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Whole / Universal Life ever good for wealth transfer ?
Old 12-14-2012, 07:27 AM   #1
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Whole / Universal Life ever good for wealth transfer ?

Always believed life insurance and investments are two different things. Had term policies when I needed, now don't.

Met a guy who has sizable whole/universal life policies - not because he needs the "insurance" -but because he's using it for tax advantaged wealth transfer vehicle to children/grandkids.

Does this ever make sense ? My belief has always been that these things are high-fees, low return -- and have no place as "investments".

Appreciate any thoughts.
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Old 12-14-2012, 07:45 AM   #2
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You can already leave a fair amount of $$ in an estate before taxes kick in, so I imagine using life insurance for inheritance implies there is lots of money at stake. I do agree they are not investments.
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Old 12-14-2012, 08:19 AM   #3
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These policies make sense for the very wealthy only, I think. It is highly taxed advantaged, but you've got to be on the hook for a lot of taxes before it is worthwhile to pay the fees and high premiums.

My mom got talked into really believing in them as an investment vehicle. She started a VUL for me when I was a teen, and put maybe 11K total into it between maybe 1998-2001. 15 years later, it is worth maybe half of that. Disappointing to say the least. I don't particularly care what it is worth to me now, but I just hate to see my parents' hard earned money down the drain like that. Premiums are something like $400/yr (right now, they will continue to rise) for a $200K benefit. I'm 33 and healthy, and my 30 yr term insurance is around the same premium for a $500K policy.
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Old 12-14-2012, 09:22 AM   #4
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These policies make sense for the very wealthy only, I think. It is highly taxed advantaged, but you've got to be on the hook for a lot of taxes before it is worthwhile to pay the fees and high premiums....
AFAICT, they don't even make sense for the very wealthy. Every discussion I see on these makes a big deal about the intended heirs holding the policy so it is out of the estate, so the pay-out is not subject to estate taxes. The usual scenario is that the wealthy person makes annual gifts the beneficiaries (gifts up to $13K annually per 'giftee' are not subject to gift taxes and don't count towards the estate tax exclusions), and they use that money to pay the insurance premiums.

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?

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.

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Old 12-14-2012, 09:35 AM   #5
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What you are buying with these products is guarantees against bad stuff happening. Guarantees cost money, simple as that. If you don't need to buy a guarantee, dont.
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Old 12-14-2012, 10:34 AM   #6
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AFAICT, they don't even make sense for the very wealthy. Every discussion I see on these makes a big deal about the intended heirs holding the policy so it is out of the estate, so the pay-out is not subject to estate taxes. The usual scenario is that the wealthy person makes annual gifts the beneficiaries (gifts up to $13K annually per 'giftee' are not subject to gift taxes and don't count towards the estate tax exclusions), and they use that money to pay the insurance premiums.
-ERD50
It could very well be that I am misunderstanding the vehicle, but I thought that the earnings are all tax free, even before they are passed on to heirs. So it is partially the estate taxes you save, and partially the taxes on the earnings that you save. The holder of the policy won't pay taxes on the investment earnings in his/her lifetime, nor will estate taxes be paid. So if you really have a lot of money, and it is therefore earning a lot of income, and the taxes you'd be on the hook for between a lifetime of federal income taxes and the estate taxes at death are more than the premiums, than it could be beneficial, right?

So yeah, you could transfer 13K to your kid every year, but you'd have already paid income taxes whenever you earned that income. In the UL thingy, you won't. Again, I'm no expert, this is just how it was explained to me.

I'm not saying this is a good product, it really is NOT for almost everyone. But someone who is super wealthy could really shelter a lot of earnings in something like this.
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Old 12-14-2012, 10:38 AM   #7
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But someone who is super wealthy could really shelter a lot of earnings in something like this.
Super wealthy people will have weasel lawyers, accountants and other very expensive professionals structuring this stuff for them. Do you have such a staff on retainer? No? Then you almost certainly shouldn't be buying this stuff unless you need mortality protection.
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Old 12-14-2012, 10:40 AM   #8
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What you are buying with these products is guarantees against bad stuff happening. Guarantees cost money, simple as that. If you don't need to buy a guarantee, dont.
Well, the same could be said for term insurance. I think the issue is whether it is worth much higher premiums to put your investments in a tax shelter. And for most, the answer is no.
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Old 12-14-2012, 10:44 AM   #9
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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.


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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.
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Old 12-14-2012, 10:45 AM   #10
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Well, the same could be said for term insurance. I think the issue is whether it is worth much higher premiums to put your investments in a tax shelter. And for most, the answer is no.
I think the term tax shelter is a misnomer. It is more of a tax arbitrage, where the cost of premiums is lower than the cost of taxes, so the net cash to beneficiary is greater. Taxes are not being avoided, they are being financed.
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Old 12-14-2012, 10:45 AM   #11
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Super wealthy people will have weasel lawyers, accountants and other very expensive professionals structuring this stuff for them. Do you have such a staff on retainer? No? Then you almost certainly shouldn't be buying this stuff unless you need mortality protection.
I hope you (brewer) are not referring to me (catccc) as "you" in the above statement. (I'm not sure since you quoted me...) Maybe you are referring to OP?

I don't claim to be super wealthy (I am most certainly not), nor do I think I should buy this. I have 30 yr term insurance because I have young kids and a stay-at-home husband. Even if you need mortality protection, you should first consider buying term and not whole or universal life.
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Old 12-14-2012, 10:48 AM   #12
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I think the term tax shelter is a misnomer. It is more of a tax arbitrage, where the cost of premiums is lower than the cost of taxes, so the net cash to beneficiary is greater. Taxes are not being avoided, they are being financed.
Yes, this is true. You pay for the premium to save on the tax. And I guess really it's the cost of premiums in a UL or WL policy in excess of whatever term policy premium you'd otherwise pay.
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Old 12-14-2012, 10:58 AM   #13
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Super wealthy people will have weasel lawyers, accountants and other very expensive professionals structuring this stuff for them. Do you have such a staff on retainer? No? Then you almost certainly shouldn't be buying this stuff unless you need mortality protection.
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I hope you (brewer) are not referring to me (catccc) as "you" in the above statement. (I'm not sure since you quoted me...) Maybe you are referring to OP?

I don't claim to be super wealthy (I am most certainly not), nor do I think I should buy this. I have 30 yr term insurance because I have young kids and a stay-at-home husband. Even if you need mortality protection, you should first consider buying term and not whole or universal life.
I read it as a general statement for everyone, not directed at you or the op. Read "you" as "one" and you get

"Does one have such a staff on retainer? No? Then one almost certainly shouldn't be buying this stuff unless one needs mortality protection."
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Old 12-14-2012, 11:04 AM   #14
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I hope you (brewer) are not referring to me (catccc) as "you" in the above statement. (I'm not sure since you quoted me...) Maybe you are referring to OP?

I don't claim to be super wealthy (I am most certainly not), nor do I think I should buy this. I have 30 yr term insurance because I have young kids and a stay-at-home husband. Even if you need mortality protection, you should first consider buying term and not whole or universal life.
No, it was the "royal" you, rather than being directed at you personally. We have lots of readers who get pitched this stuff on a regular basis and are not real sophisticated about seeing through the smoke and mirrors used by the sleazeball agents that sell this stuff to the unsuspecting. Some general thoughts on buying life insurance may be found here: Life, Investments & Everything: How To Buy Life Insurance

I have a 20 year term policy for the same reasons you do. I am coming up on the halfway mark on my policy, so I have plenty of time to decide whether I wish to convert part or all of the policy to a permanent policy. I am guess that the answer will be "no."

Actually, a very popular way to deal with estate planning and other permanent life insurance needs these days is to utilize "secondary guaranteed" universal life policies. These products are not really aimed at building cash value (although they do in the early years). Effectively they are policies which are term to <pick an age>.
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Old 12-14-2012, 11:21 AM   #15
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It could very well be that I am misunderstanding the vehicle, but I thought that the earnings are all tax free, even before they are passed on to heirs. So it is partially the estate taxes you save, and partially the taxes on the earnings that you save. ...

So yeah, you could transfer 13K to your kid every year, but you'd have already paid income taxes whenever you earned that income. In the UL thingy, you won't. Again, I'm no expert, this is just how it was explained to me.

...
I't true that you won't pay income taxes on any gains in the insurance policy, so a fair comparison is after tax gains of comparable investments.

If you are gifting the $13K each year, the gifter paid income tax somewhere along the way. Makes no difference if the giftee uses the $13K to pay a life ins premium or uses it for an alternative investment.

What I'm saying, in general (and to address MooreBonds's post also), is one should look at both sides. The gifted money already escapes estate taxes, so compare the after-income-tax if the gifter invests the money, versus buying insurance. There will be a breakeven point, based on life expectancy, so there is a 'gamble' to that - just like any insurance product. If the gifter lives beyond their average life expectancy (as 50% do), they will have paid a lot of premiums. I just think anyone considering this should understand the trade-offs. It just bugs me that the fact that the ins escapes estate taxes is always played up, but the fact that the gifted money has already escaped estate taxes is conveniently ignored (convenient of the insurance sales person).

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Old 12-14-2012, 11:26 AM   #16
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young kids and a stay-at-home husband.
Just curious: do you have a policy on your husband? When we bough the policy on me, we bought a similar one on DW because she is the primary kid-chaser. Tally up what it would cost you to replace the childcare services of a spouse when you have multiple small kids and you get to big numbers quickly.
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Old 12-14-2012, 12:00 PM   #17
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I agree that life insurance should not be looked at as an investment - if you want to invest, buy term and invest the difference.

For most people, their need for life insurance will be when they are raising their family and the need will in most cases go away once the kids are out of the nest.

There are some limited situations where people need life insurance for a long period of time (large estates that will be subject to estate taxes, significant family businesses that will be included in an estate, disabled children, etc. come to mind) then permanent insurance makes sense in that it spreads the cost of insurance protection over a long period of time and will extend protection to later ages where term might not be available.

In a sense it is tax free if you hold it until death of the insured in that the benefit is tax-free.
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Old 12-14-2012, 12:18 PM   #18
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I agree that life insurance should not be looked at as an investment - if you want to invest, buy term and invest the difference.

For most people, their need for life insurance will be when they are raising their family and the need will in most cases go away once the kids are out of the nest.

There are some limited situations where people need life insurance for a long period of time (large estates that will be subject to estate taxes, significant family businesses that will be included in an estate, disabled children, etc. come to mind) then permanent insurance makes sense in that it spreads the cost of insurance protection over a long period of time and will extend protection to later ages where term might not be available.

In a sense it is tax free if you hold it until death of the insured in that the benefit is tax-free.
Excellent summary.
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Old 12-14-2012, 12:18 PM   #19
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Just curious: do you have a policy on your husband? When we bough the policy on me, we bought a similar one on DW because she is the primary kid-chaser. Tally up what it would cost you to replace the childcare services of a spouse when you have multiple small kids and you get to big numbers quickly.
I can't decide if I'm really under insuring my stay at home DW ($250k term).
But in the unlikely event of her demise, in addition to term life money, because she has 40 SS credits, I would get SS income for all three kids (ages 8,6 & 4 now) until they turn 18 (or even later if full time students), which caps at 4k per month family maximum.
Just from a financial point of view, I think I would be set.
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Old 12-14-2012, 12:43 PM   #20
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Just curious: do you have a policy on your husband? When we bough the policy on me, we bought a similar one on DW because she is the primary kid-chaser. Tally up what it would cost you to replace the childcare services of a spouse when you have multiple small kids and you get to big numbers quickly.
Yes, good point. We both carry 30 year term insurance. There's an immeasurable value on what he does being home with the kids, and if something were to happen, I would definitely take a break from work so I could be home with them.
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