If Life Insurance is the Answer, then What is the Question

Over the years I have heard people say they have enough assets so they don’t need to buy life insurance. Their rationale was the belief that it would be relatively easy for the family or the estate to liquidate assets to pay any taxes or other debts.

Ask yourself one question, does it make sense to incur the taxes associated with selling your part of a practice just to pay taxes and other debts when there is an alternative solution to consider?

That solution is life insurance. Yes, life insurance. When stripped down, a life insurance contract is simply a transfer of your liability to the insurance company. This is true of all insurance of course, but the difference is other risks, such as fire, car accidents, disability might happen. Like it or not, death will happen; it is a certainty. Why not plan for a certainty in the most efficient way?

What makes more sense – selling a solid asset, or paying pennies on the dollar (a premium) to guarantee liquidity? A licensed Advisor with an understanding of you and your business can help you make an informed decision.

I’ve also heard people argue that “I’ll invest the equivalent of the premium, so my beneficiaries will have the money when I die.”  We ran the numbers.

Let’s assume Dr. Tom Ciobanu is a 42-year-old dentist with a family, a partnership agreement and some capital gains taxes he wants to cover upon his death. A basic Term to 100 life insurance policy issued at his age has a premium of approximately $825 a month that will remain level for the rest of his life. As long as he pays the premium every year, it will pay a death benefit of $1,000,000 no matter when he dies. Presuming he dies at his normal life expectancy the after-tax equivalent rate of return is 5.9% on that investment into the policy.  Remember that some insurance premiums, such as life and disability, should be paid directly by dentists (instead of their professional corporation) to ensure death benefits are tax-free.

Now, what happens if he decides to invest the equivalent of the premium to generate the $1,000,000 needed to fulfill his family and tax/debt obligation? Remember we are not trying to hit the ball out of the park, just to invest in a comparable investment vehicle to provide $1,000,000 upon his death.

If Tom chooses the investment route, he will have to find a financial institution that can guarantee a pre-tax interest rate of about 12% for the next 40 years.  Remember he will have to pay tax on the investment at the bank.

As my kids would say, “Good luck with that”! Even with that guaranteed return, Tom would be 83 years old when that investment would reach $1 million dollars. So yes, Tom could invest his premium and eventually reach his goal, but life insurance is guaranteed, and your life expectancy is not.