If a person knew everything they needed to know about how to make their financial life work better, would they own participating whole life insurance?
Answer – Quite probably YES, but they would need to know a lot more than most do.
The journey begins with the question, “Do you need cash in your estate?” If yes, it is usually to pay off liabilities or taxes, permit business associates to buy your interests, or to equalize shares in the estate. Life insurance is a tool. A way to get cash at death. In some ways it is like an option on money with an annual fee to maintain the option.
It requires few arithmetic skills and little effort to establish that life insurance is the least costly way to put cash into a person’s estate. It is more challenging to be sure that the variables in each scenario are the same so far as they affect out of pocket cash while living, and after tax distributable estate after death.
As we know there are exactly four ways to put cash into an estate. If the decedent has been careless, the estate trustees can borrow or sell something and if the decedent has not been careless, the trustees can transfer liquid assets or make a claim on a life insurance policy.
Smart money uses the method that has the lowest overall cost, or the greatest return for a given input. Easy thinking.
Does anyone do it? Of course, but only a few have the connections and ability to decide it is the optimal approach.
Recently a Silicon Valley multi-billionaire bought a policy with face value in excess of $200,000,000. People with an 11-figure net worth can get the best available advice and they do. If a $200,000,000 policy makes sense for them it might, just on analytical grounds, make sense for others.
Malcolm Forbes, the late publisher of Forbes Magazine had the best financial and economic minds available with a single phone call. He knew them and they knew him. No introductions required. On his death more than $70,000,000 of life insurance proceeds came to his estate. That makes a big hole in any tax problem the estate might have.
In his words, “Life insurance is an efficient way to transfer money to your heirs.”
Efficient is good. As in the least costly way to put cash into your estate.
Many participating policies are created to reposition fixed income assets into a low volatility, low cost, investment environment. Tax and investment efficiencies are such that it is nearly impossible for any other passive, fixed income investment to compete.
The idea of life insurance is negative for some. One client told me it it feels like betting against the home team and I suppose in a way, it is.
Once people get past that, it becomes an efficient, easy to manage tool that solves a difficult problem. When you see it, owing a lot of money in your estate is not a problem. Getting the deposit together so the check will clear, now that’s a problem.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.