From a recent conversation:
NOTE: I have not yet checked various types of insurance available to senior citizens.
Okay, so these folks are age 66 and 70. Their debt ratio is near "zero". The only recurring expenses at this point are supplemental health insurance, property taxes, car/home insurance, utility bill, food and the other normal daily living expenses. NO! No long term care insurance; in case you might ask, as did I. Perhaps the kicker in this broad question.
Their children will inherit about $2 million of real assets (property and related) including remainders of IRA accounts (taxable in most cases, upon sale).
A quick and dirty check indicates a "$100,00 level term life insurance policy" cost, without physical exams to be about $250/month for the women and $306/month for the man. This cost is within their budget means to purchase.
Are such life policies of value (no taxation to the beneficiary) at this $100K or higher amount? Any pitfalls?
Thank you in advance for your opinion and knowledge.
Catch
Comments
Using a life expectancy chart (here) a 66 year old woman is expected to live an additional 19.5 year. 19.5 * ($250*12) = $58,500 premium costs over a 20 year term policy. At the end of 20 years the policy goes away as well as the $58,500.
If instead, these premium expenses were placed into a tax free or tax efficient account and allowed to grow for 20 years at 5% the account balance would be close to $104K. So long as this investment was held in a tax free or tax efficient account, taxes to beneficiaries would be minimal.
If I had a net worth of $2M estate planning would be well advised and time/money well spent.
No! I would not recommend a term life insurance policy for only tax avoidance purposes. Taxes should be a secondary consideration. In his "Winning the Loser's Game", Charlie Ellis lists his 10 investor Commandments. Among a host of other don'ts, Ellis recommends avoiding any investment for tax purposes with a few exceptions.
I always hesitate to venture any such personal advice, especially with such a dirth of knowledge about the couple referenced. I'm never in my comfort zone doing this. But I do have a one-time, singular experience in this area.
My wife and I had been offered similar options and we rejected them Here are some of the tools and considerations that helped to inform our decisions. They just might be useful to others confronted with similar proposals under nearly similar circumstances.
Life expectancy is a necessary input. Here is a Link to a site that provides a rather refined estimate that reflects detailed personal inputs:
https://www.myabaris.com/tools/life-expectancy-calculator-how-long-will-i-live/
These folks likely have long life expectancies.
There is also an opportunity cost consideration if the policy is the selected option.
Given the rather long life expectancy of the couple (perhaps 25 to 30 years for at least one survivor), an investment in the stock market with the money saved by not funding the subject policy would possibly generate about one million dollars.
I did a quick and dirty set of Monte Carlo simulations to estimate the likelihood of that one million dollar outcome using the Portfolio Vizualizer version of Monte Carlo. Once again, here is the Link to that fine tool:
https://www.portfoliovisualizer.com/monte-carlo-simulation
From the other side of the transaction, an insurance agency only sells its product with favorable odds that it will make money on that policy. The couple does not need financial protection so why restrict their lifestyle opportunities for possible benefits to their beneficiaries? An attractive alternate option for those "saved" funds is a healthy,,fun vacation each year. That just might prolong their time together. Happiness over time counts.
I hope this is somewhat helpful. I'm sure I missed some additional considerations. But it is not necessary to overthink the issue. As Ceasar said, in roughly translated terms, "Don't be concerned with small matters". Don't sweat the small stuff. Enjoy living your life!
Best Wishes