Whole / Universal Life ever good for wealth transfer ?

[pb4uski]

they are very complex and the way many are marketed is really a lie...

They are actually very simple but the way they are pitched is often very complex.

You pay a fixed premium per period (year, quarter or month - you chose). If you die, your beneficiaries receive the face amount.

If you don't then at any point in time you can cash in the policy for its cash surrender value. The contract will include a schedule of minimum cash surrender values, but your actual cash surrender value will likely be more. The cash surrender value will be negligible in the early years of the contract and then will build.

The contract design is best for people who need life insurance protection for a very long time - which is why it is frequently referred to as "permanent" insurance. The premiums will typically be higher than term life insurance in the early years and lower than term life insurance in the later years - the entire design is to make the cost of insurance level so they collect more early and less later.

Most whole life is "participating" which means that the insurer will pay dividends based on how that group of policies performed.

That's it in a nutshell.

 

[Delawaredave5]

Also, remember that before 2000, the estate tax exemption was $600k per person (and even now is $5M, with many expecting it to be reduced to perhaps $3.5M). Above that, the rate quickly rises to 40%+ - which doesn't take long for some estates. Gifting (in the 80s/90s) $10,000 or whatever it was - from each parent to each child (or even to a grandparent) - could allow quite a bit in annual premiums to be shifted into a LI policy.

My understanding is estate tax exemption drops to $1million at end of this year.

Person I know using life insurance as "wealth transfer vehicle" has one kid - I have no idea of their net worth - but I'd guess $2+ million.

Given that, there's no way you could gift enough at $13k/year.

So they'd be left with $1+million to be hit with estate tax - would pay upwards of 40% on tax.

So this person knows whole/universal life policies are "poor investments" - but if they transfer wealth tax free - even if their net return is 1/2 of a comparable "regular investment" - then the insurance could still transfer "more net wealth" because of tax advantages ?

Maybe unique case - but does seem like there's a reasonable argument.

 

[mathjak107]

They are actually very simple but the way they are pitched is often very complex.

You pay a fixed premium per period (year, quarter or month - you chose). If you die, your beneficiaries receive the face amount.

If you don't then at any point in time you can cash in the policy for its cash surrender value. The contract will include a schedule of minimum cash surrender values, but your actual cash surrender value will likely be more. The cash surrender value will be negligible in the early years of the contract and then will build.

The contract design is best for people who need life insurance protection for a very long time - which is why it is frequently referred to as "permanent" insurance. The premiums will typically be higher than term life insurance in the early years and lower than term life insurance in the later years - the entire design is to make the cost of insurance level so they collect more early and less later.

Most whole life is "participating" which means that the insurer will pay dividends based on how that group of policies performed.

That's it in a nutshell.

i belive the dividends are a forced refund of overcharges.

when mortaility rates and markets allow the insurer to make to more money then the state boards allow they are required to return some of that overpayment in premium. they do it as a dividend.



it is a simpleconcept but one few really understand. especially the cash value part. few understand a premium is not part insurance payment and part savings.

its not at all . its all for the insurance premium . the cash value is only a refund of some premium money since the policy is front loaded and basically you payed way to much for insurance your not going to use.

if you ditch the policy that cash value is your refund for your overpayment.

 

[Delawaredave5]

This is what OP is referring to: Single Premium Life Insurance - Who Should Buy It?

From the article below. The $5 million exemption (x2 for married) ends this year. So this approach for folks with $2+ million is viable ?

If you’re an affluent individual, you’re probably aware of the estate tax laws.

Let’s assume you’re, 50 years old, in good health, married and have a net worth of $11 million dollars. With proper estate planning, you should only have to pay estate taxes on $1 million dollars, by using both your and your spouse’s unified tax credit.

But that $1 Million is going to cost your estate $350,000! So that last million becomes $650,000 after taxes.

Here’s an idea for you. You won’t believe this. Life insurance is such an incredible leveraging tool.

If you have the liquid cash to pull this off, here’s what you could do:

Purchase a $1 million dollar guaranteed universal life insurance policy with a single premium of $133,114.
You could have the policy owned by a life insurance trust, therefore separating the $1 million death benefit proceeds from your estate.
The results:

Your taxable estate would be reduced by the amount of premium you spent on life insurance, so your new taxable estate would be $866,886 and estate tax due would be $303,410. So your estate tax is almost reduced by $50K!
Then your family takes your $1 million death benefit to pay the estate tax, which leaves them with $696,590.
Now your family inherits both your estate of $866,886 and the life insurance proceeds (after paying the taxes) of $696,590. Add them together and that’s $1,563,476.

 

[pb4uski]

i belive the dividends are a forced refund of overcharges.

when mortaility rates and markets allow the insurer to make to more money then the state boards allow they are required to return some of that overpayment in premium. they do it as a dividend.



it is a simpleconcept but one few really understand. especially the cash value part. few understand a premium is not part insurance payment and part savings.

its not at all . its all for the insurance premium . the cash value is only a refund of some premium money since the policy is front loaded and basically you payed way to much for insurance your not going to use.

if you ditch the policy that cash value is your refund for your overpayment.

That's one way of looking at it. The premiums are somewhat redundant because if the stuff hits the fan then the insurer is on the hook to deliver the contractual benefits even if actual experience blows through the pricing assumptions - however, the redundancy is limited by market forces.

Actually, the regulator typically has little involvement in the determination of dividends, that is done principally by the insurers. Competitive pressures commonly provide and incentive to be as generous as one prudently can. In those rare cases where a company has very favorable experience and doesn't distribute it to policyholders, regulators will intervene.

While you look at the dividends as being a return of premium, the companies, regulators and others in the business tend to look at it as a return of favorable experience because if actual experience is less favorable then the dividends would be reduced. You could argue it either way (and I'm sure you will).

 

[pb4uski]

This is what OP is referring to: Single Premium Life Insurance - Who Should Buy It?....

I think the OP was referring to recurring premium whole life insurance which could also be used in situations like that you quoted.

Either way, the idea is to have a source of cash flow to pay the estate taxes so assets that the insured owns and wants to pass to heirs (like a family business or farm or properties) don't have to be liquidated to pay the estate tax.

 

[ERD50]

My understanding is estate tax exemption drops to $1million at end of this year.

Person I know using life insurance as "wealth transfer vehicle" has one kid - I have no idea of their net worth - but I'd guess $2+ million.

Given that, there's no way you could gift enough at $13k/year.
....
Maybe unique case - but does seem like there's a reasonable argument.

You still need to do the math.

1) How much ins can you buy for $13K/year?

2) If you put $13K/year into a balanced fund, what return could you expect?

3) How many years would it take for the after tax value of that investment to equal/exceed the face value of the policy?


Also, though this is speculation, most of the analysis I've seen expects the exemption to be raised to $3.5M, and a lower rate (30% ?). I'm not trying to take this political, just trying to get to the facts - a significant number of Democratic Senators are in rural districts, and farmers are generally opposed to the estate tax, as it makes it hard to pass down the family farm to the next generation. I'm just pointing this out, that there is some opposition from some members of both political parties. It is not a straight partisan thing, so it seems likely, I think, that something along the $3.5M exemption will be passed.

-ERD50

 

[mathjak107]

That's one way of looking at it. The premiums are somewhat redundant because if the stuff hits the fan then the insurer is on the hook to deliver the contractual benefits even if actual experience blows through the pricing assumptions - however, the redundancy is limited by market forces.

Actually, the regulator typically has little involvement in the determination of dividends, that is done principally by the insurers. Competitive pressures commonly provide and incentive to be as generous as one prudently can. In those rare cases where a company has very favorable experience and doesn't distribute it to policyholders, regulators will intervene.

While you look at the dividends as being a return of premium, the companies, regulators and others in the business tend to look at it as a return of favorable experience because if actual experience is less favorable then the dividends would be reduced. You could argue it either way (and I'm sure you will).

nah nothing to argue ,we both are in agreement pretty much.

i have a 40 year old universal life policy i was sold as a 19 year old kid.

its been running on itself for about 30 years now and still has the same value.

its actually handy at this point in life.

since this is a 2nd marriage and both of us are leaving everything to each other we both use insurance to leave our own kids at least something.

we didnt want each others kids to keep wondering when the surviving spouse will die so they can get their parents things.

a small policy to the kids solves that.

 

[ERD50]

This is what OP is referring to: Single Premium Life Insurance - Who Should Buy It?

From the article below. The $5 million exemption (x2 for married) ends this year. So this approach for folks with $2+ million is viable ? ...

An awful lot of assumptions there.

edit- sorry, missed the age, 50 yo, still need to do the math... [-]How old are the insured? I'm guessing pretty young[/-] of the ins co is willing to accept $133K now and will pay $1M at a future date.

I think the ins premium would be taxable also. I don't think it is that easy to get money out of the estate. That is why this is usually illustrated by paying an annual premium with annual gifting - gifting below $13K per person flies under the radar (legally) of any gift taxes or estate tax exclusions.

And they don't subtract the 'opportunity cost' of that $133K, but that depends on returns and date of death. So you can't predict it, but it should not be ignored if you are trying to present an unbiased view.

It would be interesting to compare to say, a 20 year term ins of $1M - that covers you in case of early death, and would give time for the difference to be gifted each year, invested and grow.

-ERD50

 

[pb4uski]

....i have a 40 year old universal life policy i was sold as a 19 year old kid....its actually handy at this point in life....

I hear you - I [-]bought[/-]was sold a whole life policy when I was 21 and graduated college. By the time I knew better it was best to just keep it so I put the premiums on auto-pay and let it ride. The cash value is now equal to what I have paid in premiums plus 5.2% per annum interest so it could have been a worse outcome.

 

[obgyn65]

Good question. That's what I told them, but they keep sending me stuff about their whole life products which I don't want.

+1 IIRC you're single, no kids so why would you need life insurance?

 

[Nords]

You pay a fixed premium per period (year, quarter or month - you chose). If you die, your beneficiaries receive the face amount.
If you don't then at any point in time you can cash in the policy for its cash surrender value. The contract will include a schedule of minimum cash surrender values, but your actual cash surrender value will likely be more. The cash surrender value will be negligible in the early years of the contract and then will build.
The contract design is best for people who need life insurance protection for a very long time - which is why it is frequently referred to as "permanent" insurance. The premiums will typically be higher than term life insurance in the early years and lower than term life insurance in the later years - the entire design is to make the cost of insurance level so they collect more early and less later.
Most whole life is "participating" which means that the insurer will pay dividends based on how that group of policies performed.
That's it in a nutshell.

You (and the insurance companies) kinda skipped over the part where the policy doesn't earn enough dividends to pay the cost of the premiums.

When my brother and I were born, my father bought whole-life policies on himself with us as beneficiaries. Five decades later, he had a three-inch correspondence file of all the fuss of the invested premiums not earning enough, taking loans against the policy to pay the premiums, paying off the loans, putting more money in to catch up to the higher premiums... and on and on.

Two years ago he exchanged the whole-life policies for a single-premium policy.

Ironically, after five decades of maintaining life insurance policies for us "kids", neither my brother nor I need the money. But imagine what the value would have been if he'd insured himself for just 20 years of term (until we were on our own) and then invested the difference.

 

[mathjak107]

well i worked as a receptionist for a life insurance company when i was 19 going to school. they ended up selling me a policy .

i never even understood what i bought ,i just knew a bill came and i paid it .

this went on for decades until i learned .

 

[pb4uski]

Just tell them that you are not a buyer and don't want them sending you materials anymore and that whatever they send you will be immediately recycled without even being looked at. With any luck they will conclude you are a waste of their time and go away. If they don't you can always call/write the insurer and complain.

 

[pb4uski]

You (and the insurance companies) kinda skipped over the part where the policy doesn't earn enough dividends to pay the cost of the premiums.....

Whoa Nords.............specifically where did I suggest that the dividends would be sufficient to pay the premiums?

I didn't.

FWIW the most recent dividend on my whole life policy was 271% of the annual premium. The CSV at the last policy anniversary when I was 56 is 118% of the CSV at age 60 in the 1977 illustration I received (and still have).

So you're painting with a wide brush. I'm sorry that your dad had a bad experience but one bad apple doesn't spoil the whole bunch.

 

[mathjak107]

the actual premium is the 246 bucks plus a life time of interest as all you get is the face value no matter what.

when all is said and done its your premiums ,dividends and interest that consititue the policy if you live long enough to have it endow .
that interest after decades and decades can be an awful lot that goes back into the policy.

 

[pb4uski]

Interesting point. If I took the CSV today, my average annual return would be 5.2%. If I die and DW receive the death benefit, the average annual return is 8.9%.

As I sometimes say on the golf course, "not a bad miss".

 

[Nords]

Whoa Nords.............specifically where did I suggest that the dividends would be sufficient to pay the premiums?
I didn't.

Yeah, that's what I mean. You mentioned all the ways that the policy is supposed to work, and you kinda skipped over the parts that don't always work as well as advertised. That's not intended as criticism, so kindly don't take it as such. I'm just pointing out that the insurance has its flaws, like any other financial system.

FWIW the most recent dividend on my whole life policy was 271% of the annual premium. The CSV at the last policy anniversary when I was 56 is 118% of the CSV at age 60 in the 1977 illustration I received (and still have).
So you're painting with a wide brush. I'm sorry that your dad had a bad experience but one bad apple doesn't spoil the whole bunch.

I agree that one apple doesn't describe the barrel, just like FIRECalc does a bunch of data runs, but I think that 50+ years of history is worth applying to one's analysis of the decision. The reason those policy dividends couldn't keep up with the premiums is because of several recessions, runaway inflation, and an extended period of low interest rates. You started your policy a few years before the world's greatest bull market. By 1977 my Dad's policies were already well into the red.

In other words, the insurance company didn't have a clue in the 1960s what would happen to investment returns or interest rates. Neither did we. Nor do we have a clue on the future, but every historical data point helps define the boundaries of the problem. If any of the rest of you have 50+ years of experience with whole life insurance, then tell us about it.

I'm also not convinced that insurance is a "lifetime" purchase. You buy insurance to protect you from catastrophic events. It's a great idea when you're starting a career and your new family is depending on your sole income.
It's not such a great idea when your kids are grown, your spouse has some of her own income, and you have substantial assets. I don't think that people need insurance for a very long time. I think they need it to cover specific events, and the amount of coverage can vary widely over a lifetime of different situations.

I bought life insurance when I got married (1986) and cancelled it when I retired (2002). I don't think I'll ever need it again, not even for estate planning.

 

[brewer12345]

I am a bit rusty on the exact details these days, but I know that you always want to avoid "MEC"ing a life insurance policy. MEC = modified endowment contract, which basically means you lose all the tax protection usually afforded by a life insurance policy. If you are bringing new after tax dollars to the table buying a single premium policy definitely runs afoul of the MEC rules.

 

[pb4uski]

Yeah, that's what I mean. You mentioned all the ways that the policy is supposed to work, and you kinda skipped over the parts that don't always work as well as advertised.

I guess I'm not a mindreader. I think you're talking about policies that were sold where the premiums were supposed to "vanish" after a certain number of years and in fact, in many cases didn't because the dividends illustrated were too optimistic. The industry "paid" for those transgressions in the early/mid 1990s as a result of a number of large class action suits against many insurers. The settlements of these typically made the policyholders whole (or pretty close anyway). I'm surprised your dad's policy didn't benefit from those class actions. And BTW, only a portion of policies were sold based on the premise of vanishing premiums.

....I'm also not convinced that insurance is a "lifetime" purchase. You buy insurance to protect you from catastrophic events. It's a great idea when you're starting a career and your new family is depending on your sole income.
It's not such a great idea when your kids are grown, your spouse has some of her own income, and you have substantial assets. I don't think that people need insurance for a very long time. I think they need it to cover specific events, and the amount of coverage can vary widely over a lifetime of different situations.

I bought life insurance when I got married (1986) and cancelled it when I retired (2002). I don't think I'll ever need it again, not even for estate planning.

I guess you missed post #17.

 

[mathjak107]

Interesting point. If I took the CSV today, my average annual return would be 5.2%. If I die and DW receive the death benefit, the average annual return is 8.9%.

As I sometimes say on the golf course, "not a bad miss".

the longer the policy runs the less the return.

think about it ,when it endows its 100% your own money and your really self insured . its zero % the insurance companies money .

every additional year that dividends and interest goes back in reduces the return.

if you died after paying 1 years insurance your heirs get the exact same amount paid as if you died after paying 40 years of premiums,dividends and interest in.

in order to have a policy endow you have to feed in a combined total of more then the policy in order to cover expenses and reach the face value.

the highest returns would be dying early on when your on the insurance company dime. each year that ticks forward has your cost basis increasing as you pump in more and more. eventually you are self insuring on your own money..

its the exact opposite of an annuity.

an annuity has its crappiest years early on and the longer you live the more your return increases.

each year you collect another check pushes your return higher.

thats why folks who buy cash value life insurance as an investment for what if they live are buying the wrong product.

life insurance is a bet you will die,an annuity is a bet you will live.

they move opposite each other.

life insurance has the return dropping as you live , an annuity has your return increasing as you live.

 

[45th Birthday]

Estate Planning Life Insurance

A number of years ago, when it became clear my company would be a valuable asset, my (50% business) partner and I decided to do a combination buy/sell and (respective) estate plans. This in case one of us died and the other needed to buy out the heirs. There wasn't enough cash in the business to make that happen.

We each set up irrevocable life insurance trusts and bought whole-life type policies which would effectively pay the person who died the value of the company inside a trust that couldn't be subject to the death tax. The value of half the business at the time was about $8 million, so that was the death benefit on the policies (a few for diversification).

Over 11 years between then and the time we sold the company for cash, I paid $315K in premiums. Then, I converted the policies into paid-up versions that currently have a cash value, if I choose to take it, of $300K. Figure the time value of the premiums paid and the $15K loss covered the death risk and some $$ went into the broker's pocket. The current death benefit is $900,000. The cash value increases tax free at about 5% per year.

Overall, I'm OK with what happened. During the 11 years, we were protected. When I die, the $900,000 will be used to pay death taxes. Depending upon what happens, this can be significant. I figured the other day that if nothing changes, the difference to my family of death taxes on January 1, 2013 versus December 31, 2012 would be an eight-figure number.

Luckily, we are in pretty good health, but there is no accounting for accidents. I might/probably will take out some term life policies in the trust when the dust settles to take away some of the pain from the death tax.