Using Life Insurance to pass on wealth

[NurseSharon]

We are in our late 50's and still working. Our financial advisor is encouraging us to start moving money into a whole life policy with a LTC rider so that when we eventually die, the life insurance and all of the growth will pass to our heirs tax-free. Does anyone have any experience or advice with this?

 

[ivinsfan]

Would you mind doing a little Hi I am post? We'd like to know you a little bit before advising you on such a hot topic.

 

[rodi]

Welcome NurseSharon -

As ivinsfan suggested, please take the time to post an intro in the "Hi I Am" subforum.

As for whole life as a way to pass on wealth... Some questions:
- If you invested the same amount in a balanced fund would you leave *more* to your heirs?
- Is there any chance you will need the money between now and death? What are the terms of borrowing against, or cashing out? How many years? What percentage?
- Do you need the life insurance for any reason than inheritance?
- How much does your financial advisor get in commissions/fees from this product. Whole life tends to be a very good deal.... for the person selling it.

 

[OldShooter]

NurseSharon, as you will find as the posts are added to this thread, cash value life insurance is a wonderful way to pass wealth to one's heirs --- if you are the person selling the insurance.

Start with three things:

• (1) brokercheck.com to check the background of the salesperson. Generally these reports are clean, but if you find customer disputes recorded that is a huge red flag.
• (2) "Do you have a fiduciary responsibility to me in this relationship? "Yes" is a plus. "No" is the most likely answer. See: https://www.investopedia.com/terms/f/fiduciary.asp
• (3) Rodi's question: "How much will you get in commissions/fees from selling this product."

Good luck.

 

[SecondCor521]

We are in our late 50's and still working. Our financial advisor is encouraging us to start moving money into a whole life policy with a LTC rider so that when we eventually die, the life insurance and all of the growth will pass to our heirs tax-free. Does anyone have any experience or advice with this?

Yes. My Mom and Dad took this approach. I've watched it play out over about the last 30 years. I'm quite convinced that they (well, we kids their heirs) would have been better served to just keep the money in their own portfolio and pay any necessary taxes.

I personally own zero life insurance and zero LTC insurance, and plan to skip the whole idea you're describing. I'll pay for my care out of my portfolio and I fully expect my kids to be money ahead even if they have to pay some inheritance taxes. And I can somewhat address inheritance taxes with aggressive gifting early on or over time - a method which is also generally tax-free if done well.

The life insurance charges plus the expenses the life insurance company has to cover plus the profit that the life insurance company makes plus the more conservative investments over the remainder of my lifetime outweigh, IMNSHO, any tax-free benefits that whole life offers.

Also, the illustrations they provide generally mainly show results that are not guaranteed. The real result, over time, will probably be worse than their illustrations (but probably somewhat better than the "guaranteed" columns on those illustrations.) If they say that a whole life policy should become self-sustaining in X years, it could easily be close to 2X years.

 

[copyright1997reloaded]

Another question to OP: How close are you to the lifetime exclusion limits? As of 2021, federal estate limit is $11.7 Million per person. Even when the tax law expires, the limit is still a hefty $5.49 million (adjusted for inflation).

You could also gift up to 15K for each child (single), 30K per child (married) each year which is not part of your estate.

 

[rk911]

We are in our late 50's and still working. Our financial advisor is encouraging us to start moving money into a whole life policy with a LTC rider so that when we eventually die, the life insurance and all of the growth will pass to our heirs tax-free. Does anyone have any experience or advice with this?

Hi, Nurse Sharon qnd welcome to the forum.

there may be exceptions but AFAIK proceeds from bank accounts, retirement accounts, post-tax accounts, annuities, the sale of a residence, etc all pass to the heirs and beneficiaries tax free. once those assets start earning those earnings are taxable or in the case of retirement accounts the withdrawls are taxable. my wife and i are going thru this right now after the death of her brother. he left her a substantial mix of assets all of which, according to our CPA, will pass to her federal and state income tax free.

IMO, life insurance, especially whole life, benefits the sales critter more than anyone and a blind chimp could likely get better returns in a balanced fund or even low cost index funds than in whole life.

 

[SecondCor521]

Hi, Nurse Sharon qnd welcome to the forum.

there may be exceptions but AFAIK proceeds from bank accounts, retirement accounts, post-tax accounts, annuities, the sale of a residence, etc all pass to the heirs and beneficiaries tax free. once those assets start earning those earnings are taxable or in the case of retirement accounts the withdrawls are taxable. my wife and i are going thru this right now after the death of her brother. he left her a substantial mix of assets all of which, according to our CPA, will pass to her federal and state income tax free.

IMO, life insurance, especially whole life, benefits the sales critter more than anyone and a blind chimp could likely get better returns in a balanced fund or even low cost index funds than in whole life.

Emphasis added.

The bolded statement is true with respect to income and capital gains tax. However, if the individual (and OP may fall into this category) has more than the estate tax exemption amount, then a rather steep 40% estate tax kicks in on amounts above that number.

As copyright1997reloaded mentioned, this amount is about $11.7M per person today, is scheduled to drop to about $5.8M in 2026, or may be lowered by legislation sooner or further than that.

Whole life (or really any life insurance), if owned by someone other than the decedent, typically in an ILIT, sidesteps this estate tax. That's the primary play being discussed here.

 

[Bamaman]

Another question to OP: How close are you to the lifetime exclusion limits? As of 2021, federal estate limit is $11.7 Million per person. Even when the tax law expires, the limit is still a hefty $5.49 million (adjusted for inflation).

You could also gift up to 15K for each child (single), 30K per child (married) each year which is not part of your estate.

The above was what I was thinking, and life insurance to pay inheritance taxes today is not that often needed.

I did have a friend that inherited 10,000 acres of the finest farmland anywhere. The federal estate limit was lower at that time, but she had sufficient cash to pay Uncle Sam.

I did business with a tractor dealer that owned 46,000 acres and farmed it all. Ole Dad died, and the sons are praying for a long life for their mother. At one point, Uncle Sam will want to to be paid in cash within 9 months of her death for inheritance taxes. That's when life insurance is needed.

 

[Sunset]

We are in our late 50's and still working. Our financial advisor is encouraging us to start moving money into a whole life policy with a LTC rider so that when we eventually die, the life insurance and all of the growth will pass to our heirs tax-free. Does anyone have any experience or advice with this?

Please state your approximate assets, but frankly I'm guessing you don't need this. The FA is telling you to buy it as the FA gets a HUGE commission from you.

If you actually had enough to even think your heirs would be paying lots of taxes upon your death, you would not need LTC and you would not be working.

Please hold off on this purchase until you get more information.

 

[Telly]

As a decades-long reader of Scott Burns, I follow his mantra that insurance is insurance. One purchases insurance to cover possible future losses of sufficient magnitude. Not as an investment. Insurance is insurance, investments are investments. And the place they meet, is in the pocket of the one selling insurance.

 

[NurseSharon]

Hi i am

Hi I am married and 57 yo. We have been frugal savers and are still working although my spouse is hoping to go PT soon--I am already PT. Without going into asset details, no we don't need life insurance. The way this is being pitched to us is if our heirs receive an inherited IRA or 401K, etc.. from our estate, it will be taxed to them at their tax rate. We are trying to wrap our heads around this before we make any moves with this. I don't know what the commission is that the FA receives but I'm guessing it is quite large. Also. he does have a fiduciary responsibility to us. I have enjoyed the responses and information from everyone so far, so keep it coming! THANKS

 

[SecondCor521]

The way this is being pitched to us is if our heirs receive an inherited IRA or 401K, etc.. from our estate, it will be taxed to them at their tax rate.

Generally speaking this is correct.

However, the income tax bill on a 401(k) or traditional IRA will be due by you or them regardless - a whole life policy does absolutely nothing to address that.

If you take money out of the traditional IRA or 401(k) to pay the premium on a whole life policy, then you will be taxed on that money as you withdraw it - probably at a higher rate than your heirs it sounds like, which would make it a bad idea tax-wise.

I suggest you learn and internalize how income and estate taxes actually work before you proceed. There are, as has been previously mentioned, potentially some estate tax (and liquidity) benefits to the approach that has been suggested to you. But it sounds like you don't actually understand what they're saying to you, so this product will have been sold instead of bought at this point.

I think your advisor is stretching the definition of "fiduciary" - one could argue that it's a decent idea in your case, but I still doubt it is the best idea. They probably have enough wiggle room to avoid a FINRA complaint at this point.

 

[Whisper66]

@NurseSharon - Maybe a simple example would help. Assume you and husband have assets of :
(A) $1M in brokerage account in stocks / bonds /cash. You've owned the stocks for a long time so they include large capital gains.
(B) $1M in traditional IRA account
(C) $1M in Roth account.

If you both died tomorrow in a car wreck....what federal taxes would end up due? I'd suggest passing your numbers by a tax accountant (not your financial advisor who is suggesting insurance to cover taxes). They can answer your situation easily. In the above situation, I THINK the answer is ....

No estate taxes due since estate is less than the exempted amount ($11.7 M per person).

(A) no income taxes due. The value of the highly appreciated assets is "stepped up" to the value upon your death (or six months later) and capital gains taxes (typically 15%) are paid in the future on appreciation beyond that value.
(B) No income tax immediately due. The IRA is moved to an "inherited IRA" account for your child if they are the beneficiary. They must pull the funds out from the IRA over the next 10 yrs and pay ordinary income tax rates on the amount pulled each year.
(C) No income tax due. The IRA is moved to an "inherited Roth" account. I think this also must be emptied over 10 yrs. No taxes due on anything when it comes out of that that Roth account. Only tax due are capital gains on appreciation that occurs AFTER the funds are removed.

I'm not a tax expert so invite others to point out any errors I have made. But assuming the above is generally correct, I don't see the value of an advisor suggesting insurance to cover taxes and might make me question if that advisor was one I should be working with.

 

[pb4uski]

We are in our late 50's and still working. Our financial advisor is encouraging us to start moving money into a whole life policy with a LTC rider so that when we eventually die, the life insurance and all of the growth will pass to our heirs tax-free. Does anyone have any experience or advice with this?

Hi I am married and 57 yo. We have been frugal savers and are still working although my spouse is hoping to go PT soon--I am already PT. Without going into asset details, no we don't need life insurance. The way this is being pitched to us is if our heirs receive an inherited IRA or 401K, etc.. from our estate, it will be taxed to them at their tax rate. We are trying to wrap our heads around this before we make any moves with this. I don't know what the commission is that the FA receives but I'm guessing it is quite large. Also. he does have a fiduciary responsibility to us. I have enjoyed the responses and information from everyone so far, so keep it coming! THANKS

On the last part, I would bet the house that the FA is not a true fiduciary, but it just sounds reassuring to say that.

It seems that you are focused on passing assets to heirs tax-free and if so then there are much better ways to do that... use the same money that would be used to pay insurance premiums to fund a couple Roth accounts is one possibility.

To give you an example, I have a whole life policy that I bought in 1977 when I was a financially naive 22-yo college graduate. The internal rate of return over the 44 years I have owned it has been 4.84%... not bad but not great either.... and the IRR for the next 20 years is likely to be lower as for the last 1 year it has only been 2.5%. I think you will do better in a balanced fund like Wellington or Wellesley in a Roth IRA or taxable account.

 

[brett]

Never bought anything except term insurance

We view insurance as an expense to cover risk. When our children we small I loaded up on term insurance. I slowly decreased it our asset base grew. At retirement I was left with a $15K policy as part of a pension package. We have a strong asset base to protect us. There is no risk.

Not a fan of whole life, nor whole life combined with investments of some sort. Seems to me that way of confusing the poor buyer and hiding outrageous service charges and poor net returns to the policy holder.

I would say beware of term life insurance agents who ask you if you love your children or ask you if you want to leave them a little nest egg when you pass. These are questions designed to get you to nod your head in agreement, and tug your emotions in such a way that, IMHO, financial acumen flies out the door.

 

[OldShooter]

... I would bet the house that the FA is not a true fiduciary, but it just sounds reassuring to say that. ...

Yes.

In making any recommendation, the minimum required of a fiduciary is to disclose any conflict of interest involved. Like a big commission. Obviously this salesperson has not done that, QED they are not a fiduciary.

@NurseSharon, here is the acid test: Ask the salesperson to provide you with a letter, signed by his/her compliance officer, confirming that the salesperson has a fiduciary responsibility to you. Accept no excuses.

I'd bet that such a letter will not be forthcoming. Absent the letter, and consistent with @pb4's bet, the salesperson is a liar. Hopefully their advice has not cost you too much money in the past. But, regardless, fire them. Never do business with someone you can't trust. Never. Never. Never.

People here will be happy to advise you on how to proceed finding a new broker and/or advisor.

 

[pb4uski]

The above was what I was thinking, and life insurance to pay inheritance taxes today is not that often needed.

I did have a friend that inherited 10,000 acres of the finest farmland anywhere. The federal estate limit was lower at that time, but she had sufficient cash to pay Uncle Sam.

I did business with a tractor dealer that owned 46,000 acres and farmed it all. Ole Dad died, and the sons are praying for a long life for their mother. At one point, Uncle Sam will want to to be paid in cash within 9 months of her death for inheritance taxes. That's when life insurance is needed.

Situations like this are a good use for whole life since there is a long-term need for life insurance to provide liquidity to pay the estate taxes. Another legit use is for closely held businesses to provide liquidity for the surviving partners to buy out the interests of a partner that has died.

So there are some good and legitimate uses of whole life insurance.

 

[savory]

On the last part, I would bet the house that the FA is not a true fiduciary, but it just sounds reassuring to say that.

It seems that you are focused on passing assets to heirs tax-free and if so then there are much better ways to do that... use the same money that would be used to pay insurance premiums to fund a couple Roth accounts is one possibility.

To give you an example, I have a whole life policy that I bought in 1977 when I was a financially naive 22-yo college graduate. The internal rate of return over the 44 years I have owned it has been 4.84%... not bad but not great either.... and the IRR for the next 20 years is likely to be lower as for the last 1 year it has only been 2.5%. I think you will do better in a balanced fund like Wellington or Wellesley in a Roth IRA or taxable account.

I did the same thing, perhaps I was a little older. I have not purchased any additional policies but have allowed the dividends to buy more insurance. This is a nice chunk of cash their for inheritance.

I have just started researching this but it seems setting up a ILIT would make sense from a tax perspective. Neither me nor DW will need this money when one of us pass. We have enough savings and income So, giving it to our children directly would be no problem financially.

I am wondering if others have followed this approach and good/bad consequences? If more info is needed, please ask.

Thanks

 

[OldShooter]

... I have just started researching this but it seems setting up a ILIT would make sense from a tax perspective. Neither me nor DW will need this money when one of us pass. We have enough savings and income So, giving it to our children directly would be no problem financially.

I am wondering if others have followed this approach and good/bad consequences? If more info is needed, please ask.

Thanks

Our estate plan creates four trusts; one for DS, 2 for grands and one special-needs for one grand. We are subject to state but not federal estate tax (so far!) and have no liquidity issues. So IMO no need for insurance products with associated fees. We're on our second estate planning attorney after the first one died. Both were top tier around town and neither said anything about insurance.

 

[savory]

Our estate plan creates four trusts; one for DS, 2 for grands and one special-needs for one grand. We are subject to state but not federal estate tax (so far!) and have no liquidity issues. So IMO no need for insurance products with associated fees. We're on our second estate planning attorney after the first one died. Both were top tier around town and neither said anything about insurance.

Old shooter, are you saying you have life insurance but your advisor did not suggest a plan for the policy? Or do you not have life insurance?

Since I have life insurance, our attorney drafting our will suggested a trust approach. He will not earn any additional income with this suggestion. He just thought it made sense. I just want to double check if it does. TX

 

[pb4uski]

savory, I interpreted OldShooter's response as that they do not have any life insurance.

 

[OldShooter]

Old shooter, are you saying you have life insurance but your advisor did not suggest a plan for the policy? Or do you not have life insurance?

Since I have life insurance, our attorney drafting our will suggested a trust approach. He will not earn any additional income with this suggestion. He just thought it made sense. I just want to double check if it does. TX

No, no life insurance. I had term life when we needed the protection but that was decades ago.

If you already have the insurance then the tradeoff is probably whether to cash it out on whatever terms are offered or to optimize it in your estate plan.

 

[Bestwifeever]

https://www.bloomberg.com/news/arti...le-that-s-legal-easy-to-exploit-hard-to-close

A niche strategy called private placement life insurance, or PPLI, was already gaining popularity among the very rich for its ability to shield fortunes from taxes. Now some advisers to the top 0.1% say it’s dominating conversations with their clients....

A little-noticed change in U.S. insurance law at the end of 2020 makes the tool more powerful, at the same time that competition among insurance carriers and advisory firms is giving rich investors more flexibility, lower costs and a wider choice of products on PPLI platforms. As long as assets are held in a PPLI policy, they escape taxes. When a policyholder dies, heirs inherit the PPLI’s contents tax-free.

 

[pb4uski]

.

...The bare minimum you’ll need to start a PPLI policy is about $2 million, advisers say, but it’s far more common for investors to devote at least $5 million to the strategy. ...