Life Insurance in Estate Planning

Many wealthy people do not NEED life insurance for the same reasons as many young families. Why then, do their legal, accounting and wealth advisors recommend it? Here are a number of reasons why sophisticated legal and financial advisors often recommend the purchase of life insurance for wealthy clients.

  • Gift Leverage: Life Insurance provides cash at death equal to the death benefit, but the gift is only measured by the annual premium. Assuming an estate tax of 40%, if a parent wants a child to receive a net amount of $10 million at his death, the parent would have to leave $16.6 million to his children, as $6.6 million would be paid in taxes.
  • Competitive return: The projected or guaranteed (depending on product) tax-free internal rate of return at life expectancy is approximately 5% to 6%. Returns are much higher when death is before life expectancy, and if people outlive their life expectancy, life insurance produces lower, but usually positive returns.
  • Event Liquidity: Provides immediate liquidity upon the triggering of the estate tax obligation.
  • Tax Advantage: Death benefits are generally exempt from federal and state income taxation.
  • Asset Protection: Depending upon the state in which the policy was issued, life insurance proceeds may be beyond the reach of creditors.
  • Immediacy: Life insurance works immediately, unlike other estate planning strategies that may unwind with an early death or require time to achieve results.
  • Complementary to other gifts and strategies: Life insurance can complement long-term strategies that are based on performance and longevity assumptions.
  • Predictability and timeliness: Life insurance provides cash to pay estate taxes when they are due, avoiding market timing issues that may affect assets that would otherwise have to be liquidated to pay taxes.
  • Planning uses: Life insurance can equalize inheritances where division of businesses, real estate or other assets is impractical. It provides a guarantee that an individual, charity or business will receive significant future assets.
  • Simplicity: Many of today's insurance products are uncomplicated and easy to administer.
  • Asset Class: Life insurance companies are primarily invested in diversified, high quality fixed income investments. Life insurance portfolios share some characteristics with bond investments and provide portfolio diversification thereby enhancing expecting portfolio performance.

 

*This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider

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