Protect Your Kids and Your Business – 3 Kai-Zen Case Studies

We have three Kai-Zen life insurance case studies here showing how business owners provided for their children through: 

  • Stacking policies for even greater gains
  • Setting up equal inheritance so one child could run the business when the father retired instead of selling it
  • A wedding gift 

This is part of our series on gifting leveraged life insurance to your children to give them tax-free income rather than leaving a later inheritance. For more details on the mechanics, read the main article on Life Insurance Estate Planning

Can You Have More Than One Kai-Zen For Your Child?

One of the ways you can fund your adult child’s Kai-Zen policy is by putting the five years of premium in a trust, where it gets automatically paid each year. 

We had one business owner who had two children, neither of whom wanted to work in the business. He still wanted them to be provided for during their retirement. 

Bob, the father, is worth about $30,000,000. 

He wanted to gift $1 million a year to his two adult children, $500,000 each for several years. Bob also didn’t want to worry about them doing something foolish with the money. One of the options we explored was a Kai-Zen policy each year for each child. He ended up going with that option. 

Here’s what the numbers looked like. 

What does that look like for retirement income? 

  • Age 65 – $587,000 a year
  • Age 66 – $1,124,000 a year
  • Age 67 – $1,614,000 a year
  • Age 68 – $2,061,000 a year
  • Age 69 – $2,479,000 a year

That’s an income for Bob’s child of $2,479,000 each year from age 69 to age 90. By the way, that’s a $64,454,000 income from age 65 to age 90 from a $2.5 million gift. 

Remember, it’s tax-free. 

But what if the child wants the money as soon as he can get it? 

In the scenario below, let’s have the son start drawing income as soon as he can from the first contract. In this case, age 47. He’ll leave the other four contracts untouched until retirement. 

He’s drawing $131,000 tax-free from his first contract from age 47 to age 90. Then at 65, he starts the second. At age 66, he starts drawing from the third, and so forth. 

He’s not getting the $64 million and change he would have if he had waited until retirement to start drawing from the first contract. But drawing an earlier income also gives him more options to put his own children through college or buy a house, just as two examples. He’s still getting $54 million from his father’s $2.5 million gift. 

A Business Owner With 4 Kids

Our case study here is a business owner with four kids. One of his sons is working in the business and is planning on taking over after his father retires. The father, Randy (name changed), does not want his kids to sell the business that he worked hard to build from nothing. 

Randy’s business is worth about $20 million right now. He came to us needing a way to give his children $5 million each because he wants to distribute his wealth fairly between them. 

With the current ages of his children (all roughly around age 30), he can use a gift of $500,000 for each of them or $100,000 per year of premiums. 

Each of Randy’s children would end up with a little over $5 million in distributions from age 45 to age 90. His son can take over the business. 

It also neatly avoids the messes that often happen in small businesses where the parent passes, and the children all fight over the business and the money. (And it usually destroys the business value in the process.)

What a Wedding Gift!

A 58-year-old man came in with his second wife. He’d had a Kai-Zen for several years and wanted to make sure his new wife (age 50) had one as well. 

But that’s not what this case study is about. 

After getting the policy on his wife settled, he talked about how his daughter (age 22) just finished college and announced her engagement. 

Since he’s married, he can give her up to $34,000 a year tax-free. But running the numbers, he decided that $25,000 a year (total gift of $125,000 over five years) would take care of her. Here’s what the numbers looked like. 

She’ll be able to access the money from age 37. If she doesn’t want to wait until retirement age, she could use the money for her own children, buy a house, you name it.

But wait, there’s more!

The father of the bride got talking to his new in-laws. Mentioning to the groom’s father, “hey, I just set up this plan for my daughter. Why don’t you do one on your son, my son-in-law, too?”

Here’s what the projections for the son-in-law came out to. 

This couple, through the generous wedding gift from their parents. Will have a combined income at age 65 of $625,000 a year, tax-free! That doesn’t include any of their own investments or other retirement plans. 

How Does A Gifted Kai-Zen Work?

You can fund five years of premiums for a Kai-Zen cash-value-accumulation-focused insurance contract for an adult child. Many parents will use the annual gift tax exclusion ($34,000 per couple or $17,000 per individual in 2023) to fund premiums. 

But you can see from the example above that’s not always the case. 

It’s a leveraged policy. You pay half of the first five years of premiums. The lending bank pays the other half of the first five years and 100% of the next five years. 

The cash value grows until year 15. Then, the bank takes back its investment plus interest. Then, you have the leveraged cash value, which was set up in a way that locks in gains and ignores any losses. 

For an in-depth explanation of how the mechanics work, read this article on building wealth with leveraged life insurance

How Does One Qualify?

First, you need to have a Kai-Zen policy for yourself if you are insurable. If you aren’t insurable, then we’ll need to explain that to the underwriters in the cover letter. You’ll also need to meet the following criteria.

If you’re younger than 55:

  • Giftor must have at least $200,000 annual income (or $3+ million net worth)
  • Giftor must provide 2 years of income verification
  • Insured must also provide 2 years of income verification
  • Cover letter if the insured does not financially qualify on their own
  • Giftor must own a Kai-Zen policy for themselves
    • If giftor is uninsurable, the above is waived but details must be included in the cover letter

You’re older than 55:

  • Giftor must have at least $200,000 annual income (or $3+ million net worth)
  • Giftor must provide 2 years of income verification
  • Insured must also provide 2 years of income verification
  • Cover letter if the insured does not financially qualify on their own

Your children or grandchildren don’t need to financially qualify on their own.

What Might This Look Like For You?

Each policy is tailored to the needs of the family. If you have any questions about how it might look for your family, give us a call at (888) 905-0333.

You can also click the picture below to run some “what if” scenarios. 

Kaizen - click here to estimate your retirement income