 during his life. If he holds the annuity to the day he dies, his heirs must pay the tax. Worse yet, the annuity turns into a terrible life insurance policy: death benefit of only $560,000. Rotten lemons!

What can Jay do?

First, Jay annuitizes the annuity. He will receive $46,000 every year for life. (Even if he lives to the biblical age of 120… or more). The tax law only makes $39,000 of the $46,000 taxable… causing an income tax of $17,500… leaving Jay with $28,500.

Guess what that $28,500 can do?… Pay the annual premium on a $2 million life insurance policy on his life. Barrels of lemonade.

Own any annuities?… Consider doing what Jay did.

Strategy #5Premium financing

Jack is rich… needs $40 million of insurance for estate tax purposes. But he would prefer to invest the $1 million annual required premiums in his various businesses.

My insurance consultant used a strategy called “premium financing” to purchase a $40 million policy on Jack’s wife (Jill) for a one-time payment of $1.2 million. Additional premiums will be paid by loans (which will be paid back when Jill passes).

To provide for the loan repayment, the policy death benefit must be greater than $40 million (the net amount). A lake of tax-free lemonade.

It should be noted that every detail, nuance and possible tax trap of the above strategies cannot be mentioned—because of lack of space—in this article. Warning: Only work with experts in this area.


I know, I know. You want more information or have a question on how you can make your own lemonade. If so, call me (Irv) at 847-674-5295 or email me at irv@irvblackman.com.


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