Super-Roth-Likeness: Does it Walk Like a Duck?

Comedian Steven Wright tells of the time a burglar broke into his apartment while he was asleep, stole everything, and replaced it all with exact replicas.  Later his best friend walked in, looked at Steve and said, “Do I know you?”

Americans have never been averse to imitations when the original was unavailable, especially when the substitute still did the job and was more economical as well.

This passion for the more commonplace might help you make sales to clients who have maxed out their qualified retirement options and are looking for an effective way to accumulate more for supplemental income when they no longer work.  In this case there is an “imitation” that may be better than the original.

Consider a Roth IRA, best described as “a reverse traditional IRA.” Contributions are after-tax and distributions are tax-free.  But consider, too, an over-funded universal life policy that builds significant cash value in later years.

Compare the features and uses of the two vehicles:

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Feature Roth IRA Overfunded UL Policy
Eligibility Must not exceed certain income limits Must be insurable
Contribution Limits Yes – $6,000, poss. $7,000/year None, limited only by the amount of coverage
Contribution Deductibility No No
Tax-deferred Value Growth Yes Yes
Self-completion of accumulation goal if pre-mature death occurs No Yes – Death benefit ensures the accumulation goal, then a non-taxable 1035 to annuity is available when no longer needed
Tax-free withdrawals Yes Yes, thru FIFO withdrawals or loans
Early Withdrawal Penalty Yes No
Creditor Protection Yes Yes, with trust ownership
Estate Tax Protection No Yes, with trust ownership

The perceived value of an executive bonus plan is greatly enhanced when the policy is designed as an over-funded contract and the possibility of withdrawals to supplement retirement income is highlighted at the time of implementation.  But any client is more inclined to consider use of an insurance contract for retirement purposes when the similarities to a Roth IRA, or any qualified plan, are explained.

Speaking of similarities, there is the story of a citrus farmer in the Central Valley who has developed a grapefruit that looks exactly like an orange, except that it is bigger and it is yellow.

Get in touch to discuss how a client’s retirement can be better, or with any other planning questions that arise in your casework, at either 706-354-0401 or

Executive Bonus – Enhanced To Show Quality

If you wanna feel better about yourself just do an Internet search on something like Celebrities Without Makeup, or Un-photo-shopped VIPs.  It will do your heart good to see how plain looking or, in some cases, how down-right ugly-wuggly many icons among the “beautiful people” really are in their natural state.

Personalities whose reputation rests significantly on their physical attractiveness even have a critical team member responsible for the prior scouring of any pictures intended for distribution to assure that nothing un-doctored, un-enhanced, or unflattering slips through for consumption by the masses.

The Lady and Lord Mucks of the entertainment world understand that they work in a tough marketplace and things simply sell better when they look good.

Perhaps we insurance advisors could take a lesson from that when showcasing our own products and services.  The difference is that a properly accoutered insurance-funded benefit plan will not only sell more easily, it will remain an ongoing thing of attractiveness and substance to those it protects.

A prime example is the often unadorned (and as a result the often unsold) executive bonus arrangement.  The plan chassis is simply an executive-owned policy paid for by the employer.  But creative use of some of its flexible features makes it the most attractive non-qualified benefit in most business situations:

Eliminate sticker shock

The amount of premiums paid by the employer is reported on the executive’s W-2.  Avoid the sting of a year-end tax increase by adjusting the bonus so that the after-tax amount covers the planned premiums and the remainder can be withheld to cover taxes on the total bonus on April 15.

Forget about recovering costs

Too many employers worry about getting premiums back if the executive leaves after a couple annual bonuses.  If recovery is a serious issue than use a split dollar plan.  Otherwise provisions requiring reimbursement are burdensome and reduce the attractiveness of the plan to the executive.  An employer can reduce risk by funding a policy at lower premium levels in the early years, then increasing the bonus amount as the service period lengthens.

Make it a “gold watch” as well

A policy that must be maintained by the executive beyond retirement can be seen as an anticipated burden that takes some of the luster off the current benefit of the coverage.  Fund the policy in a manner that will achieve paid-up status and allow the executive to carry the self-sustaining policy into his or her non-working years.

Make it a “living benefit” as well

Adding a long-term care rider gives the executive lifetime protection as well by assisting with costs of care using tax-free accelerated benefits.  Funding the policy to paid-up status at retirement gives the executive this protection through his or her entire life.

Economize using a “two-policy solution”

A paid-up permanent policy, especially with an LTC rider, can get costly.  Recognizing that death protection needs are higher during the working years, structure the plan so that the bulk of the coverage is provided with a level-premium term policy for the duration of the anticipated working life.  This can be dropped at retirement when no longer needed.

In addition, carry a smaller permanent policy whose death benefit will cover a significant portion of costs if long-term care expenses arise, but will still provide adequate estate liquidity if long-term care needs don’t arise.

The ultimate futility of cosmetic or techno-treatment to shore up current or deteriorating beauty was summed up best by comedian Moms Mabley when she said, “Beauty is only skin deep, but ugly is to the bone!”  But there is no decline in the beauty of a well-designed benefit plan that will keep good executives in the company fold through the provision of employer-provided lifelong protection.

Unlock More Key-Person Coverage

Real old-timers remember the days of one of comedy’s iconic duos, the husband and wife team of George Burns and Gracie Allen.  Any younger connoisseurs of good humor would do well to spend some online-time calling up at least some of their radio, television, and cinema work-product on YouTube or some other source.  But search engines didn’t help me uncover one famous routine, so I will paraphrase:

Gracie: Did you hear that my friend got hit by a car that didn’t have its headlights on?
George: That’s awful! Why didn’t the driver bother to use the headlights?
Gracie: Because it wasn’t dark yet!

Knowing all the facts can certainly change the response to circumstances.

And so it is when talking to a business owner about how much company-owned coverage he or she can get on an important executive. Consider:

The standard key-person formula

Most carriers will allow a business to own coverage on an important executive in the amount of ten times his or her compensation package.  This includes not just W-2 salary, but also bonuses, cost of perks (e.g. club memberships), fringe benefit costs (e.g. health insurance, etc.), qualified retirement plan contributions, deferred compensation, as well as the use of a company car or other business assets.

Stretching the limits a bit

Some carriers will allow a larger multiple for financial justification.  But some might impose a lower multiple as well if it appears unlikely the executive will work for ten more years.  When owner-executives are involved a carrier may allow for part of the proposed insured’s Schedule K income to be taken into consideration.  If the proposed insured is being awarded ownership interests, the value of those interests might be treated as compensation.

Debt can help

Some carriers will allow additional coverage based on a percentage of the company’s longer-term obligations to financial institutions if it can be shown that loss of the executive will curtail the company’s ability to repay.  Sometimes the policy is initiated by a lender’s requirement, in which case the financial institution is secured through a collateral assignment.

Redemption obligations

A major reason a business may be economically burdened by the death of an executive is the existence of an agreement to buy his or her ownership interest in the company from the surviving family.  The agreed purchase price can be added to the amount of coverage sought.  If no agreement exists this might open up a discussion of that planning need with the client.

Company-owned policies are often more easily placed because the limited time for which coverage is needed (till the insured’s anticipated retirement or for the expected period of service) make economical term insurance a good product choice.

George Burns lost his show-biz and life partner in 1964.  His career continued after Gracie until he passed away 32 years later, just 49 days after his 100th birthday.  So we will end with the signature closing of Burns & Allen:

George: Say good-night, Gracie.
Gracie: Good-night, Gracie!

Who Qualifies For Non-Qualified?

In 1826 the German author Joseph Freiherr von Eichendorff (Jo-Eich for short) published a novella titled (in English) Memoirs of a Good-for-Nothing.  Both he and it are unimportant except for a Latin phrase from the book: Quod licet Iovi, non licet bovi, translated, “What is permissible for Jove, is not permissible for the bull.”  It describes the common double standard when, “what is permitted to one important person or group, is not permitted to everyone.”

Seems a bit unfair, but the expression can be turned on its head: “What is permissible to the bull, is not permissible to Jove.” 

The visibility and responsibilities of those in high places often deny them the flexibility and lack of restraint enjoyed by the common folks in the seclusion and simplicity of their more private lives and smaller worlds.

A good example is in the matter of non-qualified benefits and owners of businesses; but the reversed double standard is caused by the tax law, not because of anyone’s high or low position or estate.

Consider the following assuming a 100% company owner with full-time employees.

Qualified Plans

These include benefits whose cost is immediately deductible to the employer, but for which taxation of those costs is deferred and not recognizable to the plan participants until benefits are actually received.  The most common examples are qualified retirement plans.  The limitations for the owner are, first, that there is a ceiling on how much can be contributed on his/her behalf.  In addition, contributions must be made for qualifying employees, reducing the attractiveness of the plan for owner-retirement.

Non-Qualified Plans

These most commonly take the form of Deferred Compensation (DC) or Executive Bonus (EB) plans.  Here the employer has broad latitude to discriminate regarding participation and the amount of benefits under the plan, but any employer deduction for a contribution must take place and only takes place when that amount is recognizable as income to the benefiting employee.

No Owner Advantage for a Pass-Through Entity

(An S-Corp, partnership, or an LLC taxed as either one)  Premiums paid under an EB plan are deductible to the business, but recognizable on the owner’s W-2 that year.  Any undistributed amounts held under a DC plan are still reported on the owner’s Schedule K-1 for that year.

No Advantage for C-Corp Owner

(Or an LLC taxed as a C-Corp)  Here too, EB premiums are deductible to the company, but reportable on the owner’s W-2.  But amounts held for a DC plan contribution fare even more poorly.  The money held back is first taxed in the company’s corporate bracket.  At distribution there is a business deduction, but the owner gets taxed again in his/her personal bracket.

Perhaps a More Advantageous Alternative

A personally-owned, over-funded life insurance policy acts much like a Roth IRA, but without all of the disadvantages of a Roth.  Let’s talk about that next week.

Winston Churchill certainly understood the privileges of position.  The story goes that one morning several subtle altercations had taken place between him and his long-standing personal valet, David Inches.  Later in the day the following exchange took place:  Churchill:  You were very rude to me, Inches.  Valet:  You were very rude to me, sir.  Churchill:  Yes, but I’m a great man!

Using Excess RMDs To Increase Your Legacy

The London Bach Choir has been around since 1876 when it debuted with a performance of Bach’s B Minor Mass.  For the next ninety or so years their gig didn’t get much attention except among those with a musical preference for things like, well… the B Minor Mass.

But all that changed in 1969.  Their exposure and listener-ship ballooned when popular singer-songwriter Michael Philip Jagger solicited their participation in a recording with his rock group, The Rolling Stones.  The result was a tune that has since become a staple in The Stones’ performance repertoire and in the world of popular music.

Few today are unfamiliar with its iconic lyrics:

You can’t always get what you want.
But if you try sometime,
You just might find,
You get what you need.

And so it is when older clients reach age 70-1/2 and want to use the required minimum distributions (RMDs) from qualified plans as a source of premium to buy insurance coverage, sometimes in response to carrier marketing programs encouraging the practice.

As an advisor, you should be aware of and alert your clients to several issues in this marketplace if you are to effectively manage expectations as well as make an achievable sale.

Middle-market prospects often don’t have financial justification for coverage

In these days of sizeable lifetime exemptions most don’t face any anticipated estate tax and most don’t have an income replacement need because they have little or no earned income in their retirement years.

Carrier enthusiasm is curbed when traditional financial needs don’t exist

And this despite marketing campaigns to the contrary.  An underwriter on a case is like the conductor on a train.  Nothing moves down the track till he or she gives the word.  And sales pieces are not always run by a carrier’s “conductor” prior to distribution.

The percent-of-net-worth solution

Many carriers are sympathetic to issuing insurance in an estate for liquidity, inheritance equalization, or the promotion of the ease of asset distribution.  Consequently some will allow, even in the absence of traditional justification, an amount of coverage determined as a percent of the total estate, the number varying among receptive carriers.  Existing coverage is taken into account.

So don’t just throw an app up against the wall

You must know the sympathetic carriers and be able to state a purpose for coverage other than “to increase the legacy.”  Those words were used in the title only to get your attention.  If you use them on an app they will surely get the attention of an underwriter, but not with beneficial results.

Give us your client’s situation and let us informally financially shop your case.  When submitted the stated purpose will be “see attached cover letter” which we will write for you based on prior conversations with the underwriter.

It is worth the time.  The coverage is on an older client utilizing a permanent product, a sale that will result justifiable compensation for your extra effort.

Both The Rolling Stones and the Bach Choir are still with us.  Jumpin’ Jack isn’t as Flashy as he once was.  But the Choir rolls on even expanding its footprint in the world of popular entertainment, participating in the soundtrack of movies like Robin Hood, The Chronicles of Narnia, Shrek the Third and Jack the Giant Slayer.