Written By — David Shafer
Life insurance is a flexible tool for estate planning. I want to add a demonstration on how it can be used by someone just outside of what are normal parameters would be, age wise, for income from an EIUL. Let’s take a 63-year-old man who has significant real estate holdings and also significant depreciation available for offsetting taxes. Normally we would say that this person is a little above our age cut-off for using EIULs for income.
This person has planned well and will have enough income from his real estate holdings and other sources to live an abundant life. But he does have a couple of concerns. He has been the manager of his real estate holdings, making the major strategic decisions. What happens when he reaches an age where he either can’t or doesn’t want to continue to be actively involved? Or what happens if he dies and his wife is suddenly confronted with the real estate portfolio?
He might consider two options with an EIUL.
Let’s say he liberates $250K from his real estate using some of his depreciation tax offsets. He puts this into an EIUL as a lump sum payment. This life insurance policy is structured as a modified endowment contract, which means if he wants to access his cash value there WILL be tax owed. However, the policy is structured so he buys $600K life insurance initially, which increases to $700K at age 71. The face value slowly increases to $1.39M at age 85 and $2.1M at age 90. Between his current age and age 71, 15% of his cohort will die. After age 71 the odds of dying start to increase rapidly so we increase the face value during this time period. By the time he hits 85 years of age 62% of his cohorts are dead. By age 90, 82% have died.
The most likely scenario is that his wife outlives him and now she has a significant amount of tax-free cash to unwind the real estate portfolio in a reasonable manor or hire a portfolio manager.
The second possibility is to fund the EIUL over 5 annual payments and keep it from becoming a modified endowment contract. This keeps the possibility of pulling the cash value from the policy tax-free. Making 5 payments of $50,000 buys you $700,000 of insurance initially, which goes up to $850,000 by year 6. Because of IRS regulations, you are forced to purchase more insurance earlier, which drives up the internal costs. However, if at age 80 they wanted to pull out tax-free income for 10 years they could pull approximately $35K per year. If they wanted to unwind the real estate in their late 70s, they could supplement their income nicely. And chances are there would still be a significant tax-free death benefit left for his heir.
These are two examples of how to move depreciated protected equity into another tax-protected environment. And it only makes sense to play the odds of how long you will live. A 63 year-old man has a 50% chance of dying before he turns 82, 66% before 87, and 90% before age 93. And the last 2 years of our lives will most likely be spent sick, dealing with doctors, hospitals, nursing homes, and hospice. Few have time to deal with real estate, investments, etc. during those last two years.
Planning to live forever is a fool’s choice. Planning to take care of yourself and your loved one’s in your senior years is a real gift.
BawldGuy Here: Many real estate investors unintentionally become the victims of their own success. This strategy, means they can dodge the ‘I’m too old,it’s too late’ to solve these kinda problems dilemma. Again, great info from one of our contributors — a ‘slam dunk’ expert.
If you’re wondering if this makes sense for you, the first thing to do is call me at 619 889-7100. I can take a look-see and let you know what’s what. Have a good one.
Related posts:
- Real Estate Investors: How EIUL’s May Fit Your Purposeful Plan For Retirement
- Why EIUL? Real Estate Investment Strategy
- Purposeful Planning For Real Estate Investors Must Be Flexible ‘Cuz Life Happens
- Inflation and EIULs – Purposeful Planning In Action
- Using An EIUL As a Savings Vehicle – Generate Tax Free Income
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