But since those premiums were already taken out of the estate, it ends up going back to an investment decision - will the insurance payout more than the premiums that were put into it? On average, that can't be or the ins cos would not offer it.
Ins can be used like this to provide liquidity, as estate taxes are due in a relatively short period. But do most people need that liquidity, or are there cheaper ways to get it?
It's partly based on what charts the salesperson shows to the wealthy (remember that just because someone accumulates large wealth doesn't guarantee that they are truly sophisticated investors that understand the nuances of 0.05% Vanguard ETF Expense Ratios, or instantly see better alternatives to life insurance). But also it's partly based on diversification - they're not putting 90% of their estate wealth into this policy.
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.
If the wealthy person passes at a younger age, there wouldn't be enough years to just gift (w/o ins), and get much out of the estate. But maybe term ins could cover them up to their average LE - I'd bet the difference in premiums would work in their favor. The ins salesman are very slick at accentuating the positive (from their POV), and never mentioning any drawbacks. People go for it because it sounds good, but I don't think the math works.
2 points:
1. Term life is usually sold as income-replacement, not for estate planning. Do you really want to roll the dice and see if you pass on before age 75 when your term policy expires? And good luck even getting ANY term coverage when you're 85. However, you do pose a valid point in that they could combine a whole life policy with a 20-year term, so that if they pass in the first 20 years, it would help increase funds available for taxes to offset fewer years of reducing the estate value.
2. Another aspect that the wealthy use is to buy the policies when they're somewhat younger (50s/60s), and letting the policy grow in value. That is, don't make the minimum annual payments so that the policy barely stays in force to pay out the death benefit - structure the payments to pay some extra, and let the policy grow in value so that, after 20-30-40 years, the projected cash value death benefit of the policy is far above the original policy's death benefit. This is one of the main draws that whole life policies offer for estate planning for wealthy people as an alternative to avoid having their estate whacked with 40%+ estate tax rates.
Of course, it's a gamble. If they overpay the premiums, and die at a younger age before the cash value has 30 years to compound and take off in value, then it wasn't the most efficient method - but to them, it still likely beats forking over 40% to estate taxes.
