You have quite a few options when it comes to how you transfer money from one generation to the next. Let’s take the example of David Jones, who decided to leave $15 million in his bank account for nearly 20 years prior to his death. David thought he was just being conservative and preserving his money for his kids and grandkids. What he actually did, however, was counterproductive and depending on the date of death, may have cost them millions of dollars.
How so?
First, David didn’t earn very much interest by accepting bank deposit rates in the current environment. For many of those 20 years, he only earned around 1% on his money. Worse yet, he paid tax on the interest every year, further reducing his returns. When he eventually passes away, his heirs can owe millions in estate taxes, negating most, if not all, the interest he earned over those 20 years.
Had David used a life insurance strategy instead, he could have left them $30 million or more, rather than the $10 million or less he may transfer under his original method. Here are some of the many reasons life insurance is the best tool for wealth creation and wealth transfer:
- Leverage: Life insurance allows you to buy more money in the future. If you’re a healthy 70-year-old, buying a $10 million policy might only cost you in the ballpark of $3 to $4 million. Your rate of return will depend on how long you live, but it will certainly be positive. It could also be paid annually instead of in a single sum, further improving the amount of leverage and the after tax internal rate of return.
- Estate planning: Estate taxes are nasty — you could be looking at 50% or more depending on the state you live in. The trick is to die with less than the lifetime gift tax exclusion, currently set at $11.2 million. Granted, that may sound pretty good, but there is no guarantee that the number will remain that high. Remember, on January 1, 2026, the exemption levels will drop back to 2017 levels by law! That can create quite a tax problem!
- Principal guarantees: When you leave money to your heirs in accounts full of stocks and bonds, your principal is constantly at risk. Granted, you can make a lot of money with stocks, but you can also lose a lot, and maybe your heirs don’t have quite the same risk tolerance that you do. When it comes to wealth preservation and transfer, the safe choice is to use a vehicle that guarantees principal and can reliably pass money to future generations.
- Tax efficiency: Life insurance is inherently tax efficient because the death benefit pays income tax free to your heirs. If purchased inside of a properly structured life insurance trust, the proceeds can be estate tax free as well. The trick is to remove yourself from ownership of the insurance policy by using an irrevocable trust. The difference between passing money along income and estate tax free versus paying a 50% tax rate is astronomical.
- Creditor protection: Life insurance can help you take an otherwise exposed asset, such as cash, and protect the asset (cash value) and the death benefit. This can provide extraordinary peace-of-mind, especially in the litigious environment we’re living in today.
It’s common for life insurance to be viewed as too complex, or simply as an income replacement vehicle. When that happens, some of the most important reasons to buy it are overlooked. When it comes to wealth creation, life insurance is the unrivaled winner. Your heirs will receive a fixed, guaranteed death benefit that can be used to fund anything from real estate to educations to retirement income for future generations.
Speak to the experts at Howard Kaye to learn how a life insurance solution can help you. Our life insurance advisors have pioneered many of the most popular planning strategies. Call us today at 800-DIE-RICH, and let us show you how to think about money in new ways that will leave more money to your heirs than you ever anticipated.
