The poor and middle class view life insurance as nothing more than a necessary evil.
… a commodity that you should pay as little as possible for.
But what if I told you that *some affluent families happily pay $10,000+ and even $100,000+ per year on life insurance?
… NOT because they’ve been “sold to” by a smooth talking insurance agent, but strategically have purchased it for estate and tax planning purposes that any CPA or legal adviser would gladly endorse.
Let’s take a look at a few examples where a $100,000 life insurance premium not only makes good financial sense… but is an absolute no brainer!
Quick Guide to When a $100,000 Life Insurance Premium is a No Brainer
WARNING: I’m not here to talk to you about whole life insurance (too expensive) or “investing” in life insurance (what a scam!) here. I’m going to show you tried and true tax and estate planning strategies, which act as a cornerstone for many affluent families’ financial plans.
If you’re a wealthy individual, you might be wondering if the people I’ve described above are crazy, and why anyone would spend more than $14 per month for life insurance, as so many commercials advertise.
And that’s ok if you think that way, but if you’re going to grasp the contents of this article, you need a shift in your paradigm.
Here’s the thing…
The poor and middle class buy $22 per month term policies from agencies like Select Quote because their family REQUIRES the coverage.
Take the case of a married couple with little to no assets, living paycheck to paycheck, and one working spouse. What do they have to fall back on if the breadwinner were to die unexpectedly? For this family, life insurance is a must, but they’re likely to buy a cheap term life insurance policy.
The wealthy don’t purchase life insurance because their family would be destitute should they die without it. The wealthy buy life insurance because they know something about life insurance that the poor and middle class don’t.
… that life insurance is the greatest financial tool in the world for leveraging their dollars.
Let me show you an example…
Case Study #1 – Investing in Yourself (How to Leverage $107,246 for Maximum ROI)
Bill and Stephanie, ages 75 and 72 respectively, are retired with three grown children.
Between their commercial real estate holdings and other investments, their gross income is just over $800,000 per year, with a net worth of $12 million. Their living expenses are less than $200,000 per year.
… Do Bill and Stephanie need coverage?
With no debt, grown, independent children, and barely over the Estate Tax Exemption amount, which for the two of them will be at least $10.8 million (in 2015), as we’ve said, their family clearly won’t be in financial ruin if they don’t buy life insurance.
But Bill and Stephanie want to leverage their money and pass on as big of a estate as possible to their children.
… So what if they WERE to buy life insurance?
They have the cash flow.
They have the wherewithal to pay the premiums long-term.
Would it be a prudent investment?
Let’s take a look:
Bill and Stephanie decide to buy a $5,000,000 second-to-die permanent life insurance policy for $107,264 annual premium.
If she were to pass away at her life expectancy, Bill and Stephanie would have paid a total of $1,608,960 with a guaranteed return of $5,000,000 to their estate!
**That’s pencils out to an impressive after-tax ROI of 13.2% per year.
Our Wise Investment Calculator helps demonstrate their return on investment here.
CLICK THE IMAGE BELOW FOR A VIDEO EXPLANATION:
**Keep in mind this is a very simplified model, where we’ve isolated return on premiums to the beneficiary from the insurance policy. A fully developed concept will include considerations such as expected estate growth, estate tax liability, and lifetime gifting rules and ownership of the policy.
Analyzing the Effects
If we assume Bill and Stephanie average a 5% return on their investments, and assume both have passed by Stephanie’s age 87, the $107,264 they paid for life insurance would have been worth $2,314,603 upon Stephanie’s death.
Therefore, by adding life insurance to their plan, Bill and Stephanie added over $2.6 Million to their estate!
Besides the impressive returns their estate will realize, adding a $5,000,000 life insurance benefit has these additional benefits:
- Life insurance provides immediate money to the estate if liquid cash is needed to pay estate taxes
- With additional planning, some or all of the death benefit could be removed from Bill and Stephanie’s estate so it is not subject to estate taxes
- Paying $107K per year will reduce their estate value, thus reducing their estate tax liability
Case Study #2 – Super-Size Your Charitable Giving (How to Turn a $100,000 Gift into $300,000)
Janet is a 68 year old widowed woman who contributes annually to her local theater/playhouse.
As one of their largest donors, Janet plans to leave the theater $100,000 cash in her will as a bequest.
She’s already earmarked this money for them and it’s sitting in CD’s making 2%.
However, what if she were to use that same $100,000 to purchase a life insurance policy with the theater as beneficiary?
Donating gifts of life insurance to charity instead of other assets by bequest has many benefits:
- It avoids probate and hold-ups in the settling of an estate
- The charity receives substantially more money, which can help them to fund larger projects
- Publicity from large gifts may help attract other donors
- The estate receives a tax deduction for the donation
As a healthy, non-smoking woman, Janet could purchase a $300,000 life insurance policy with a single-premium of just $95,523.
Analyzing the Effects
If we assume Janet’s life expectancy is 86, her $100K sitting in CD’s will grow to $142,824 by the time of her passing.
By purchasing life insurance instead, Janet will be able to gift an additional $157,176 to the theater!
Case Study #3 – The Taxable, Illiquid Estate
Let’s take the case of a married couple, Harry and Elizabeth, ages 70 and 68, with a $30,000,000 net worth and income in excess of $2,000,000 per year.
The Tax Problem:
If both spouses were to die in 2015, their estate would be subject to federal estate tax to the tune of $7.7 million dollars.
($30 Million – $10.8 Exclusion Amount = $19.2 Taxable @ 40% = $7.68 Million)
Besides the $7.7 Million dollar punch in the gut to their estate, Harry and Elizabeth have a bigger concern…
The Liquidity Problem:
IRS Form 706 (the Federal estate tax return) is due within 9 months of the second spouse’s death.
As for the payment of said taxes, Estate planning attorney Matthew J. Duncan says:
Estate tax returns must be filed not more than 9 months after death unless an extension is obtained. If a tax is due, it must be paid not more than 9 months after death.
With the majority of their assets tied up in real estate and business holdings, Harry and Elizabeth are concerned their estate won’t have the liquid cash needed to pay the tax bill.
… and they certainly don’t want to see their children forced to sell one of their assets in a “fire sale” for lower-than-market-value price.
The $118,733 Life Insurance No Brainer
Rather than see their estate diminished by estate taxes and distressed sales, Harry and Elizabeth purchase a second-to-die life insurance policy with a death benefit of $8,000,000.
… It costs just $118,733 per year.
Analyzing the Effects
The policy solves multiple problems:
- It ensures liquid cash will be available to pay estate taxes
- It preserves their estate
- It enhances their estate value
As Harry and Elizabeth are healthy seniors,the SS actuarial tables predict a life expectancy of age 84 for Harry and 86 for Elizabeth.
Assuming Elizabeth is the second to pass away (at age 86), they will have paid $2,137,194, enhancing their estate by close to $6 million dollars.
Plus, as we’ve covered in case study #2, Harry and Elizabeth can also take proactive measures to ensure the death benefit is not included in their gross estate value.
If you an individual or family of means, speak to a life insurance agent. Tell them about your plan to distribute your assets. You may be surprised to find out that a $10,000+ or even $100,000+ premium life insurance policy could greatly enhance your estate’s value, while providing and tax benefits and peace of mind.
You always want to talk to an independent agent, especially when it comes to purchasing a large life insurance policy.
I’ve personally helped dozens of high net worth individuals and would love to help you too. Call us at 877–443–9467 today!
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