Ever wonder whether life insurance pays for your estate taxes and if so the how ? Say, if you own a large estate, and need to protect the estate from paying 55 % federal estate taxes (after you die) make sure you bu y a huge life insurance policy. This way the life insurance policy grows tax-free and there is enough to pay the estate taxes. say your estate is worth $20 million, it will need to pay $11 million in estate taxes, after your death leaving only $9 million to your dependents.
How to Handle this?
Buy life insurance for $5 million, so the policy grows tax-free from $5 million to $20 million, increasing your estate's worth to $35 million (your $20 million estate, less $5 million towards premium, plus the $20 million payout). After paying $19 million in estate taxes, your family will get $16 million which includes an extra $7 million thanks to the life insurance policy you bought.
What is the Reality ?
Initially you were paying only $11 million in estate taxes but with life insurance you have paid $19 million in estate taxes. If there is no other alternative to let money grow tax-free and also avoid estate taxes, the only solution is to buy life insurance to grow your money tax-free, for your kids inherit most from your taxes. There are however, legal and fully discloseable methods to resolve this by using a combining recognized methods with captive life insurance companies but they cannot completely avoid all taxes.
What is worse is that you spend a large amount on fees to life insurance companies for life insurance policies and commissions to the salesman. why pay an enormous life insurance fee when you can save yourself that money by buying your own captive insurance company instead.
A disclosure stating that your advisor will receive commissions is not enough so ask for a definitive statement of the total remuneration to be received by the life insurance advisor, both this year and in subsequent tails from the life insurance company. If you have a life insurance polcy, ask for an updated accounting of total commissions and tails received.
Private Placement Life Insurance
when you purchase life insurance for estate tax planning purposes, make sure you or your advisor ask for "Private Placement Life Insurance" (PPLI) from the life insurance company, to get you lower fees than what your life insurance agent would have got you. Also, the life insurance company and its actuaries will assist in structuring the PPLI to help you get better returns. PPLI is better than ordinary life insurance is because it saves your premiums from going towards pay commissions.
Conclusion
The lesson you can learn from this article is that if you have enough money to pay estate taxes, it is not essential to purchase a life insurance. If you do, you are anly giving away you money to the goverment and your salesman, which could otherwise be invested in other legal opportunities, which in turn will increase the amount of what you leave behind for your family.
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