MEET Charles De Rosa, a retiring key executive at a company he helped build…
Charles was a senior executive at a large engineering company. About ten years into his employment, Charles’ role in the company had expanded greatly, he had joined the top management rank and the company decided to take out a $12 million key-man policy on him. After a long career and 28 years at the business however, Charles was ready for retirement.
The problem wasn’t just that Charles left “big shoes to fill” at the company. But the company had no further reason to hold onto the policy without Charles being there, especially because the $150,000/year in premium obligations could now be allocated elsewhere. They offered to transfer the policy to Charles, who, by this time, personally owned a $3 million policy for his family, which was enough coverage while the company policy was in force, but not enough if the latter was cancelled. While the $12 million policy had $3 million in cash value, the $150,000 premium was more than Charles wanted to spend and $12 million of coverage plus the $3 million personal policy was more than he needed. What to do?
Rock-paper-scissors? Draw straws? Surrender the $12 million policy for $3 million but pay the ordinary income tax of approximately $300,000 due on the inside gain? Sell the policy for about the same $3 million and hit the same tax wall. Plus cancel the entire death benefit in either case!
WHAT ARE HIS OPTIONS?
Fortunately for Charles, he didn’t do any of those things. He talked with an agent who introduced him to Fair Market Advisory Services. (“FairMarket Advisors”) which is the exclusive national distributor of proprietary, tailored loans designed to solve predicaments like Charles’. After understanding the dilemma, FairMarket Advisors was able to arrange a non-recourse, fixed-interest loan for Charles that would:
- Keep the policy ownership with Charles.
- Leave his beneficiaries unchanged—so Charles will still be able to leave a legacy behind for his family
- Convert the $12 million policy to a reduced paid up policy of $5.1 million, eliminating the need for the lender to keep paying premiums, adding that cost to Charles’ loan…and cutting into the amount of the death benefit payable to his beneficiaries.
- Pay Charles $2.7 million tax free loan proceeds in cash at closing, the same as he would have netted after taxes from a surrender or sale.
- Provide Charles’ beneficiaries with a net death benefit interest starting at $2.28 million. (See Schedule Attached.)
Now that’s a solution! Charles didn’t have to give up the policy, (or continue paying for it) he got tax-free cash in hand, his family got a continuing interest in the death benefit, and best of all, the kind of peace of mind that makes beginning retirement even easier.
| YEAR | AGE | POLICY BENEFICIARY INTEREST (ESTIMATED) |
| 21 | 68 | $2,280,000 |
| 22 | 69 | $2,260,000 |
| 23 | 70 | $2,200,000 |
| 24 | 71 | $2,150,000 |
| 25 | 72 | $2,100,000 |
| 26 | 73 | $2,000,000 |
| 27 | 74 | $1,950,000 |
| 28 | 75 | $1,880,000 |
| 29 | 76 | $1,800,000 |
| 30 | 77 | $1,700,000 |
| 31 | 78 | $1,620,000 |
| 32 | 79 | $1,520,000 |
| 33 | 80 | $1,400,000 |
| 34 | 81 | $1,290,000 |
| 35 | 82 | $1,200,000 |
| 36 | 83 | $1,200,000 |
| 37 | 84 | $1,200,000 |
| 38 | 85 | $1,200,000 |
| 39 | 86 | $1,200,000 |
| 40 | 87 | $1,200,000 |
| 41 | 88 | $1,200,000 |
| 42 | 89 | $1,200,000 |
| 43 | 90 | $1,200,000 |
| 44 | 91 | $1,200,000 |
| 45 | 92 | $1,200,000 |
| 46 | 93 | $1,200,000 |
| 47 | 94 | $1,200,000 |
| 48 | 95 | $1,200,000 |
| 49 | 96 | $1,200,000 |
| 50 | 97 | $1,200,000 |
| 51 | 98 | $1,200,000 |
| 52 | 99 | $1,200,000 |
| 53 | 100 | $1,200,000 |