Wealth Transfer Strategies: Life Insurance vs. Stocks and Bonds

Most of us who are looking to create a legacy have the same basic goal: transfer as much money as possible to the next generation without too many headaches or delays. What sort of headaches or delays might you encounter? It could be dealing with probate, excessive or unexpected taxation, business succession issues, or IRA distribution rules. The list goes on and on.

So today, I’d like to compare the results of transferring money to the next generation by way of life insurance versus through a portfolio of stocks and bonds. I think you’ll be astounded at the efficiencies one solution offers over the other.

Life Insurance: A Guaranteed Payout

Let’s start with an example of the use of stocks and bonds. Harry dies with $15 million in a brokerage account comprised of stocks and bonds. After taking advantage of his $5.49 million estate and gift tax exemption, Harry still has nearly $10 million of his estate assets subject to taxation, creating a $4.8 million tax bill and wiping out nearly one-third of the money going to his kids, grandkids, and charity. If we assume $2 million of Harry’s money was held in an IRA, that creates another layer of taxation and burdensome rules regarding when and how those IRA beneficiaries can take their money.

Now let’s assume Harry funded an irrevocable life insurance trust (ILIT) instead. Why a life insurance trust? Well, if the policy is owned directly by Harry and not by a third party, the proceeds of the policy would be included in Harry’s taxable estate. No thanks.

We use the trust vehicle to remove the asset from Harry’s estate but still provide specific instructions to the trustee about how and when to distribute the proceeds of the policy. Further, if Harry set up the ILIT 20 or 30 years before his death, he was able to continuously remove assets from his estate each year as he continued to fund the trust to pay the life insurance premiums.  

Using life insurance to transfer wealth has other distinct benefits, such as leverage and avoiding market volatility. Let’s say Harry died in 2009 after funding only 10 premium payments of $200,000 on his $10 million policy. The life insurance benefit is a fixed, guaranteed amount, so his beneficiaries would receive the full $10 million even though he only paid a fraction of that amount in premiums. This is a huge advantage of funding life insurance: You always know what the payout will be.

Avoiding Volatility Risk

With regard to market volatility, 2009 would have been a rough year for Harry to pass away with a portfolio of stocks and bonds. It was the immediate aftermath of the real estate crisis and the Dow Jones dropped all the way down below 7,000. If Harry died when the market was in flux, his beneficiaries might only have received a mere fraction of $10 million. When you invest in stocks and bonds, you always need to consider the risk that stocks can go to zero and bonds can default. With life insurance, you don’t have any volatility risk at all.

Can you imagine if one conversation with an experienced life insurance advisor could save your heirs millions of dollars? We’ve been down this road countless times and have seen the shock and regret people face when they pay a 50% estate tax rate or suffer massive market losses at older ages. Building an estate plan with Howard Kaye will maximize the transfer of your wealth and ensure that no stones go unturned when it comes to your money. Contact us today at 800-DIE-RICH to learn more.

Start typing and press Enter to search

Please enter your email to download our informative reports.

    Please enter your email to download our informative reports.

      Please enter your email to download our informative reports.

        Please enter your email to download our informative reports.

          Please enter your email to download our informative reports.

            Please enter your email to download our informative reports.

              Please enter your email to download our informative reports.

                Please enter your email to download our informative reports.

                  Please enter your email to download our informative reports.