by Michael Fliegelman, CLU, ChFC, AEP, RFC
Why Permanent Life Insurance Will Never Go Out of Style
October 10, 2007 Source: InsuranceNewsNet,Inc.
If consumers go by price, simplicity and ease, term insurance would win the Term vs. Perm Debate that has been going on for decades. What’s not to love about term insurance?
Term insurance premiums have become very affordable thanks to the highly competitive market. For example, a $100,000 20-year level premium term policy may cost as little as $150 per year or a total of $3,000.
Term insurance products also offer consumers something permanent insurance can’t: the convenience of shopping for and buying a policy any day and time through the Internet. One online term insurance quote
provider claims a database of complete information on hundreds of policy variations from top insurance companies. Once a product has been selected, the online processing of some term insurance policy can be completed in just 15 minutes.
Can permanent insurance products compete or are they destined for extinction?
Some experts believe permanent life insurance is here to stay because it provides solutions for complex situations term insurance cannot meet. One such circumstance involves estate planning.
The role of permanent insurance in estate planning is something term Insurance can never duplicate. Permanent insurance is widely viewed by financial planners as a very efficient and useful component of estate planning.
Through an irrevocable life insurance trust (ILIT), permanent life insurance reduces the impact of estate and gift taxes. The ILIT becomes the beneficiary of a permanent life insurance. Because the death benefit
proceeds belong to the ILIT and not the insured, it increases the size of the estate without increasing estate taxes. The death benefit can also be used be used to pay off tax obligations. In addition, permanent life insurance, through the ILIT provides liquidity without selling non-liquid estate assets.
Some may argue that the role of permanent life insurance may soon be greatly diminished if the lawmakers decide to permanently abolish estate tax in 2011. But the fate of this bill remains uncertain.
Previous efforts to do away with the estate tax have all failed. Its repeal is expected to deprave the federal government of about $1 trillion over 10 years yet it benefits only a very small portion of the population according to those who argue against its abolition.
Still others are predicting that, even if the estate tax is not repealed permanently, its post-2010 bite would be so greatly reduced that special tax shields would no longer be necessary. But CBS News reported that
three of the leading presidential candidates from the Democratic Party promised to raise the estate tax under their watch.
As such many financial planners believe
that the best defense against the estate tax is to assume that it will be a permanent fixture rather than hoping for the best and doing nothing to protect estates.
For example, Dick and Jane, a married couple, have a net estate of $2 million broken down into the following:
• Real estate valued at $500,000
• Personal property valued at $150,000
• Miscellaneous cash and investment accounts valued at $350,000
• IRA accounts valued at $1,000,000
Instead of purchasing a permanent life insurance for the purpose of establishing an ILIT, the couple relied on wills leaving all assets to the surviving spouse or children.
Dick and Jane die in 2011 when the estate tax was reinstated, as is with no changes, after its temporary repeal in 2010. Dick died first and left everything to Jane and no estate taxes were triggered. When Jane died shortly after her estate uses the $1 million exemption on the $2 million estate. The estate tax bill on the other $1 million is $435,000.
Since the late couple’s miscellaneous investment accounts is only $350,000, the heirs need to raise $85,000 within nine months after their mother’s death. The tax-deferred IRA accounts can cover the cost of the entire estate tax bill but this would produce an income tax event. Real estate can be sold to generate additional funds necessary but given the limited time the heirs have, they may have to settle for less than the optimal market price.
Supposed Dick and Jane both owned life insurance valued at $500,000 each. Without estate planning, the policies would add $1,000,000 in the estate and an additional $500,000 in estate taxes for the heirs to pay.
Dick and Jane could have invested in permanent life insurance and established two ILITs that divide the $2 million estate into two trusts of $1 million each. At Dick’s death, his trust could have claimed the $1 million exemption. At Jane’s death, her trust could use her $1 million exemption. That would leave the heirs with zero estate tax due and no complicated financial decisions to make.
If Dick and Jane had transferred their life insurance policies to the ILIT at least three years before their deaths, the insurance proceeds would not be considered part of their estate and save the heirs $500,000.00 in taxes. By making the ILIT the beneficiary of their policy and their children the beneficiary of the ILIT, the heirs get an additional $950,000.
Until providers can make a term insurance product that can duplicate those results – and unless the permanent repeal of the estate tax has been guaranteed – permanent life insurance will always have a place in this world where nothing is certain but death and taxes.