Life insurance? A way to pass on wealth?

[Eagle]

Recently someone in the personal finance industry mentioned using life insurance to transfer wealth onto their heirs. Particularly whole life insurance...

Is it possible to transfer wealth through life insurance without gift taxes or estate taxes?

[disneysteve]

Recently someone in the personal finance industry mentioned using life insurance to transfer wealth onto their heirs. Particularly whole life insurance...

Is it possible to transfer wealth through life insurance without gift taxes or estate taxes?

Sure. Life insurance does "transfer" wealth if you want to think of it that way. But absolutely, positively do not buy whole life. Use term insurance. You can transfer a whole lot more wealth for a far lower cost.

If I die today, my wife gets over $1.5 million from my insurance. I could easily raise that amount for only a few more dollars per month if I wanted to.

The same amount of whole life would cost 10 times as much as I'm paying now.

[Eagle]

Okay thanks DisneySteve.

I kind of thought so too. I believe the person in question (the OP) mentioned their parent had a significant amount of assets they wanted to transfer to their children.

For someone to buy a whole life insurance policy in good health would mean wasted premiums and for someone in bad health it would mean paying ridiculously high premiums.

Turns out the person who suggested whole life insurance had just started in November 2015 as a certified financial planner. Guess they were pushing product... Still, really unsound advice if you ask me.

[97guns]

I'm naive when it comes to life insurance, always been drilled into me that it's a bad investment. What kind of monthly premiums are we talking about? I'd like to do some calculations and come to my own conclusions

[disneysteve]

Turns out the person who suggested whole life insurance had just started in November 2015 as a certified financial planner.

The only people who ever insist whole life is a good idea are the people selling whole life policies. They make a bundle in commissions when they talk someone into that crap.

[disneysteve]

I'm naive when it comes to life insurance, always been drilled into me that it's a bad investment.

Life insurance is absolutely a bad investment. In fact, it isn't an investment at all. The problem is when people look at it as being one - and when salespeople tout it as being one.

Term life insurance is no different than auto or home or health insurance. It is risk management. And it's darn cheap at that. Depending on age and health, you could be talking about maybe $30/month for a 500K policy.

[LivingAlmostLarge]

From very wealthy friends I heard it's a way to pass on money tax free into a family trust. Everyone in their family gets whole life upon birth and goes into family trust. I'm sure there are reasons $$$ behind it. And she's loaded. She made a comment that after her heart surgery in her 30s she couldn't have bought insurance even in her 20s after her congenital problem was discovered.

[FLA]

I just got my statement for 300k of term I have for around $500 a yr. I pay that much until age 64 and then it jumps to 6k. Which is when I cancel my term and pre-pay my funeral expenses and the kids get my assets. By the time I am 64 they should be well established in careers and if they aren't, 150k added to my assets won't have made much more of a difference.

I should probably have more term but I don't feel like I need it as the ex makes a good salary and could take care of the kids

[Eagle]

I'm naive when it comes to life insurance, always been drilled into me that it's a bad investment. What kind of monthly premiums are we talking about? I'd like to do some calculations and come to my own conclusions

Life insurance is not an investment.

I think everyone who has debt and/or kids should have a term life insurance policy. Further, it helps replace potential lost income. Most people recommend about 10 times your current salary. We have about that much for me.

My wife is a stay at home mom and we still have about a $500,000 policy on her. If I die the wife, kids, and mortage are taken care of.

If she passes I can afford to hire someone to take care of the kids during the day while I work.

Term life insurance costs a fraction of whole life insurance. For example, mine is like $15 a month for over a million in coverage. I'm in my early 30's.

[ThinkingCapital]

I agree. It seems like that advice was given by someone who was pushing a particular life insurance product.

[corn18]

Whole life insurance and indexed annuities are not good investments. Term life insurance and SPIA's are the right way to go.

[ygrey]

Yes you can transfer wealth in one way without paying any taxes! Basically, life insurances is so that one's near and dear ones are secure even after they pass away. Therefore, it's a great idea.

[FLA]

never mind

[Like2Plan]

Recently someone in the personal finance industry mentioned using life insurance to transfer wealth onto their heirs. Particularly whole life insurance...

Is it possible to transfer wealth through life insurance without gift taxes or estate taxes?

Eagle,
I think the inheritance tax exclusion is 5million dollars. But, the value of the life insurance is counted in that amount.

But, 5 million (10 million for a married couple) is a lot. With this new threshold (since 2015) I've read that it's only the estates of about the top2% of the wealthiest owe any estate tax. Of course, that is the federal level--you would also need to check on your state.

[dczech09]

The estate tax does not (effectively) kick in until one passes with assets in excess of $5.45 million. This is the lifetime exemption amount in effect for 2016. So really, only a few people will be impacted by this.

What some people do is they use life insurance as a means of transferring wealth tax-free. They utilize an irrevocable life insurance trust, which is basically a trust that holds a life insurance policy. The irrevocable nature means that any death benefit would go to the trust and NOT be included in the insured's estate for tax-calculation purposes. People with larger estates can use this as a strategy to either pass on money without tax, or to pass on money that can be used to cover a tax.

I am in no way advocating whole life insurance; for more than 90% of people out their, whole life insurance is not necessary.

Whole life insurance is NOT an investment and should not even be in the same discussion as investments. It is insurance! But alas, people seem to confuse the cash value as being some sort of magical investment account that has super powers greater than anything else ever conceived by mankind.

Whole life insurance may have its uses with estate planning, and perhaps for some people with special needs in the family. However, most people are best served with term life insurance