As you are aware, life insurance is traditionally used to replace an income or retire a debt, but there are many ancillary uses as well. I previously wrote about using it to pay estate taxes, protect a pension and to equalize an estate. Today I will discuss other potential uses.
The first example is that of a 75 year-old widow with $100,000 in a low yielding CD which she plans on leaving to her grandchildren. The $100,000 could be repositioned into a single premium guaranteed universal life policy with a face amount of $164,500. The life expectancy of a 75 year-old female is 12 years, and the internal rate of return (IRR) after 12 years on the policy just described is approximately 4.25%, which of course is tax free.
I am often asked how likely it is that a 75 year-old can qualify for life insurance, and the answer is more often than you think. Now obviously some 75 year-olds are uninsurable (as are some 35 year-olds), but many, if not most, could qualify for some type of policy.
The second example is that of a well-to-do couple, but who are still under the federal estate tax threshold ($10,900,000), so insurance isn’t necessary. But as an alternative investment to further diversify their portfolio, they could procure a $2,000,000 second-to-die policy for an annual premium of $18,673. The joint life expectancy of a 60 year-old couple is 32 years and the tax free IRR at that point is 6.53%. That equates to a 10.05% return in the 28% federal income tax bracket.
The last example is charitable giving. Rather than give an age-specific example, I will just explain the concept. Oftentimes, charitable gifts are part of a pledge and are ongoing for a number of years. In such a case, the charity can procure a policy on the donor, the type of which best satisfies their objectives between current income and future income.
The charity would be the owner and beneficiary of the policy and would use the donor’s contribution to pay the premium. The donor would still receive a tax deduction for the contribution.
To summarize, life insurance can be used to replace an income, retire a debt, pay estate taxes, insure a pension, equalize an estate, increase a bequest, as an alternative investment and in charitable giving. It appears to have as many uses as duct tape!