Life Insurance

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radardeb's picture
radardeb
Status: Member (Offline)
Joined: Sep 11 2008
Posts: 19
Life Insurance

I have a question.  I am a partner in a very successful business started 4 years ago which generates lots of cash.  So, at the tender age of 58, I recently bought a VERY expensive ($1500/month) whole life policy so that my daughter could pay the estate taxes when I die.  Otherwise I don't see how she could pay them or continue the business.  The insurance company is very highly rated for financial security, but now I'm wondering if insurance companies will survive the coming years.  Does anyone have any insight that might guide me here?

csadvisor's picture
csadvisor
Status: Member (Offline)
Joined: Oct 6 2008
Posts: 11
Re: Life Insurance

 

I am a former insurance agent and current financial planner.  Without details of your situation, it is impossible to answer your question, but I will try to instead to address some of your concerns.  I am guessing you are looking to mitigate estate tax liability by passing a lump sum to your daughter outside of probate(which is what life insurance does).  Regardless of how highly rated the insurance company is, there always exists the possibility of failure.  Assuming your overall desire is to preserve your wealth and pass it along to your daughter (and not Uncle Sam), in this case in the form of a business.  I would recommend that you talk to an estate planner that specializes in business continuation.  The business should be able to be structured in a way to make it an ongoing concern regardless of your material participation in the business.  One way this can happen is by different corporate business structures such as privately held stock.  If you bought the insurance without a comprehensive estate plan, it may not efficiently do what you want it to do. 

The BIG question, I believe, is how do you plan financial security for your family regardless of the solvency of your insurance company.  When you answer that question, you will have more adequately assessed your risk from multiple possible losses and done everything you can to reduce or eliminate them.

I hope that didn't sound too much like an insurance salesman's answer...be happy to answer followup questions.

radardeb's picture
radardeb
Status: Member (Offline)
Joined: Sep 11 2008
Posts: 19
Re: Life Insurance

THanks for your reply.  There is not currently corporate business structure in place other than that my heirs will inherit my share of the business.  Let's face it - there may not be a business to pass on if everything goes south, but this is a business which I believe is fairly recession proof.  I have no other significant assets to pass on other than a mortgaged house and some brokerage accounts sitting in cash, some PM, and a year's supply of food.  But even if the business doesn't survive, she would have the money to buy land, pay off my house, etc.  If I cancelled the insurance in a year or so and took the cash value or a small paid up policy, I could redirect the $ I'm using for premiums to buy more survival goods or possibly land.  But I'm taking the risk that a business that brings in around $150K/year (my share) would have to be let go because she couldn't pay the estate taxes.  I have thought about the possibility of selling my interest in the business (not sure how easy that would be in today's financial scenario).  That would make it easy for me to pay the life insurance premiums, live on the proceeds and possibly funnel some $ to her now. 

Carl Veritas's picture
Carl Veritas
Status: Gold Member (Offline)
Joined: Oct 23 2008
Posts: 294
Re: Life Insurance

 

Do you know how much death benefit $1500 a month would buy between:

 

(1) Term Life Insurance Policy (death benefit only and $1500 would buy a lot of coverage)

and

(2) Whole Life Insurance Policy (sold as insurance with investments which explains the cost)

 

 

 

radardeb's picture
radardeb
Status: Member (Offline)
Joined: Sep 11 2008
Posts: 19
Re: Life Insurance

I do know, and really, REALLY agonized over whole life vs. term.  But at my age I can only get 20 year policy and there's a chance I could outlive that, and then all would be for naught. 

gyrogearloose's picture
gyrogearloose
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 549
Re: Life Insurance
radardeb wrote:

at the tender age of 58, I recently bought a VERY expensive ($1500/month) whole life policy so that my daughter could pay the estate taxes when I die.  

 

Our solution to a similar sort of position was to set up a family trust and gift the max tax free gifting amount each year to the trust, but then your trust laws may be different.

It might be worth asking a lawyer or accountant that is familiar with trusts about this tack. 

Pro. of insurance path. If you die in 2 years time your daughter does very well in comparison to the trust path

Con. of insurance path. If you live to 90 the insurance company has made shitloads off you.....

Hamish

Carl Veritas's picture
Carl Veritas
Status: Gold Member (Offline)
Joined: Oct 23 2008
Posts: 294
Re: Life Insurance

 

Whole Life Insurance policies are marketed as a two-for-one product:   

Insurance (death benefit), with an investment component (cash value).

If you pass away---

Some whole life policies will only pay off one or the other when you die. Not both. They'll pay off the death benefit and the insurance company keeps the investment component. And your death benefit is reduced whenever you borrow from your investment (cash value).

Read your policy and find out what you just bought.

 

Explore this scenario ---------

You know you could get the protection for a lot less with a Term policy, so there is a built in savings there.

What if you bought the 20 year Term policy and invested the savings (premium difference) in a conservative, low cost investment like the Wellesley Fund from the Vanguard Group for the 20 years?

How much will your monthly investment produce in 20 years? Lots of calculators to compute this.

You will have more flexibility if your insurance and investments are seperate. You will have the amount of insurance you need and penalty free access to your investments should you need to.

If you die, your beneficiary gets the full death benefit from the term policy AND the investment from Vanguard.

 

 

 

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