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Using Your Insurance
Ownership Arrangement Solves three needs
When you buy life insurance, you are usually the owner of the policy as well as the person insured. But it is also possible to name another owner to accomplish certain business or personal objectives. That is what Dr. Tod Bigelow has done.
Dr. Bigelow was expanding his practice in Hattiesburg, Mississippi, constructing a new office building, and bringing a partner on board. Those business activities, combined with the ongoing desire to financially protect his family, resulted in the need for additional life insurance.
“I actually had three needs,” Dr. Bigelow explains. “First, the bank required me to obtain life insurance as collateral to qualify for the construction loan. Second, my new partner and I agreed to use life insurance to fund a buy-out agreement in case either of us died. And third, I wanted to add life insurance to a trust that I have set up for my family.”
Dr. Bigelow purchased $1.25 million in term life insurance through a group policy sponsored by the American Dental Association (ADA, Chicago, IL), which is underwritten and administered by Great-West Life and Annuity Insurance Company (Greenwood Village, CO). He explained what he wanted to accomplish to Great-West Life’s underwriter, Joyce Jess, and associate manager, Rochelle DeMills, and they agreed on a strategy to split the coverage into three life insurance certificates with three different owners.
THREE OWNERS FOR THREE OBJECTIVES
Here is how Dr. Bigelow’s $1.25 million in life insurance is set up:
- Dr. Bigelow is the owner and insured for $325,000 of his coverage. This life insurance certificate is assigned to Dr. Bigelow’s bank as collateral for the construction loan, and his wife, Pam, is named the beneficiary. So, for example, if Dr. Bigelow were to die before the construction loan is repaid, the bank would have first rights to the proceeds to pay off the balance of the loan. Any amount remaining after the loan was satisfied would go to Pam.
- The second insurance certificate, for $450,000 of life insurance, is owned by Dr. Bigelow’s new partner, Dr. William Tolbert, who is also the beneficiary. Similarly, Dr. Bigelow is the owner and beneficiary of an equal amount of life insurance on Dr. Tolbert. “The life insurance is being used to fund a buy-out agreement we have for the new office building and the land it sits on, which are owned equally by us both,” Dr. Bigelow explains. The buy-out agreement (sometimes called a buy-sell agreement) stipulates that if either partner dies, the remaining partner will use the life insurance proceeds to buy the deceased partner’s share of the property from his estate.
- An irrevocable life insurance trust owns and is the beneficiary of $475,000 in life insurance on Dr. Bigelow’s life. The trust is set up for the benefit of his wife and two children. “My estate planning attorney recommended that the life insurance be owned by an irrevocable trust to take advantage of estate tax laws,” he says. In general, life insurance owned by an irrevocable trust is not included in the insured’s estate for purposes of calculating potential estate taxes.
Based on his experience, Dr. Bigelow offers some words of advice to other dentists who may wish to explore options for owning life insurance.
“Start by identifying your objectives,” he says. “Then, talk with your advisors to determine what ownership arrangement for your life insurance will help you accomplish your objectives.”
He continues. “For example, my estate planning attorney advised me on the irrevocable life insurance trust, and Joyce and Rochelle at Great-West Life explained to me how life insurance is owned when collateral assignments and buy-out agreements are involved. They guided me through the whole process and made sure all the paperwork was in place. I wouldn’t have known how to accomplish all this without the expertise of these pros.”
Dr. Bigelow’s statements were obtained by Great-West Life & Annuity Insurance Company, underwriter and administrator of the ADA Insurance Plans, relative to his coverage under Group Policy #104TLP, and reprinted with permission. For more information, visit www.insurance.ada.org or call 888-463-4545. This article does not constitute legal, tax, or financial advice; please seek professional input as appropriate to your situation.