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
- Flexibility to change the premium each year
- Some interim cash value, providing a partial refund upon early termination
- Flexibility to reduce the death benefit as needs change
- 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.
Flexible term insurance
For most families, term insurance has been the best kind of life insurance to cover the financial risk of early death. With term, you pay only for life insurance without the complicated savings features that permanent (also called cash value) policies contain. Consumer advocates often recommend term insurance as the sensible choice for most life insurance needs.
Term insurance that puts you in control
What has been true for a long time needs to be reconsidered. Term insurance is still easy to understand and easy to buy, but it is now much riskier. The problem is that insurance companies are becoming less generous with the convertibility provision, so you may not have a good option to continue your life insurance beyond the planned period if your health changes.
Flexible-premium universal life can function like term insurance with much more flexibility. It is term insurance that can adapt to your changing needs, so the old “term versus perm” decision is no longer necessary. You can have both at the same time.
Here’s an example, using current values:
- Man, age 36, in good health
- $1.5 million death benefit
- $1,600 annual premium for 30 years
- Cash values:
Year 5 – $5,000
Year 10 – $11,000
Year 15 – $16,000
Year 20 – $18,000
Year 25 – $16,000
Key features:
- Low premiums for a limited period, such as 10 to 30 years
- Flexibility to change the premium each year
- Some interim cash value, providing a partial refund upon early termination
- Flexibility to reduce the death benefit as needs change
- Option to keep the policy in force for life
- Ability to use the cost basis as a tax shelter in a tax-free exchange to an annuity