Life insurance
Hello:
In reference to the advice of creating a life insurance trust ( to pay for the life insurance ) where the trustees are my children and the beneficiary is my wife for example, I have the following questions:
LIT= Life insurance trust for short
I am 51 years old my wife is 53.
1- Since we don’t who is going to die first, I assume we have to create 2 LIT’s and pay for 2 life insurances to be sure my wife or I receive the protection of life insurance?
2- What type of life insurance that Slott’s strategy refers to? Whole life?
3- Wouldn’t the premiums of both insurances more than consume my 1,000,000 IRA’s if we live another 20 to 25 years?
4- At what age it is recommended to start buying the life insurance?
thank you in advance
paul
Permalink Submitted by Bruce Steiner on Mon, 2010-08-16 00:57
Life insurance works best as insurance against dying substantially sooner than average.
You are correct that if you live to (or close to) your life expectancy, you will not have gained anything by buying life insurance (assuming you earn at least an average return or not too much less than average return on your assets). The people who live to (or close to, or beyond) their life expectancy are the ones who pay for the benefits that go to the beneficiaries of the people who die substantially before their life expectancy.
If you’re supporting your wife (or your children, or your wife and children), and they wouldn’t have enough money to live on if you died sooner than expected, you could buy insurance at a modest cost, and the proceeds would replace your salary so as to provide for your family’s living expenses. If your wife is the breadwinner, she could buy insurance on her life. If you both work and your family would be OK if one but not both of you were to die early, you could buy a policy that pays off at the second death. If you both work and both incomes are needed, you could buy separate policies on each of you.
If you need insurance, you should buy it now. If you don’t need insurance but you want insurance, you can buy it (or not buy it) whenever you want, so long as you buy it before your death (and before your health declines such that you can no longer get insurance at a reasonable price).
Permalink Submitted by Brian Pugaczewski on Mon, 2010-08-16 16:20
Paul,
Your questions demand a variety of answers, each depending on the complexity of your personal situation.
What are you designing the trust for? Is it for estate planning? Is it for income replacement? Debt elimination?
Addressing each of your concerns:
1) Yes, if you are using the insurance to replace income or eliminate debt, you will BOTH need your own insurance. If you are using the insurance to assist with an estate tax bill, your best option is survivorship insurance which is based on 2 lives.
2) The type of insurance you need depends on your specific goals and how long you want to protect your goals. It could be term, return of premium term, whole, universal, etc. However, survivorship insurance is not offered in the term variety.
3) Not at all. In fact, I have built my practice around using life insurance as a method of leaving a legacy efficiently. The retirees/parents/gifters can then spend more of their accumulated assets, using the insurance as a leveraging tool.
4) Insurance pricing is essentially, but not totally, based upon two components. Your age and your health. You will never be younger than you are today and very few individuals will be healthier in the future than they are today. If you want to keep your long-term costs down, look sooner rather than later.
-Brian
Permalink Submitted by sergio iglesias on Tue, 2010-08-17 01:50
[quote=”[email protected]“]Paul,
Your questions demand a variety of answers, each depending on the complexity of your personal situation.
What are you designing the trust for? Is it for estate planning? Is it for income replacement? Debt elimination?
Addressing each of your concerns:
1) Yes, if you are using the insurance to replace income or eliminate debt, you will BOTH need your own insurance. If you are using the insurance to assist with an estate tax bill, your best option is survivorship insurance which is based on 2 lives.
2) The type of insurance you need depends on your specific goals and how long you want to protect your goals. It could be term, return of premium term, whole, universal, etc. However, survivor ship insurance is not offered in the term variety.
3) Not at all. In fact, I have built my practice around using life insurance as a method of leaving a legacy efficiently. The retirees/parents/gifters can then spend more of their accumulated assets, using the insurance as a leveraging tool.
4) Insurance pricing is essentially, but not totally, based upon two components. Your age and your health. You will never be younger than you are today and very few individuals will be healthier in the future than they are today. If you want to keep your long-term costs down, look sooner rather than later.
-Brian[/quote]
Some background that may help narrow your answers
Most of my assets are 401/403/ IRA Roth accounts + house , Since we plan to retire early (less than 5 years from now, at 55yrs old ) I don’t expect our total asset amount to be more than 1.5M
No debt (no mortgage etc)
1) I guess our goal of insurance is to replace income for the survivor, expenses for tax bill if any and leave as much as possible the 401K/IRA stretching for children after we are both gone
2) Based on #1 not sure what I need , whole life-survivorship?
3) Can you be more specific in your answer, isn’t life insurance very expensive?
4) Are you saying that once I get coverage , they can’t cancel it ?
thanks in advance
paul
Permalink Submitted by Brian Pugaczewski on Tue, 2010-08-17 12:13
Paul,
1a.) If your first goal is to [i]replace income[/i] for the survivor, then you only need coverage for the duration of your income generating years. To minimize your insurance costs and protect your income effectively, a term policy of 5-10 years with a death benefit based upon the amount of income you need to replace will do the trick. Rule of thumb for insurance coverage: for every million dollars of death benefit, you can generate $40,000 – $50,000 of income without touching principle.
1b.) If your second goal is to [i]pay a tax bill/leave a legacy[/i] for your children, then some projections and calculations need to be done. Without knowing all of the specifics of your situation, survivorship insurance is generally the most appropriate and efficient way of acheiving that goal. Survivorship insurance is a permanent insurance policy with cash value that is offered via whole life (dividend based), universal life (interest based) and variable universal life (mutual fund based) options. Describing the specifics of each of the policies is another post in itself, but all will accomplish your goal.
2.) Having multiple goals means you may require multiple insurance policies across multiple mediums. Having a portfolio of insurance (term AND permanent policies) with specific goals in mind for each policy, is the best way to plan for ‘worst case scenario’, as well as ‘best case scenario.’
3a.) As mentioned earlier, insurance is based upon your medical history and age band. Any insurance company will need to review all of your medical records as well as a blood and urine exam so their underwriters can make a determination as to whether they will insure you or not, and at which rate class. Insurance companies offer a plethora of rate classes, each which their own pricing model (ie. Preferred Elite, Preferred, Standard Plus, Standard and then Tables B – E).
3b.) I will provide you with real insurance quotes from one of the largest insurers in the world. I do not have your exact age or health or location, but this will help you understand general pricing:
For a 53yo male, with standard health (normal health rate class, premiums can be higher or lower) in New Jersey:
10 year term policy with $1,000,000 death benefit: $2,585/yr
Univeral Life Survivorship policy (53yo, standard health woman as 2nd life) with a $200,000 death benefit: $1,801/yr
You will notice that for the survivorship insurance, you will need to live another 100+ years for this policy’s ‘leverage’ to be essentially 0. Even if you live another 50 years at $2,000/yr. That is only $100,000 in paid premiums and your bene’s still received $200,000, or a 2-to-1 leverage. That’s an (atleast) extra $100,000 you can spend in retirement without feeling guilty about not leaving money to your children. You need to determine how much would you like to leave to each kid and structure the policy around that number.
4.) That’s the beauty of life insurance, once you have coverage, you have it for the life of that contract. If you buy a 10 year term policy and (hypothetically) acquire some sort of uninsurable disease, then you will be out of luck trying to buy a new insurance policy. If you buy a permanent policy, then you have it forever, and that’s the reason you buy insurance, in case you acquire some life threatening disease or get hit by the proverbial bus.
-Brian