Our primary goal as life insurance advisors is to help you efficiently pass money along from one generation to the next. One way we do that is by using life insurance to transfer money through a future death benefit. Doing so accomplishes various objectives including avoiding probate, potentially avoiding income and estate taxes, and providing a cost-effective, guaranteed sum of money for your heirs.

We are sometimes asked about term insurance and the role it plays in financial and estate planning. Let’s take a closer look at why term insurance, a very suitable vehicle for income replacement and excellent for younger families, is not a good wealth transfer vehicle and where we usually see term policies come into play. We’ll also dig into the types of life insurance policies that we most often see being used for wealth transfer.  

The Inefficiency of Term Life

Term life is particularly ineffective when it comes to legacy planning because the policies are not designed to pass money along from one generation to the next. The only time that would happen is if the insured dies before life expectancy. Even a healthy 50-year-old who buys a 30-year term policy will only have coverage through age 80, at which point they are likely to be alive and unable to qualify for a new policy. Term insurance misses out on the key appeal of life insurance: passing tax-free dollars along to your heirs.

You’ll find term life insurance in an estate plan when income replacement, rather than wealth transfer, is the goal. If a young family has one high-income earner and one modest income earner, it is possible they would buy a 20 or 30-year term policy with a few million dollars of face value to cover the income that would be lost if that higher income earner were to pass away. Once these folks are a little older and more established, perhaps when the kids go off to college, funding some form of permanent insurance would be the more efficient way to go.

Whole vs. Universal Life Insurance

Depending on your objectives, either whole life or universal life could help you achieve your legacy planning goals, but we believe universal life is often the better option. Universal life allows you to maximize the death benefit at a lower cost, while whole life has more of a focus on cash accumulation. If the goal is to pass down as much money as possible, you probably aren’t all that concerned with cash value.

Along the same lines, a single premium policy will usually cost less than a policy in which the premium is divided up and paid over your lifetime or perhaps a 10-year period. If you have the ability to write that $1 million check today, you can reduce the size of your taxable estate and know with certainty exactly what that premium will buy for your heirs.

We’d like to give you a quick example of a legacy planning strategy we use that allows you to give your estate away twice. We mentioned above that single premium policies can be cost efficient, so let’s assume a couple in their late 60s with a $10 million estate decides to use a portion of their lifetime exemption to gift $2 million into a life insurance trust.

That $2 million will provide their heirs with a $10 million payout upon the death of the second spouse. Assuming the other $8 million in the estate grows back to (or more than) $10 million through market investments, this couple can provide a legacy that covers both family and charity.

This allows the couple to give away their estate twice. This eliminates the natural conflict between leaving a legacy to family, and taking care of important charities and other causes. This strategy is critical, especially if you compare the value of this inheritance versus the same couple keeping that money in cash and getting hit with estate taxes, the difference is astronomical.

There are many ways to pass your assets along to your heirs, but we believe life insurance is the most effective. Speak to one of our experts today and learn how to create an incredibly versatile and efficient estate plan by taking advantage of the leverage and tax benefits associated with life insurance. Contact us today at 800-DIE-RICH.

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