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De-risking a Concentrated Stock Position

 

It’s so simple it’s scary.

Clients with a concentrated stock position that is intended to transfer to family and/or charity may be able to potentially increase the per share value of the transfer while de-risking the portfolio by using life insurance.

How?

It’s so simple it’s scary.

Say you have a married couple, male age 73 and female age 72 with 64,000 shares of stock in one company valued at $158 per share. The couple intends to transfer the stock to family at their joint death.

It may be possible to convert the $158/share into $327.66/share by repositioning a portion of the stock with insurance. That’s a 107% increase in value on day one.

At the same time, it is possible to diversify and de-risk the portfolio.

Very simply, this is how it works:

  • Sell less than half the shares, or 30,520 at a total value of $4.8M.
  • Pay 20% capital gain on the sale and take hold of a net $3.9M in proceeds.
  • Invest that $3.9M in a single premium Survivorship life insurance policy on the joint life of the couple, with a death benefit of $10M.
  • The per share value has increased from $158/share to $327.66/share with the $10M life insurance.
  • The couple continues to own 33,480 shares of the original stock but has diversified its estate holdings.
  • The life insurance has guarantees that allow its value to remain stable even in down markets.
  • The internal rates of return up to joint life expectancy of age 91 is 5.07%, and 5 years later, almost 4%.

Take a look:

chart

Internal Rate of Return (IRR)
Year EOY Age 1 Death Benefit IRR (%) 3
1 73 155.78%
5 77 20.66%
10 82 9.85%
15 87 6.46%
19 91 (L.E.) 2 5.07%
24 94 (L.E. +5) 2 3.99%

1 EOY refers to End of Year
2 J. L. E. refers to Joint Life Expectancy
3 IRR refers to Internal Rate of Return

Winning Results

By illustrating a de-risking strategy that utilizes life insurance, clients with a concentrated stock position may be able to diversify the position and de-risk the portfolio while increasing the per share value.

It’s so simple, it’s scary.


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