So a guy about to be cut off from your payroll just pitched you a product you have never heard of. That the long and short of it?

He Who Shall Be Unnamed said:

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I am nearing the end of my term policies and thankfully "lost the bet" on those, in a way of thinking. My insurance broker has reached out to me to set up a discussion about letting my policies lapse versus extending or even getting new policies. In his pitch, he is wanting to discuss purchasing new insurance "for help in future taxes and as a possible estate planning tool". I consider myself woefully inadequate in terms of my understanding of these issues, and was hoping to get some advice here as to how life insurance might help me. I am 60 and healthy, and have enough in terms of my retirement accounts and savings to where I really am not interested in the death benefit of life insurance in terms of what my premiums would be. Thanks for any advice in advance, I just want to have some idea ahead of the discussion so I am not caught flat footed.

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You should first inform yourself about the estate tax:

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However, the estate tax exemption amount, currently $13.99 million per individual, is scheduled to "sunset" at the end of 2025 and revert to pre-TCJA levels, which is an estimated $7 million per individual (adjusted for inflation). The maximum federal estate tax rate will remain 40%.

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If it applies to your situation, you certainly need a financial advisor to take your whole financial picture into account. If not, I'd discount that portion of the insurance broker's pitch.

SquareOne07 said:

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He Who Shall Be Unnamed said:

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SquareOne07 said:

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Consider, also, the taxable liability that will be inherited by kids due to the inheritance of your IRAs and how much they'll pay in taxes as a result of having to liquidate that in a 10 year window.

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Thanks. Is there some inherent tax advantage of an insurance policy that will help reduce this tax liability that I need to be considering? Not just cash flow, some true tax benefit I need to be considering?

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It won't reduce the amount of taxes paid, but it will "make your heirs" whole, if you will.

Assume your child inherits a $2M IRA. Unfortunately it's likely they'll inherit this money in their highest earning years and they'll have to liquidate that $2M over a 10 year period resulting in that $2M being taxed (35%) out of $700k leaving your son/daughter with $1.3M rather than the $2M. A strategy people will use is to buy a $700k policy so that their child actually receives the whole $2M net of taxes.

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Damn, you're good! This is what my agent just sent me in response to scheduling an appointment. Maybe others here can benefit from this:

"The life insurance product that we've had the most success with for estate planning purposes is survivorship life insurance. When there is a married couple with children, the IRS tends to come calling on heirs at the death of the second spouse from the standpoint of estate taxes or income taxes due on qualified money (IRAs, 401Ks, etc.). Up until the last few years, non-spouse beneficiaries of retirement plans could spread taxes over their own lifetimes. This meant that if a 40 or 50 year old child inherited their parent's IRA assets, the could take out minimum amounts each year letting the bulk of the asset continue to grow until A) they needed the money and B) they were hopefully in a lower tax bracket in their own retirement. Now, the IRS is forcing anyone other than a spouse to drain the IRA and pay taxes within a 10 year period from inheritance. This means that many folks who inherit will be in their highest earnings years and therefore the added income will taxed at the highest rates.

Survivorship life insurance was designed to pay out when the second spouse dies for just this purpose. It can be a very efficient way to mitigate tax burdens as well as ups and downs in markets as the death benefit is a pre-set amount."

At the end of the day, whatever I pay for an insurance product will decrease the amount of inheritance my child receives, and the GST he has in place will provide for some income anyway. Overall, unless the net of such a product is a significant tax savings, personally I don't think that there is a tremendous benefit to "smoothing out" the tax burden during his productive years.

He Who Shall Be Unnamed said:

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SquareOne07 said:

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He Who Shall Be Unnamed said:

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SquareOne07 said:

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Consider, also, the taxable liability that will be inherited by kids due to the inheritance of your IRAs and how much they'll pay in taxes as a result of having to liquidate that in a 10 year window.

---

Thanks. Is there some inherent tax advantage of an insurance policy that will help reduce this tax liability that I need to be considering? Not just cash flow, some true tax benefit I need to be considering?

---

It won't reduce the amount of taxes paid, but it will "make your heirs" whole, if you will.

Assume your child inherits a $2M IRA. Unfortunately it's likely they'll inherit this money in their highest earning years and they'll have to liquidate that $2M over a 10 year period resulting in that $2M being taxed (35%) out of $700k leaving your son/daughter with $1.3M rather than the $2M. A strategy people will use is to buy a $700k policy so that their child actually receives the whole $2M net of taxes.

---

Damn, you're good! This is what my agent just sent me in response to scheduling an appointment. Maybe others here can benefit from this:

"The life insurance product that we've had the most success with for estate planning purposes is survivorship life insurance. When there is a married couple with children, the IRS tends to come calling on heirs at the death of the second spouse from the standpoint of estate taxes or income taxes due on qualified money (IRAs, 401Ks, etc.). Up until the last few years, non-spouse beneficiaries of retirement plans could spread taxes over their own lifetimes. This meant that if a 40 or 50 year old child inherited their parent's IRA assets, the could take out minimum amounts each year letting the bulk of the asset continue to grow until A) they needed the money and B) they were hopefully in a lower tax bracket in their own retirement. Now, the IRS is forcing anyone other than a spouse to drain the IRA and pay taxes within a 10 year period from inheritance. This means that many folks who inherit will be in their highest earnings years and therefore the added income will taxed at the highest rates.

Survivorship life insurance was designed to pay out when the second spouse dies for just this purpose. It can be a very efficient way to mitigate tax burdens as well as ups and downs in markets as the death benefit is a pre-set amount."

At the end of the day, whatever I pay for an insurance product will decrease the amount of inheritance my child receives, and the GST he has in place will provide for some income anyway. Overall, unless the net of such a product is a significant tax savings, personally I don't think that there is a tremendous benefit to "smoothing out" the tax burden during his productive years.

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Haha well thank ya!

Your guy and I are on the same page. I'd encourage you to not just look at the cost of the strategy (the cost of the insurance) as a sunk cost that reduces his inheritance. From the moment that first premium is paid, it will have purchased a lot more than it's worth. You can actually ask your guy to run some ROI calcs that basically show your premiums paid relative to the death benefit received. It's not uncommon to run illustrations on these policies and still see a 5+% (tax free!) rate of return on the premiums that have been paid relative to benefits paid out.

At the end of the day you're thinking about things and that's a heck of a lot more folks. Good on you!