Estate Liquidity Is Costly. How You Get It Matters.

Approaching life insurance should change as you age. When young, people “need” life insurance do deal with the “If I die” problem. When you are young the value of your career is enormous and people rely on that value to satisfy lifestyle for their family and to deal with obligations they have created. Mortgages, student loans, children.

For older people, the issue becomes, “When I die”

The “If I die” condition

Life insurance dealing with an “if” situation primarily creates capital where some other capital is lost. Career capital is only conditionally usable. You must be alive to do so. The typical solution is renewable term life insurance. It is inexpensive in the beginning because few people die when they are young and most of those who might have died have been excluded by medical and other underwriting.

But, as one ages, term insurance becomes very expensive. The industry prices the insurance on the basis the client knows more about their health than the insurer. Since the insurer cannot refuse to renew, they assume anyone who does would be unable to get new coverage.

An example for a 30-year old female nonsmoker for $1,000,000 of term renewable each 10 years to age 80, paying annually.

Age Original New

Age 30 $ 330.00

Age 40 $ 1,440.00 $ 430.00

Age 50 $ 3,300.00 $ 1,030.00

Age 60 $23,980.00 $ 3,300.00

Age 70 $59,980.00 $10,140.00

age 80 – expired

Total premium paid about $890,000 with a high likelihood of no claim. For an insurable 30-year-old female non-smoker, more than half will live beyond age 84. Getting new coverage, if medically able, is a nuisance but quite attractive financially.

The “If I die” question should be answered against the career value and the need for its continuing.

The “When I die” condition

Somewhere in life we intuitively switch from if to when. At some age the if condition becomes meaningless because career value has become zero. So life insurance need for the if reason is also valued at zero.

The “when” condition relates to different matters. Primarily, What is the internal structure of your net worth, and would remaining assets provide necessary living costs for a spouse?

Take two people both with a net worth of $2,000,000. Person A owns a bank account with $2,000,000 in it. Person B owns rental real estate worth $3,300,000, with a tax laibility of $1,300,000 built into it. Person A’s estate would look much like his estate before death.

Person B would not be so easily resolved. Life insurance would protect the asset for person B. You cannot necessarily sell something for full value when you need to do so. Plus there could be fees and commissions to sell. Borrowing to pay the taxes would be costly, the interest would not be deductible for tax purposes, and the resulting loan could tie up the estate until liquidated or accepted by the heirs. The expectation is Person B’s estate would be less than $2,000,000 once settled.

The reasonable choice would be to arrange life insurance rather than relying on the sale of the property to provide liquidity to pay the tax bill. In this case the insurance protects the continued ownership or resolves the forced sale problem, but not inexpensively.

For a 60-year-old-male non-smoker in good health, insurance of $1,300,000 that would not expire, has a level premium of about $30,000.

The price seems high but it is not the insurance that is expensive it is the tax liability that is expensive. The insurance is merely how you pay. If Person B created a sinking fund with deposits of $30,000 annually and after tax yield of 3%, they could have the money at age 88. A death before that would leave the estate short. The accumulation would be subject to probate costs and executor fees and the vagaries of yield and taxes over three decades.

All in all the taxes will be paid somehow. Life insurance provides the greatest predictability and a very acceptable after tax yield.

Other estate considerations

Term to 100 or a similar product may not be the best insurance choice. Where assets are more mixed, as with nearly everyone, participating insurance or universal life may provide advantages that reduce the net cost. Notice, in estates planning, there are always two costs.

  1. The liability arising in the estate, usually taxes, sometimes charitable gifts.
  2. The price to get the cash available to write the check.

There are four ways to get the cash the estate trustees will need. Sell something, borrow, own cash ahead of time, and life insurance. Of these life insurance is demonstrably the least costly.

It is not sound business to work a lifetime to build a large estate and then lose a large fraction of it to weak planning.


I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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