Life insurance is more than just a way to pay outstanding debts and end-of-life expenses. Many use it to provide money to their loved ones after they pass. You can even take it a step further and recommend life policies for their wealth transfer tax benefits.
These days, individuals can transfer their assets to their heirs using several different means. Annuities, 401(k)s, IRAs, trust funds, cash accounts, and other investment vehicles all allow the owner or account creator to designate beneficiaries. However, if your client has the money and is in relatively good health, they may want to purchase life insurance, specifically single premium whole life, to forward their wealth to the next generation.
Let’s explore when you should consider suggesting life insurance to clients for the sake of its tax benefits.
Your Client Has Large Lump Sums in Savings Accounts
To use life insurance as a wealth transfer tool, your client needs to have wealth. We generally recommend they have liquid assets equal to at least $5,000, since this is usually the minimum premium for a single premium whole life product.
Single premium whole life (SPWL) is a great product for individuals who want to capitalize on the wealth transfer tax benefits of life insurance. Here’s why:
- The policy is paid for and the death benefit is guaranteed after one premium payment.
- The single premium payment can lead to potential savings over an annual premium payment.
- The policy accumulates cash value, which is accessible to the policy owner and grows tax-free.
One particular instance when you could suggest an SPWL policy to a client is if they tell you they’re maxing out their contributions to their IRAs or 401(k)s. You could also recommend purchasing an SPWL policy to a client if they have reached the age at which they must take required minimum distributions (RMDs) from their retirement plan. Your client can use their “overflow” or RMD money to purchase an SPWL policy. Similar to these 401(k)s and IRAs, an SPWL policy would allow your clients to build cash value on their money tax-free. It would also allow them to shift any “extra” wealth they may have to their heirs more easily.
Your Client Wants to Pass Money on to Heirs or Charity
Investment accounts IRAs, 401(k)s, and annuities can be a great way to save for one’s golden years — but a “taxing” way to leave money to family, friends, or charity. Through these products, the transfer of funds from the deceased to designated beneficiaries may be subject to delays, as well as dues to good old Uncle Sam.
If an individual places funds into a bank account, IRA, 401(k), annuity, or even a life insurance policy, AND names their estate as the beneficiary, the account or plan will likely have to go through probate when they pass. On average, this process takes six to nine months to complete, according to the American Bar Association.
Once that is over, the estate and any other assets for which the deceased did not name an heir will likely be subject to the federal estate tax and maybe even a state inheritance tax. Presently, the estate tax, or “death tax,” affects estates that exceed $5.6 million per person or $11.2 million per married couple. (This is after the annual federal gift tax exclusion.) Any amount over those limits is generally taxed at the top tax rate of 40 percent. The heirs may then be responsible for paying a tax, determined by the deceased’s state, on what they inherit. Currently, only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) have an inheritance tax.
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