Most Estate Plans include some form of life insurance; likely a permanent life insurance policy that helps them ensure their legacy after they die. However, there is sometimes a still a home for term life insurance within an estate plan.
Term life insurance provides coverage for only a period of time (as agreed between the insured and the insurer) after which the insurance policy is no longer in effect. Term life insurance by nature will be much cheaper than permanent life insurance because it is providing coverage for a shorter time period. Premiums generally go up if the policy is renewed because the older you are, the higher their risk of payout.
With that said, you may wonder why would anyone use term life insurance for an estate plan? Here are a few examples where term life insurance might come in handy.
- The Life Insurance Gift Boomerang:
If you have given away your excess insurability (check our our blog on this) to a charity or your children, you’ve done a great deed. However, you also need to protect your estate. If you die within 3 years of your gift, the death benefit of the policy gets paid out to YOUR ESTATE even though you intended it to go elsewhere. To protect against this life insurance ‘boomerang’, you can use term life insurance. Take out a 3 year policy that covers the estate tax you would have to pay.
For example, let’s say you gifted a $10 million life insurance policy to the Ronald McDonald House, and the rest of your estate is greater than $22 million. If you die in 1 year, the $10 million death benefit becomes the property of the estate. The $10 million would be taxed at 40%, so $4 million of estate taxes would be owed, and your gift is reduced to $6 million! You can take out a life insurance policy for a 3 year term, with a $4 million death benefit; this would pay the taxes that your estate owes, and allow your heirs or the charity to keep the full endowment that you intended them to receive.
- THE GRAT and QPRT Boomerang:
The Grantor Retained Annuity Trust (GRAT) pays an annuity to the grantor until the term ends, after which the beneficiaries get the remaining assets. The Qualified Personal Residence Trust (QPRT) is set up so that the grantor gifts their primary residence or vacation home to the trust, but the gift will take effect at the end of a specified ‘term”. In both cases, if the person who created the trust dies before the term expires, their contributions to the trust will be returned back to the estate. And they would lose the main benefit of having the trust!
Once again, term life insurance offers a great solution here. If you have a term life insurance policy for the duration of the QPRT or GRAT term period (for example, 10 years), for the amount of estate taxes estimated, that will ensure that your children receive what was intended for them.
- Selling Property to Family
You may choose, with your children, to have them purchase a piece of property from you. You agree to let them pay for it over the course of 5 years. For a $5 million property, their payment would be $1 million per year. Let’s say you die 2 years into this agreement, and $3 million of the property is still in your estate. If the estate is large (over $22 million), then your children could owe 40% in taxes on the remaining property value, in this case $800,000.
Here is where a term life insurance would come in handy. In this example, you can take out a policy with a 5 year term, and a death benefit of $800,000 (so that your heirs can pay the estate tax if the policy reverts back into your estate). Each year, as a certain amount of the property is transferred to your children, you can reduce your death benefit (and cut premiums down) by an equal amount.
If you would like our team to help you determine whether term life insurance is a good fit for you or your affluent clients, please let us know. We love to help, and can support an existing team or provide direct assistance. It is our goal to make a measurable difference in your financial life.
Note: the statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with your trusted financial advisors and lawyers. For current tax or legal advice, please consult with an accountant or an attorney.
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About Axia Global
J. Michael Roney, Founder of Axia Global, has worked alongside the best financial and legal professionals in the field to craft profitable solutions for even the most complex wealth preservation and estate planning cases. Together, the team at Axia Global has nearly a century of combined experience in the financial services sector.
