OUR PROCESS

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Investment advisory firms are cousins of life insurance estate planning firms (like Blue Star).  This is because investment advisory firms are trying to help clients maximize net after tax investment returns consistent with the client’s individual investment risk profile.  In a similar way, life insurance products are designed with different investment risk options for different risk tolerances.  The one major difference is that life insurance contracts provide a massive liquidity event upon the death of the insured.  And, this liquidity event is what makes life insurance products ideal for helping clients with estate tax risk mitigation.

As mentioned above, it’s crucial to choose the right type of life insurance product for the client based on their risk tolerance and individual estate planning goals.  For instance, the most conservative clients will want guaranteed universal life where ALL of the investment risk is passed to the insurance company and the client simply pays a known premium amount for a guaranteed death benefit.  Conversely, investors that prefer sharing in the investment returns of a specific insurance company might prefer whole life or universal life products.  Finally, clients that want their money in the equity markets will prefer indexed universal life or variable life products.

When discussing life insurance for estate planning, even the more conservative policies can provide the clients with a net rate of return of 5% to 10% (using total premiums paid and then an assumed death benefit at the client’s life expectancy).  In addition, it’s relatively easy to set up the ownership of these policies so that these death benefit amounts are both income tax free and gift/estate tax free (creating a pre-tax return of more than 10% per year).  While this is an excellent return over time, one of the unique advantages of the life insurance asset is that it also pays a tax free death benefit if the client dies prematurely.  And, these death benefit amounts provide substantial liquidity for the estate in these early years which can completely offset the estate tax due (a unique benefit that no other investment alternative can offer).

In any case, it does not serve the interests of the investment advisor to see 50% or more of the client’s wealth go to estate taxes at the death of the patriarch or matriarch.  Instead, life insurance serves to keep the family’s wealth in-tact which should make the Blue Star services attractive to any firm that is managing money for wealthy families on an intergenerational basis.

Here is the Blue Star recommended process for how we can help investment advisors serve their clients:

1. Don Prehn, President of Blue Star, has an initial phone call with the investment advisor to review Blue Star’s financial modeling capability and show some case studies of when life insurance was used to help clients reduce or fund estate tax liability.  The investment advisor then determines if any of these services could possibly be useful to any of their clients.
2. For any client where Blue Star’s financial modeling/life insurance services are possibly useful, Don Prehn and the investment advisor schedule a 20 to 30 minute introductory call with the client to get some general information about the estate.  All client information is confidential.  If requested, Blue Star and Don Prehn will sign an NDA.
3. Blue Star then creates a customized financial model for the client with a forecast to determine what estate tax liability (if any) the client's estate might have between now and some point in the future.  (Some clients want this analysis run to age 90 or 100, other clients want it run all the way out to age 120.)  If there appears to be a future tax risk to the client, Blue Star develops a number of alternative solutions to solve the tax problem (which may or may not involve the use of life insurance).
4. Don then schedules a second follow-up call with the investment advisor to discuss the alternative solutions.  The investment advisor determines if any of these options should be presented to the client.  If so, then Don and the investment advisor explain the different options to the client and request that the client authorize them to explain these proposed solutions to the client's existing estate planning attorney.  Also, if the client doesn't have an existing estate planning attorney, Don can refer a couple good firms in the client's geographic area.
5. Next, Don and the investment advisor (if desired) then meet with the client's estate planning attorney and review the plan options.  Once completed, the investment advisor and the estate planning attorney work out the final plan recommendations and then a follow-up call is scheduled with the client.  On this call would be the client, the investment advisor, the estate planning attorney, Don and possibly the client’s CPA.
6. If the client approves any of the solutions, then Blue Star works with the client to apply for life insurance (if applicable) and the estate planning attorney starts drafting the necessary legal documents (grantor trusts, family foundations, etc.).
7. The client is only responsible for paying for time billed by their own advisors.  This typically includes the client's estate planning attorney and their CPA.  In about 50% of new estate planning cases, new life insurance is recommended as part of the overall plan recommendation.  The reason for this is that life insurance is an effective and straightforward tool for creating estate liquidity without causing additional income or estate tax liability.  This liquidity gives the estate flexibility, control and leverage in a myriad of important areas including funding taxes, covering administrative expenses, allowing more time for the orderly sale of business, private equity or real estate assets, equalizing estates between children that may work in the family business and those that don't, etc. etc.  In any case, if new life insurance is purchased then Blue Star is paid by the insurance company.  Blue Star does not charge consulting fees to the client.
8. In about half the client cases, Blue Star recommends to advisors and their clients that they should NOT purchase life insurance.  This is due to the fact that in some client circumstances, new life insurance is unnecessary or there are more cost effective ways to solve a particular planning problem.  We advise clients this way because it’s the right thing to do and also because our guiding principle is to do everything in our power to earn your trust as your expert, unbiased source for life insurance information.
9. Blue Star can also review any existing life insurance policies owned by the client to make sure they are continuing to provide the best possible results (often not the case).  To help us with this policy review assessment, Blue Star has a close relationship with Veralytic, an independent life insurance research company.  The way this works is that the client provides us with some basic information about their policy.  Then, Blue Star pays for a customized Veralytic report which compares their existing policy to every other life insurance product currently available in the marketplace.  Importantly, this report summarizes results with a 5 star rating system showing how the policy compares to other products in each of the following categories:

A.    Financial strength of the insurance company

B.    Competitiveness of policy costs

C.    Stability of pricing offers based on historical behavior

D.    Accessibility to cash values (i.e. restrictions on distributions, surrender charges, etc.)

E.    Actual historical performance

We can then replace any existing policy with better products if (a) the policy is underperforming or not meeting the client’s current needs and (b) the client is still medically insurable.

Contact Us at Blue Star for more information