Rich in America Secrets to Creating and Preserving Wealth PHẦN 7 pot

In other words, a childless60-year-old married male making $50,000 per year and renting asmall apartment will probably be turned down for a $10 million, 10-year level-term policy assumin

which you, the insured, provided them during your life) Bear in mindthat you may not be able to purchase all of the insurance you mightwant and can afford, because ultimately the life insurance carrier (or,rather, its underwriting department) will determine the amount ofcoverage you will be permitted to obtain In other words, a childless60-year-old married male making $50,000 per year and renting asmall apartment will probably be turned down for a $10 million, 10-year level-term policy (assuming he could afford the premiums) sinceclearly he has no need for this amount of life insurance.

Of course, life insurance planning is different for high-net-worthindividuals A needs analysis may not be an appropriate method fordetermining the amounts and types of coverage needed, since theremay be no actual need at all, but rather a desire For instance, let’s sayyou are 35 years old, married with two children, each under 5 yearsold You live in a $1 million home with a $500,000 mortgage, earn $1million a year, and have saved $3 million Clearly, you are very suc-cessful How much life insurance do you need? How much life insur-ance do you want? This scenario is very different from the situationfaced by an older middle-class couple who does not earn a million dol-lars per year and who has not accumulated as much in savings Theplanning and analysis that go into determining the type and amount

of coverage that would be appropriate for these people would be quitedifferent from those to determine a millionaire’s coverage needs.Here are some situations in which you, as a high-net-worth indi-vidual, might require life insurance planning:

• If you are the income beneficiary of a large trust that does notcontinue for your spouse or other dependents after your death

• If you have an annuity or pension payment that does not tinue for your spouse or other dependents after your death

con-• If you have an illiquid estate, and your heirs therefore haveinsufficient liquidity to live and to pay estate taxes

• If you have created a charitable trust and want to make up toyour heirs the assets that would otherwise pass to the charityupon your death.

If you elect to purchase such insurance, it is essential to coordinate it withyour financial, retirement, and estate planning and gift-giving needs Youmust also coordinate the investment attributes of your life insurance withyour other investment activities If these considerations sound compli-cated, they are You will need to consult with your financial planner and/or

a licensed life insurance agent In particular, seek out someone with anindustry designation, such as a certified life underwriter (CLU) To sim-plify the issue, it helps to understand the two broad categories of lifeinsurance: less permanent, non–cash value life insurance, and more per-manent, cash value life insurance

Less permanent, non–cash value life insurance comes in several

forms One is known as term life insurance This policy type provides

coverage, is generally thought of as temporary, and does not late a cash value Term coverage is generally priced according to thecost per $1,000 of coverage (i.e., the cost of insurance, or COI) andincreases annually as the insured ages Term life insurance policies may

accumu-be used to insure against the loss of life of a wage earner for a specifictime period connected with a specific financial obligation, such as the30-year term of a home mortgage or a child’s four-year education.Some variations on term coverage are:

Annual renewable term: This is a term policy type in which the

con-tract is renewable annually to some stated age, usually 75 Premiumsincrease annually (as the insured ages) Once the insured reaches age

75, the policy is no longer in force and the coverage ends

Level term: This is a term policy type in which premiums stay the

same for a specified period of time (e.g., 10, 20, or 30 years) The term

or duration for which a level premium policy may be contracted is a

function of the state in which the policy is purchased Some states donot allow level premium contracts of more than 20 years.

Convertible term: What’s known as conversion has become more of a

feature than an actual policy type Both annual renewable term andlevel premium term policies might come with a conversion feature thatallows the policy owner to convert the policy to the more permanent,cash value variety, such as universal life or whole life (see below), but at

a higher annual premium within a certain number of years (such as forthe first 10 policy years, or until the insured reaches age 60) The majorbenefit of this feature is that the policy may be converted withoutadditional (medical) underwriting, which is quite a significant benefit,especially if the insured is ill

More permanent, cash value life insurance also comes in severalforms:

Whole life: This policy type gets its name from the fact that policy

pre-miums are generally payable for your entire, or whole, life Prepre-miumspaid to the carrier are invested in the carrier’s general funds Theinvestment return earned by the carrier, together with other factorssuch as the past year’s mortality experience (i.e., how many coveredpeople have died), will help to determine if the carrier will have a sur-plus of cash at year-end If it does, it may declare a dividend (which isactually a return of premium or principal) Dividends can be used bypolicy owners in several ways, some of which include purchasing paid-

up additional insurance, applying them toward the payment of theannual premium, or receiving them as cash

Universal life: Universal life insurance is generally referred to as

interest-driven insurance Premiums are paid to the carrier, which then depositsthe money in a separate accumulation account established for the specificpolicy The account is then both credited with interest and charged withthe cost of insurance, as well as mortality and expense charges, usually on

a monthly basis The balance in the accumulation account continues toearn tax-deferred and compounded interest Periodically, the carrier maychange the interest rate, which can go up or down over time, but whichmay not go below the contractual minimum rate.

Variable universal life (VUL): This type of insurance is similar to

uni-versal life except that instead of a cash accumulation account to whichpremium dollars are credited, premium dollars are allocated to mutualfunds offered by the carrier for the particular variable universal lifeproduct The funds invested in it are held in a separate account.Usually there are several (and there can be as many as 30) funds fromwhich to choose and allocate investable premium dollars The rate ofreturn on the investments is what drives policy performance As with

a universal life policy, the separate account experiences gain (or loss, asthe case may be) and is also charged with the cost of insurance, as well

as mortality and expense charges, usually on a monthly basis

Private placement variable universal life: This type of insurance is a

variation on variable universal life and is essentially the same, exceptthat investable premium dollars are placed with a private investmentmanagement firm (such as U.S Trust) rather than invested directly in

a mutual fund offered by the carrier of that specific VUL product Thetwo major advantages of this type of policy are that the policy ownerhas more control over the underlying investments, and the costs (such

as COI), expenses, and commissions are generally lower One caveat:Private placement VUL policies are generally structured with veryhigh annual (or one-time) premiums (usually starting at $1 million).The increase in cash value (by way of interest, dividends, and/orgain) of a cash value life insurance policy is untaxed until withdrawalsare made from the cash value—and then only to the extent that thesewithdrawals exceed the premium basis, unless the policy is a modifiedendowment contract In this case, the gain comes out first when with-drawals are made The tax is at ordinary income tax rates, however,

rather than at capital gain rates Contact your attorney, tax advisor,and/or insurance agent for advice regarding taxation of withdrawals(and/or surrenders) from cash value life insurance policies.

Cash value life insurance policies may be considered suitable assetsfor long-term estate planning vehicles, such as irrevocable life insur-ance Crummey trusts For example, a policy (or multiple policies) may

be placed or purchased in an irrevocable trust, allowing the proceeds toescape taxation in the insured’s estate at death, and providing incomeand principal for beneficiaries for many years

Clearly, life insurance offers many advantages and is often theonly way to instantly create an estate until you have created onethrough wealth accumulation, but few people enjoy paying for it Sev-eral premium-financing options are available and elaborate mecha-nisms are also available to shift the payment of premiums to third

parties Through the use of split-dollar policies, insurance premiums

may be paid for by a corporation And through policy and promissarynote sales to a defective grantor trust or via loans (or a promissory note),rather than with direct gifts to a trust (some or part of which may

be taxable), the payment of premiums can sometimes be made moreefficiently (While these premium-financing options ought to be dis-cussed in the context of your overall estate and gift-giving plans, theyare extremely complex and should not be entered into without firstseeking appropriate tax and legal advice.)

Life Insurance Policy

Reviewing how much insurance you need at any point, selecting anappropriate type, and making sure you have enough (and not too much)are all part of life insurance planning You also must take into accountthat you will be subject to a medical exam that will determine yourunderwriting category (e.g., “preferred,” “standard,” “smoker,” or “non-smoker”) Not every applicant for life insurance is extended an offer by

the carrier Health problems or even occupations and hobbies, such aspiloting a private plane, may lead to your being uninsurable or being putinto an underwriting class that is “rated,” meaning the insurance will bevery expensive (in comparison to the better underwriting categories).

As part of your life insurance planning process, you and your sors may determine that an irrevocable life insurance trust is an appro-priate estate and gift-giving plan Creating an irrevocable trust, in whichyour trustees purchase a life insurance policy on your life within thetrust, may have the net effect of allowing the life insurance to escapebeing taxed in your estate when you die Life insurance trusts are acomplex estate planning vehicle, but worthwhile because they may beconsidered triple tax advantaged, in that you may be able to escape:

advi-• Gift tax: Gifts to the trust may qualify for the annual per

donee gift tax exclusion

• Income tax: Interest, dividends, and gain within the cash value

of the policy may escape income taxes

• Estate tax: The life insurance itself may not be included in

your estate, as already noted

Annuities

Annuities are another possible element of an insurance package that agood agent will discuss with you Annuities are an investment vehiclethat give you a guaranteed income for the duration of the policy Sim-ilar to an IRA or a SEP, the earnings on your investment are deferreduntil you withdraw the funds It is rare that an annuity program canoutperform the investment opportunities available to an affluent indi-vidual, and annuities do not generally provide any of the estate plan-ning advantages associated with life insurance As with life insurance,

several kinds of annuities are available An immediate annuity will start

providing you with an income as soon as you pay your one and onlypremium However, you can never again withdraw that money, so youhad better be sure that this is what you want.

A life-only annuity lets you receive payments throughout your life,

but stops when you die This means that if you are hit by a car the dayafter you’ve signed the papers, neither you nor your heirs will make

another penny A 10-year certain and life annuity guarantees payments

for a decade, even if you don’t live that long, and then continues to payyou as long as you continue to live

As with life insurance, annuities can be fixed or variable If theyare fixed, you’ll receive the same payments every year, no matter whathappens to the financial markets, even if there’s unusual inflation.Variable annuities, however, are those in which your money is invested

in equity funds, and your income rises or falls depending on the funds’performance

Yet another type of annuity is a deferred annuity Here, you are not

paid when you buy the policy, but at a future date when you want tostart receiving income Deferred annuities can be fixed or variable.Annuities provide you with an income for what could be a verylong time, and as with retirement accounts, you do not pay taxes asthey appreciate However, just as with retirement accounts, you will bepenalized if you withdraw the money before you are 591⁄2years old

Disability Insurance

Many people who are otherwise very well covered for all kinds ofinsurance needs forget to arrange for adequate disability insurance.Although most people tend to believe they’ll never be disabled, theodds are higher than you might think that some kind of disability mayoccur at some point in your life If it does and you can’t earn enoughincome to maintain your current lifestyle, you will very much wish youhad purchased disability insurance

The general rule is to buy insurance that will replace about 65 cent of your current pretax earnings, because these benefits are tax-free(as long as you’ve paid for your own insurance) As always, there arevarious policies available, and they can be expensive However, you canactually save money if you buy disability insurance that covers you up

per-to age 65 (because many people sper-top working after that, replacing salary

is no longer an issue) Another way to save money in premiums is toincrease the number of months you must be disabled before the policybegins paying you benefits

Health Insurance

Unlike life insurance, which people without dependents may not need,health insurance is a must for everyone Any good financial planner willinsist that you be well covered, and if you’re not, may be able to point you

to an agent or broker (For the most part, an insurance agent works for aspecific company and offers products exclusive to that company, whereas

a broker will show your products from many different companies and,theoretically, match you with the ones that best meet your needs.)

If you have an employer, most likely you’re already insured In fact,the concept of medical insurance was started by large labor unions as away of obtaining a salary increase without having to worry about pay-ing additional taxes The unions asked for health programs, and theiremployers granted them because back in the early to middle part ofthe last century, health benefits were reasonably priced Health insur-ance was far down on an employers’ balance sheet Today, however, itcomes right behind salaries and rent As we all know, American healthcosts have skyrocketed

If you’re not insured through your employer, you’ll want to findindividual insurance If you do not, you’ll have to accept the risk that ifyou’re sick, you will fund whatever medical costs you encounter out of

your own pocket There was a time when this might not have been anunreasonable gamble, but current medical costs make this choice im-practical Of course, you may be required to spend as much as $30,000

a year covering your entire family with top-of-the-line insurance Butconsider what might happen if you’re not covered—a worst-case sce-nario could mean medical bills ranging into the high six figures We’veseen situations where they rose even above that So why not transfer therisk from your own assets to those of the insurance company?

If you don’t have an employer, try to be creative in coming up with

a way to cover yourself Recently, one of our clients set up a familyfoundation that is large enough to employ four younger members ofhis family Because these children have real jobs at the foundation,they are paid like any salaried employees and receive W2 forms at theend of the year By so doing, the foundation is permitted to—and has—set up a health plan for these family employees Another U.S Trustclient family set up a foundation as a limited partnership, and at theend of the year, they receive a K1 form, or the equivalent of a W2 forpartnerships This arrangement also allows them to establish a healthprogram Keep in mind that for any of these group medical programs,there must be an employer/employee relationship You can’t simplybring a group together for the sole purpose of receiving medical cover-age The insurance company will investigate to verify withholdingtaxes, which prove that the covered individual is an employee

Another health care–related issue that you must consider is term-care insurance.This type of policy is designed to help you look afteryourself in the event of a prolonged illness Such coverage has becomeimportant because, fortunately, we’re living longer, but unfortunately, weseldom have sufficient assets to cover what may prove to be the enor-mous expenses associated with a long life Many people don’t realize it,but regular health insurance and government-funded Medicare do notcover these long-term health problems For instance, the frequently

long-changing Medicare rules currently specify that if you are confined forthree days to a hospital and then enter a skilled nursing facility to betreated for the same problem, Medicare will pay 100 percent of the first

20 days of such care Between day 21 and day 100, they’ll pay all but $105per day of these costs After 100 days, however, Medicare pays nothing atall To add insult to injury, if you didn’t enter the hospital first, you wouldnot have been eligible for any Medicare payment

Although some employee programs do cover long-term care, most

of them don’t, so you will have to purchase it yourself Long-term-careinsurance is expensive, however The younger you are when you buy it,the cheaper it is (generally, the rates start when you are 40 years old)

At age 40, an average long-term-care insurance policy (standard, smoker rate) would cost you about $1,600 a year; at age 50 it costsabout $2,100 annually; at 60, $3,600; and at 70, $6,500

non-When purchasing this type of insurance, make sure it includes aninflation rider What might look like a great deal of money today may not

be in 30 years You don’t want your health care to suffer because of it

Property and Casualty Insurance

This kind of insurance protects you against the financial consequence

of having your property destroyed or damaged by a variety of perils Apartial list of policies insuring real and personal property includeshomeowners, condominium, co-op, renters, farm owners, ranch own-ers, personal articles floater, automobile, water craft, airplane, andflood insurance

Most policies provide coverage for loss or damage to property byincluding or excluding certain perils that may cause the loss Under atypical property policy, a few of the excluded perils are neglect, earth-quake, flood, intentional acts, wear and tear, and breakage of fragilearticles Thus, it is important to determine whether other types ofinsurance will be required

Most policies limit the amount of coverage for certain types ofproperty These limits include:

• Contents: Typically limited to 50 to 75 percent of the dwelling

value

• Other structures: Typically limited to 10 to 20 percent of the

dwelling value

• Jewelry: Typically limited to $1,000 to $5,000 per loss.

• Silverware: Typically limited to $1,000 to $5,000 per loss.

• Furs: Typically limited to $1,000 to $5,000 per loss.

Replacement-Cost Insurance

Your sofa may be beautiful, but the truth is that even if it cost

$5,000 when you bought it yesterday, today you could probablysell it at only a fraction of that price But if that sofa is destroyed,you’ll want to buy something that’s as good as the one you lost,and not a used piece Therefore, when you’re looking to insureyour property, you’ll want what’s known as replacement-cost cov-erage, as opposed to no-replacement-value or depreciated-valuecoverage Replacement-cost insurance is more expensive thanother types, but it’s worth it, and we recommend it highly

Also, consider taking replacement-cost insurance on your erty We had a client who owned a famous home in California featur-ing very ornate oak carvings throughout The house was struck bylightning and burned almost to the ground It cost the owners $7 mil-lion to restore the house in the same condition.They would never havebeen able to afford to do this, complete with all its intricate carvings, ifthey hadn’t owned replacement-cost insurance Otherwise, theirinsurance would have paid only for standard features

prop-• Money: Typically limited to $200 to $1,000 per loss.

• Securities: Typically limited to $1,000 to $5,000 per loss.

• Additions and alterations: Typically limited to 10 percent of the

contents value

Specific endorsements and/or policies can be purchased to providecoverage for excluded perils or limited property coverage You maywant to consider a personal articles floater, flood insurance, an all-riskendorsement, and/or earthquake coverage

Automobile Insurance

Automobile insurance is fairly straightforward When you buy a car,you also buy insurance for it—the process is ingrained into our heads at

a young age And unlike other kinds of insurance, automobile insurance

is usually required; many states won’t let you buy a car without it Buteven if it’s not required, you should make sure you are fully insured.True, the cost of automobile insurance has skyrocketed over the lastdecade, but that doesn’t mean you shouldn’t be fully insured As withhealth care, it costs much less than the potential out-of-pocket chargesyou may face in a worst-case scenario In addition to purchasing thestandard insurance coverage, you should also make sure that you are wellcovered for liability in case of bodily injury and property damage If you

or someone else driving your car plows over a curb and into a restaurant,the insurance will cover the costs of hiring an attorney to defend your-self against what could be an onslaught of lawsuits Coverage will alsopay for other court costs, as well as any judgments against you

Liability Insurance

Personal liability insurance protects you from having to pay out a largesum of money from your own pocket in case your actions have causedsomeone else to suffer bodily injury or property damage