When it comes to transferring your wealth to the next generation, you have several options. You can keep things really simple and pass along bank and brokerage accounts full of stocks, bonds, and cash, but beware of the tax bill that may follow. We’ve seen families shocked when 50% of the wealth created by a generation gets wiped away in a single year.

Here are five reasons why life insurance is the best wealth transfer vehicle.  

1. Tax Efficiency  

Life insurance is an investment alternative that offers you a solution to the tax headache created by many other wealth transfer vehicles. The proceeds from life insurance are free of income tax, so if your death benefit is $5 million, your heirs will receive the full $5 million.

The only situation in which tax may be due on life insurance proceeds is when you remain exposed to the estate tax. However, that problem can be solved by properly using a life insurance trust. Life insurance strategies can be structured to reduce the value of your estate, and then pass the entire death benefit along to your family and charities free of income and estate tax.

2. Guarantees

If you invested $1 million in a broad stock portfolio during the early 90s, you earned great returns for most of the decade. However, when the year 2000 rolled in, the market dropped heavily for each of the next three years. The markets recovered, but then they crashed again in 2008.

Market investing is exciting but loaded with risk. Your only confidence that you will make money is looking at historical results, which are full of volatility. Some people remain uncomfortable with the possibility of losing half their money when a recession hits, a market bubble bursts, or any number of other risks happen. 

Life insurance removes those risks by offering fixed returns. If you pay your premiums and the insurer stays in business, you won’t have to worry about losing your money. If you’re really craving greater upside potential, there are insurance products, such as indexed universal life, that provide a fixed return plus the possibility of additional credits through exposure to a linked market index. Those policies are market risk free but offer a significant upside.

3. Using Leverage

Let’s say a $2 million policy on a healthy 65-year-old male costs $50,000 per year. Upon making that first premium payment, that policyholder’s heirs are guaranteed to receive the full $2 million tax free, even if he dies in year one.

Let’s say he lives to 85, which is very close to life expectancy, he would still have paid $1 million to receive $2 million — a 100% return that boils down to 5% tax free per year. This is an example of the leverage offered by life insurance.

We can’t calculate exactly what the return will be on a life insurance policy until the insured dies. That said, we know exactly what heirs will receive the day the policy is placed. Even for those who live past life expectancy, the return — especially when factoring in the tax-free nature of it — is most likely going to beat the alternatives.

4. Business Succession Planning

Part of the reason so few businesses have viable succession plans is that they are complex, involve moving parts, and are often accompanied by tough decisions. Including life insurance in your succession plan can be the difference between having ideas about the future and turning those ideas into real plans.

Let’s say Dan owns a store that does $2 million per year in revenue. One of his two kids will take over the family business while the other pursues a medical career on the West Coast. Dan wants the inheritances to be even, but most of his money is tied up in the business. He can use life insurance to create liquidity and partially fund the inheritance for his child not taking a role in the family business.

5. Fulfilling Charitable Intentions

There are many ways to use life insurance to fulfill charitable intentions. We’ve written about giving your estate away twice, once for your family and once for the benefit of charity. We’ve also written about charitable remainder trusts — excellent vehicles for wealth creation and charitable gifting.

Life insurance is a great way to fund your charitable intentions because of the leverage associated with it. Sending a few thousand dollars to a charity each year provides support, but putting that same money into a life insurance policy can guarantee a much larger impact. In addition, we also have ways of helping to make sure that generosity is not stopped at death. Our charitable giving strategies allow you to gift into perpetuity by providing so much leverage that the tax-free funds from the death benefit invested at a modest rate of return generate an ongoing gift to your charity equivalent to your former annual gift.

The experts at Howard Kaye have been designing estate plans for decades. When it comes to wealth transfer, we have pioneered many of the strategies being used throughout the industry today. Call us at 800-DIE-RICH and learn how life insurance can help you achieve all of the useful benefits discussed above.

Leave a Comment