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Make every dollar count: maximizing inheritances for beneficiaries: the capital transfer strategy uses "unneeded" assets to fund life insurance purchases. Which clients in your book of business are good candidates?


Your clients have worked hard to accumulate a sizeable estate by saving consistently and investing wisely. Now they are concerned about reducing current income, protecting assets from market fluctuations and from the claims of creditors so that they can leave a legacy to their children while at the same time still preserving some flexibility to have access to the assets if needed.

The opportunity

While balancing these competing interests may seem to require extensive planning, these aims can be easily achieved for many clients. Clients who have assets that they expect they will never need and who have already mentally allocated these assets to their beneficiaries are the perfect fit for the capital transfer strategy. By reallocating these assets to fund a life insurance policy with a no-lapse guarantee, the client is able to make every dollar count.

Further, by turning the asset into a guaranteed amount for their beneficiaries, they have eliminated current income on the asset, as well as concerns about market fluctuations and interest rate changes and, in most states, added some protection from creditors. Perhaps best of all, the beneficiaries will receive the death benefit income tax-free.

This is a great opportunity for life insurance producers in the estate planning market. With the increase in the estate tax exemption in recent years, fewer and fewer clients are subject to federal estate taxes. Although the future level of estate tax rates and exemptions is uncertain, it is unlikely that the number of clients affected by the estate tax (and, therefore, needing life insurance to pay estate taxes) will increase significantly.

However, there are clients at nearly every income and asset level that have assets which meet the criteria for the capital transfer strategy. Capital transfer doesn't require a large amount of assets--the strategy will work for even modest amounts. By choosing an appropriate product and funding period, any client concerns about needing access to the funds can be addressed. While it might seem that capital transfer is a fit for every client, maximizing the amount passing to their beneficiaries is not always a priority, for a variety of reasons. So don't be surprised if some clients are not interested.

Choice of asset

Once the client is interested in the concept, the next question is what asset does the client use for the capital transfer strategy? This is not always the asset that the client intends to pass to their beneficiary. Other assets may work better from a tax and funding perspective. Clients' assets generally fall into two categories for tax purposes: qualified and non-qualified.

Qualified assets are those derived from retirement plans, such as 401(k) and pension plans, and IRAs. These assets were often started with tax-deductible funds and the growth has continued to be tax-deferred. When amounts are distributed from these accounts, typically the full amount is taxable to the recipient, including the beneficiaries after the death of the account owner. While these assets are great vehicles for accumulating retirement savings, they are not very efficient for estate planning purposes as the amount that the beneficiary will receive is usually significantly less than the current value of the account.

The other asset category of non-qualified assets includes certificates of deposit, money market and savings accounts, mutual funds, real estate, stocks and other investments. These assets were acquired with funds that had already been taxed and the periodic income earned on these assets is subject to tax as it is received. These assets may be subject to capital gains taxation when sold. As a result, the after-tax yield on some of these assets may be low, especially if clients are taking large required distributions from qualified assets.

Deferred annuities also work well for capital transfer because the annuity can be annuitized to give certainty to the tax consequences of distributions. When annuitized, the distributions will get an exclusion ratio so that the same amount of each distribution will be subject to income tax. The net amount can then be used to fund the life insurance purchase using an annual or limited pay scenario.

Client profile

From our experience of working with clients in this market, the best prospects are clients over the age of 60 and more likely to be single or widowed. They generally fall into one of four categories. They are: (1) clients who definitely won't need the money and are willing to fund the transfer in a single payment; (2) clients who are willing to transfer the asset in a single transaction but feel that they might need to access the funds at some time; (3) clients who are willing to transfer the asset at this time but would prefer to make payments over time; and (4) clients who will only part with the asset over time. Depending on which category the client falls into, different products may be appropriate.

In selecting the appropriate asset, there are many factors to consider. Using a single payment approach to fund a life insurance policy will generally result in the highest amount passing to the beneficiaries. However, if the asset is qualified, there may be a large associated income tax liability. Given the age of the typical clients, this may have other consequences as well, such as resulting in higher taxes on Social Security benefits and increased Medicare premiums. In these cases, clients may be better off using periodic payments to fund the life insurance.

But what if the client is concerned that she might need access to the asset in the future? There are several solutions. Many life insurance products provide access to the death benefit during life if the client is terminally ill, has certain prescribed medical conditions or is unable to perform certain activities of daily living. The amount of the death benefit that can be accessed depends on the terms of the policy and the applicable category. The other option is that some companies offer a no-lapse guarantee on a cash accumulation product. With these products, if the cash value is accessed, part or all of the no-lapse guarantee may be lost. However, this may be an acceptable trade-off for the peace of mind of knowing that the cash is available.


Every producer should take a look at his or her current book of business. There are almost certainly clients who fit the profile for capital transfer. Talk to them about the concept at the next annual review or schedule an appointment specifically for this purpose. By taking "unneeded" assets and using them to fund life insurance purchases, clients can make every dollar count when it comes to providing a legacy for their beneficiaries.

Hugh F. Smart, AVP and Director, Advanced Markets, Columbus Life Insurance Company, Cincinnati, has more than 20 years of experience supporting financial professionals with the application of advanced planning techniques for their clients. He provides strategic leadership to the advanced markets team at Columbus Life, with a focus on estate planning and conservation, wealth accumulation and distribution, retirement planning and business succession planning techniques.

Example 1

Eduardo, age 65, rated standard, has a $100,000 Certificate of Deposit that he does not need to provide income. If he cashes it in and uses the proceeds to purchase a single-premium life insurance policy with a lifetime secondary guarantee death benefit, the policy could have a death benefit of about $240,000.

By using the capital transfer technique, Eduardo has the certainty of knowing how much his beneficiaries will receive and he has eliminated current taxation associated with the CD and any concerns about future interest rate changes. Of course, if Eduardo is in good health, a higher death benefit may be possible.

Example 2

Jane, age 71, in good health, is living comfortably off her late husband's pension and some other assets. She has an IRA of her own with a current balance of $150,000 and she will have to start taking required minimum distributions next year. Jane does not expect to need the assets and wants to transfer them to her daughter, Mary. Jane realizes that the amount that Mary will receive will be substantially less than the account balance because of the income tax liability.

While Jane is willing to cash in the IRA this year and pay the income taxes, she agrees that it would be better to liquidate the account over 10 years, taking a $16,000 distribution each year. Assuming that she is in a 25% tax bracket, she will have $12,000 a year to contribute to the life insurance policy. She uses this amount to purchase a no-lapse guarantee universal life policy with a death benefit of $235,000.

Once again, Jane has provided a guaranteed amount to her beneficiaries and they will benefit from having income tax-free funds without having to deal with the post-death IRA distribution rules.
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Title Annotation:ESTATE PLANNING
Author:Smart, Hugh
Publication:Life Insurance Selling
Date:May 1, 2010
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