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Wealth Transfer Using Life Insurance

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There are several strategies to pass assets to the next generation, but using life insurance for wealth transfer is one of the most efficient.  Life policies immediately create a fully valued tax-free asset upon first premium receipt.

Many of our clients want to know about the most efficient and cost effective ways to maximize the distribution of assets to their spouses, future generations and favorite charities. There may be no better asset class than life insurance.

Why Use A Life Insurance Policy For Wealth Transfer?

There are many reasons, but the most but the two most common are cost and tax avoidance. With life insurance, you are paying pennies on the dollar. When you consider that a healthy 60 year old can create a $100,000 death benefit with a one-time deposit of around $25,000, the cost becomes very attractive.

And of course, life insurance proceeds are income tax-free to beneficiaries. Additionally, these policies can be structured to avoid federal estate and state inheritance taxes. There are very few asset classes that can make this same claim. That’s why life insurance policies are used so often in estate planning.

What Types Of Life Policies Work Best?

The two most common types are whole and universal life insurance. You will rarely see term life insurance used as these types of polices have a defined ending point. A policy that expires after a 30 year term will have no benefits is the insured is still living.

Whole and universal policies each have their own advantages. Whole life policies are more conservative and generally offer more cash value while universal life policies may have no cash value, but can be much less expensive. Both types can be guaranteed to cover the entire life of the insured.

Single Premium Life Insurance & Life Pay Plans

Single premium life insurance can be a smart strategy for wealth creation and transfer. With this type of life insurance, a single premium is deposited, creating an immediate death benefit that is guaranteed until the owner passes away. Typically, single premium policies provide larger death benefit amounts when compared to life or multi- year pay policies.

Multi-pay or life-pay policies are just what you would guess – policies that are funded over a set number of years or a lifetime. These types eliminate the need for large upfront sums of money and can have additional tax advantages to the insured.

Accelerated Death Benefits – Access For The Insured

Single premium life insurance can also benefit the insured or the purchaser during his or her lifetime. The cash value in a fully funded policy will grow quickly and can provide income to the purchaser if needed. In turn, the purchaser can also surrender the policy for its cash value at any time. Other policies have an option of an accelerated death benefit that can be drawn on to pay for long term care coverage.

By invoking this rider, the woman in the example above would have $200,000 available to her for long term care expenses- income tax free. In this example she avoids premium payments into a traditional long term care policy and still rests assured that she has significant nursing home protection if necessary.

Simplified Underwriting – Easier Setup & Enrollment

Many elderly consumers feel that they are not healthy enough to purchase life insurance in their golden years. This is simply not true. Simplified underwriting allows many seniors to qualify for life insurance. With simplified underwriting, there is no physical or blood work needed.

So long as the proposed insured can answer no to a few questions, underwriting can be done using the answers on the application and a quick telephone interview. The fact is single premium life insurance is not difficult to purchase. Those who feel they are in extraordinary health can choose to go through advanced underwriting and may qualify for increased insurance benefits.

The Tax Advantages Offered By Life Insurance Policies

Certainly the advantage of life insurance over an annuity, a savings bond, a certificate of deposit or other investment is the favorable tax treatment of a life policy. The entire death benefit is passed income tax free to the beneficiary. However, the death benefit can count toward the gross value of an estate for estate tax purposes. To avoid estate taxes, some policies are owned by the beneficiaries or an irrevocable life insurance trust. It is crucial to work with a knowledgeable agent and attorney if estate taxes are a concern.

Often single premium life is considered a modified endowment contract or MEC by the IRS. The policy can be taxable to the owner if gains are withdrawn- just like an annuity or savings bond can be taxable to the owner. If the owner is under the age of 59 ½ the IRS can access a 10% early withdraw penalty. Thus these policies are best utilized when the funds are likely not needed in the immediate future.

In conclusion, life insurance can be one of the safest and most dependable investments for many families. Life insurance is especially valuable due to the favorable tax treatment and guaranteed returns associated with these policies. It is important to choose a well rated company and an informed advisor to select the best possible policy for your future.

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Category: Articles, Life Insurance, Wealth Transfer