Life Insurance Optimized for Law Firms

A new life insurance product addresses the unique needs of established, conservatively managed, law firms. It has no surrender charges and provides for immediate accessible cash values in excess of premium contributions. Participating law firms are always able to cash in their policy and record a gain, even if the policy has been in force just for a couple of weeks. Let’s take a closer look at the key features of this unique life insurance product.

Accessing Cash

At all times, a participating law firm has access to more cash than the premiums contributed. Increased values are immediately accessible in one of two ways: policy surrender or policy loans.

Policy Surrender

In a typical case, per $100,000 of premium contribution, the firm’s balance sheet would immediately reflect a value of about $104,000. The company could surrender the policy and realize a $4,000 profit. For tax reasons, a much more efficient method to access cash would be via policy loans.

Policy Loans

 The firm can immediately access loans against full cash surrender values, except for minimal policy charges required to maintain the policy for the subsequent three months. In our example, per $100,000 of premium paid into the policy, approximately $102,500 can be borrowed.

During the first 10 policy years, a small interest rate of .9% (90 basis points) is assessed on policy loans. After the 10th year, loan charges are offset by corresponding interest rate crediting on the policy. Funds can then be accessed without net loan charges.

Bottom line, whether via policy surrender or policy loans, the law firm is always in a cash-positive position, relative to not participating in the program.

Rate of Return

The new life insurance product is designed to offer a competitive cash-on-cash rate of return when compared to similarly liquid asset classes like bank checking, savings, or money market accounts. Properly accessed, earnings inside life insurance policies are tax-free.

In the current low interest rate environment, policy cash-on-cash earnings in the early years are about 1.5%, increasing to around 3% after the first 12 policy years. 

Earnings will fluctuate up or down with general interest rate trends. Policy crediting is set to be slightly higher than the yield on comparable asset classes; earnings can be accessed tax-free, as discussed above.

Life insurance death benefits are also managed to remain tax-free, providing an additional benefit not available via other conservative liquid assets.

10-Year Level Term Alternative

The most common form of business life insurance is 10-year level term. While 10-year term is often the least expensive form of life insurance, it does have an annual expense. This recurring expense increases at every policy renewal. Policy renewal is not automatic; it must be earned with the insured’s continued good health.

For law firms that already accumulate a portion of their earnings to fund the buy-out of retiring, disabled, or deceased partners, the new product offers a far more cost-and-tax-efficient option. No insurance expense must be booked; coverage is financed entirely via internal tax-free earnings.

Institutionally-Priced Life Insurance

One advantage of the new product is that it is institutionally priced. Lower policy charges and expense ratios are derived from volume-based efficiencies. Also, mortality charges covering a select group of low-risk lawyers are lower than those that apply to traditional retail life insurance products offered to the general population.

Of course, the tax code is also of great help.  Given the many social benefits of owning life insurance, the code allows life insurers to accumulate funds without taxation. Policyowners can access these tax-free earnings, provided the policy is structured within regulatory guidelines.

The product is offered by a mutual life insurance company. Mutual companies are owned by their policyowners for their benefit. They do not need to slice off profits to outside shareholders.

The combination of institutional pricing, the tax code, and mutual life insurance company structure, make it possible to design an exceptionally efficient life insurance product.

Tax-Optimized Funding Strategy

To optimize tax-efficiency, regulations require premiums to be accelerated into the first 7 policy years. Therefore, Law firms should consider how much of their liquid asset portfolio they can reposition into the program over those years.

As a general guide, that percentage should be no more than 10% - 20% of liquid asset reserves currently held in bank accounts, money markets, short term treasuries and equivalent - and no more than a 50% total commitment over the 7 years of contributions.

To extract maximum policy performance, funding should be limited to whatever the firm believes it can comfortably commit to for the 7 years. Accessing funds early, whether via policy surrender or loans, diminishes policy performance.

Program Flexibility

Unexpected events happen and accessing policy values may become necessary shortly after program initiation. Should circumstances interfere with planned premium contributions, the program can usually be adapted to align with the firm’s updated priorities. Premiums can usually be skipped, and the program can be restructured to adapt to the new realities.

As discussed above, accessing policy cash values either via policy surrender or loan is always possible. While some of the tax-efficiencies of life insurance would be lost, the law firm would still be in a cash position superior to never having participated in the program in the first place.

Eligible Participants

Participants most commonly consist of law partners age 69 or younger. They must earn at least $75,000 per year. Some firms limit coverage to just one or two key partners. Others offer participation to dozens, or even hundreds, of partners.

Good health is required to underwrite coverage on an individual or a small group of partners. Ten or more partners may be eligible for guaranteed issue coverage.

The program is flexible in that different levels of partners can be included at various participation levels. Income is often used to determine eligibility and participation levels.

Exploring Opportunities

The ideas outlined above hint at several possibilities by which law firms can enhance the funding of multiple concurrent financial planning priorities. A participating firm’s yield on safe-dollar assets is enhanced. Liquid asset tax-efficiency increases via access to tax-free policy earnings and eventual tax-free death benefits. To get started, law partners should ask:

Has the firm optimized the tax-efficiency of funds saved for the buy-out of partners at retirement, disability, or death?

Are current safe-dollar saving strategies competitive with the after-tax yield of life insurance earnings and eventual tax-free death benefits?

What are the buy-out funding objectives of the firm for the next 5 – 10 years?

Answers to these questions enable us to develop ideas on how the firm might get additional use from otherwise idle taxable balance sheet assets. For a more in-depth discussion about this unique opportunity, please connect with me and let me know of your interest.