Liquidity bridge for estate planning
The estate tax has been called a voluntary tax, because you can easily avoid it by moving assets outside of your estate. However, effective transfer techniques often require a long period to implement. Many people use life insurance to protect against the financial risk of dying before the transfer plan is completed.
But what kind of life insurance?
Whole life insurance has high premiums, and it is inefficient for a limited duration.
Term insurance has low premiums, but it may not be available for the period needed.
Flexible-premium universal life can be set up to function like term insurance, while providing the necessary flexibility to keep the policy in force for as long as needed.
Policies that cover one or two lives can be designed to provide the desired hedge. We will focus here on situations involving two lives, typically two spouses, because this solution is so powerful.
Here’s an example, using current values:
- Man and woman, age 65, in good health
- $10 million death benefit
- $18,000 annual premium for 20 years
- Cash values:
Year 5 – $47,000
Year 10 – $143,000
Year 15 – $229,000
Year 20 – $135,000
Key features:
- Low premiums for a limited period, such as 10 to 30 years
- Some flexibility to change the premium each year
- Some interim cash value, providing a partial refund upon early termination
- Option to keep the policy in force beyond the limited period, if needed
Policies covering one life have similar features, but the premiums are higher.