By Dr. James M. Dahle, WCI Founder
Lots of people think I hate permanent life insurance (whole life, variable life, universal life, etc.) and spend most of my time plotting the demise of those who sell it. While it is true that I think permanent life insurance is dramatically oversold (especially as another “retirement plan” for doctors), there are a few times it can be useful. I am often asked,
“Well, what is permanent life insurance good for?”
and . . .
“You always qualify your statements about whole life insurance with ‘almost everyone' or ‘nearly everyone.' What are the exceptions to your general distaste for it?”
This post is about the exceptions.
Is Permanent Life Insurance a Good Idea?
I hope what I write here is never used to sell these products inappropriately. I expect I will never purchase one of these products (again), and I certainly do not think they are mandatory for any doctor. But they are a reasonable option in some circumstances. Here are situations where it could make sense.
#1 Reducing Estate Tax Where You Don't Want Heirs to Access the Money Until You Die
The first situation is for an investor who expects to have to pay estate tax. Keep in mind that if you don't die with more than $12.92 million ($25.84 million married) [2023], you won't be paying any federal estate tax. That is the vast majority of high-income professionals. However, there are a number of states with an exemption lower than the federal exemption. Massachusetts, for instance, has an exemption of just $1 million. A person dying there with an estate of $5 million wouldn't owe any federal estate tax, but they would owe hundreds of thousands of dollars in state estate tax.
Avoiding that payment can be very useful. The way you avoid it is by reducing the size of your estate. Every dollar that isn't in your estate at death is a dollar that isn't taxed at death.
You can give money to charity and give money to your heirs before you die. But there are limits to how much you can give to each heir ($17,000 per year [2023]), and besides, you might not want them to have it yet due to maturity issues. You can put it into an irrevocable trust. Then, when you die, it's not in your estate and it goes to your heirs according to the terms of the trust. However, trusts have very high tax rates. They reach their top bracket at just $14,451 in taxable income [2023].
Using a permanent life insurance policy, which grows tax-free and provides a tax-free death benefit, can be a great option if you are very healthy and have no dangerous hobbies. You give the money to the trust; the trust buys a life insurance policy on your life; and when you die, your heirs get the money tax-free. The trust can even distribute the money in some way other than one big lump sum if you want (although continuing growth in the trust may be highly taxed, and there are ongoing trust fees, of course.)
Bear in mind that this isn't the same thing as the whole life policy your local Northwestern Mutual salesperson is hawking to you when you're 30 and have $400,000 in student loans and aren't even maxing out your retirement accounts. You're buying life insurance because you want the death benefit, not the cash value. So, you structure the policy to have the highest possible death benefit for the lowest possible premium. In fact, you don't have to use whole life insurance at all. You can use guaranteed universal life if you like. While that death benefit typically doesn't rise over the years like whole life, you can buy a heck of a lot more benefit with the same premium since there is no cash value accumulation (which you don't want anyway). If you're married, you will generally want to use a “second-to-die” policy, which has even lower premiums.
Buying permanent life insurance in an irrevocable trust can lower your estate tax while avoiding giving your heirs money before they can handle it and avoiding any trust income taxes.
#2 Providing Liquidity at Death
This is another estate planning use for permanent life insurance. Some people have very illiquid estates. Imagine a man who owns a family business, a farm, or a particularly expensive piece of property as the most significant portion of his estate. Upon his death, his three kids may have to sell that business, farm, or property to get their inheritance or perhaps even just to pay the estate taxes due. The life insurance money provided by a permanent policy can be used to pay those estate taxes. It can also be used to provide an inheritance for two of the three kids, allowing the third one to keep the business or property. It may also allow the heirs to wait a few years to sell so they don't have to get rid of it at fire sale prices.
There is one other use for super savers. If you will owe estate tax but don't have any significant taxable account with which it can be paid, your estate will have to pay your estate tax out of your IRAs. Pulling a big lump sum out of an IRA all at once triggers lots of income tax, which also will have to be pulled out of the IRA. If you withdraw 25%, 50%, or even 75% of your IRA to pay estate and income taxes, there will be a lot less left in that IRA for your heirs to stretch. Life insurance proceeds can take the place of a taxable account to pay any estate taxes due, keeping the IRA intact to be stretched for the next 10 years. Granted, you have to pay the premiums with something (such as IRA withdrawals), but you can do that with small withdrawals each year—which will probably be taxed at a much lower rate.
#3 Providing for a Disabled Heir When You Will Never Be Financially Independent
Imagine you have a special needs child who will always be dependent on you. Also, you're a crappy saver and investor, meaning your retirement plan is to work until the day you die. Or perhaps you're a decent saver, but you just want to make sure there is a defined amount for you to leave behind to provide for your child. While it is quite likely that you will leave more behind by using typical investments rather than a permanent life insurance policy, having a life insurance policy to provide for the heir in a guaranteed manner may make you feel like you have permission to spend the rest of your money. Again, note that you're buying the life insurance for the death benefit, not for its investment components.
You'll want the highest death benefit for the premiums paid, and you don't really care if it becomes a Modified Endowment Contract (MEC). You could buy the whole thing with one single payment if you wanted. A guaranteed universal policy may also fit the bill.
#4 Key Man Insurance Late in Life
Many businesses are very reliant on a certain person. If that person dies, the business may die. Sometimes, having money instead of that person can solve some problems and keep the business alive until the so-called key man can be replaced. More likely, a lump sum of money provided at the death of a partner will allow their remaining partners to buy out their heirs and maintain control of the business. Term life insurance can often be used for these sorts of needs. However, if the key man or key woman in this business is older, it might be a better deal to just buy a permanent policy. Term life insurance in your 60s, 70s, or 80s is rather expensive—if you can get it at all.
#5 Taking a Single Life Annuity
Occasionally, it may be wiser to take a single life annuity and buy a life insurance policy than to buy a lower-paying joint life annuity. Upon the death of the first spouse, the second spouse uses the death benefit to buy a Single Premium Immediate Annuity (or just takes withdrawals from an investment account) to provide for themself. It's good in theory, but in reality, most people are better off just buying the joint annuity. It's certainly simpler, and you only have to worry about one insurance company's guarantees instead of two.
#6 Combined with a Charitable Trust
If you have an estate tax problem and plan to give some money to charity, have highly appreciated shares of an investment you would like to sell, and still want to maximize how much your heirs get, you could combine a permanent life insurance policy with a charitable trust. For example, you could take the highly appreciated shares and put them in a Charitable Remainder Annuity Trust. You would avoid the capital gains taxes on the asset, get an income tax deduction this year for the remainder portion of the donation, avoid estate taxes on the money since it is out of your estate once it is in the trust, and then use the annuity payments from the trust to buy a life insurance policy in an irrevocable trust for your heirs to replace the money you gave to charity.
The devil is in the details, of course, but it's quite possible that this complicated process enables you to help your favorite charity and still pass more money to your heirs than you could have if you had not given anything to charity. The “free lunch” comes from the taxes avoided.
Note that in the first six reasons listed above that you are buying the insurance because you want the death benefit. You're not looking for an investment or “another retirement account.” The last two reasons below involve using the insurance primarily for its investment/asset protection benefits rather than a death benefit.
#7 Pretending You Are Your Own Bank
Infinite Banking and Bank on Yourself are financial concepts used by life insurance salespeople to sell more policies. They both have rabid proponents who think that saving inside their life insurance policies and then borrowing their own money somehow allows them to avoid the evil banking system. I can't explain the entire concept in just a paragraph or two, but if you're really interested, read this post by me and this one by another unbiased blogger who spent entirely too much time investigating the concept before arriving at the same conclusion I did.
Our conclusions: this wasn't right for us but it wasn't the stupidest thing you could do with your money and it could work out just fine for the right person (who usually has an odd distrust for the banking system and an intense interest in gold as an investment). So, permit me to include this on the list of reasonable uses for permanent life insurance. But again, this isn't the usual whole life insurance product being hawked to you by someone masquerading as a financial advisor.
#8 Super High Earners Wanting Asset Protection
In many states, permanent life insurance provides exceptional asset protection when compared to a taxable account and home equity. If you combine a desire for that asset protection with being in the highest tax bracket both now and in retirement AND you have already maxed out every tax-protected account available to you AND you have a decently sized taxable account, it might make sense to buy a permanent life insurance policy with a small portion of your assets. In this situation, unlike the first six situations above, you are wanting the investment (and asset protection) aspects of the policy, rather than the death benefit. You should also be aware of a few things.
First, there is a very good chance you will be better off investment-wise simply investing in a taxable account. The more you value the asset protection (and assuming your state actually provides it) and the death benefit, the more useful you will find this technique.
Second, when you purchase a policy as an investment, you should do everything you can to increase its investment return. This may mean buying “paid up additions” with whole life (since you pay lower commission on those than the base policy and thus increase returns). It probably also means paying annually, not monthly. If you can't afford to pay your premiums annually, you're probably buying too big of a policy.
It might mean trying to do a little better than you might in a whole life policy (guaranteed returns of 2%, projected returns of 5% over a lifetime.) Policies that might do a little better include index universal life policies and variable universal life policies. However, realize that these are complex financial instruments, and complexity favors the issuer and his salesperson, not the buyer. The key is to keep your insurance costs (and in the case of VUL, the investment costs) as low as possible. Your hope is that over your lifetime, the insurance costs will be lower than the tax costs you would incur investing in a taxable account.
By the way, buying one of these things is like getting married. If you want any kind of decent returns, it is “'til death do you part.” If you're not ready to make that commitment, don't buy it. You can always buy it next year or 10 years from now unless your health goes sour. And in that case, it's not like a taxable account invested in a tax-efficient manner is a bad alternative most of the time. Taxable accounts even have a “tax-free death benefit” that insurance agents hope you don't know about called the step up in basis.
Before buying any permanent life insurance policy, be sure you understand the myths that insurance agents like to use to sell them. If you're one of the rare doctors who fits an exception noted above, then shop wisely, choose the right policy the first time, and stick with it until death. But if you're like most physicians, you can just continue to say “Thanks, but no thanks” when offered a permanent life insurance policy.
Get a life insurance quote here from one of the WCI Vetted Insurance Agents.
What do you think? Am I too soft on insurance agents? Too hard on them? Do you agree that all of these are reasonable uses of permanent life insurance? Why or why not? Did I leave one out? Comment below!
[This updated post was originally published in 2015.]
Thanks for this article, Jim. You outline a number of good uses. I would add an additional one. We have worked with clients to make charitable gifts through life insurance as an alternative to leaving a charitable gift in a will. As an example, one of our clients had a $4 million gift to his alma mater in his will to endow a teaching chair. Instead, we worked with him and alma mater to purchase a $4 million 10-pay universal life policy. He committed to 10 payments of $90,000 per year. He could deduct the $90,000 payments against his income today, so the after-tax effect cost to him was less than $50,000 per year or $500,000 total. If he died tomorrow, the net increased amount to his heirs would be $3.5 million. He was also recognized at his reunion for his gift now, rather than waiting until after his death. As I’ve talked to major charities, they often want to see death benefits of a $1 million or more to go through the complexity of this arrangement (and they would rather have the $4 million NOW!). However, this is a nice alternative for charitable givers to consider.
I’m not convinced that is a great use. It’s all about the discount rate you use for the time value of money. For example, he could give $90K a year to the alma mater and get all that recognition now and exactly the same tax benefit. I obviously don’t know his life expectancy, but let’s say it’s 30 years. Would the charity rather have $900K now or $4M in 30 years? I bet they’d rather have the $900K. Let’s say they invest $900K for 30 years at 8%. That’s $9 Million. Would they rather have $4 Million when you die or $9 Million?
But if the goal is to GUARANTEE a certain amount (rather than a probable higher amount) to charity (or to heirs), then life insurance works well. That guarantee isn’t free though. In this case, the cost may be $5 Million (or whatever.)
Your $90K per year approach is fine if the donor doesn’t care what the money is used for. It’s a bit like trying to buy a Mercedes putting down $29.95 per month. It doesn’t endow a named chair or any other named. Naming gifts are usually highly negotiated transactions with the charity. Minimum amounts for chairs is usually in the $2 to $4 million range, depending on the institution and depending whether the chair in in Celtic literature or neurosurgery. Obviously spending $3 million today could achieve the desired result. $90,000 wouldn’t get the donor very far. He already gives $50,000 per year anyway. (Insurers often require a history of substantial giving to issue the policy.) This is a way to bump up the annual giving and leave a legacy.
Your $90K per year approach is fine if the donor doesn’t care what the money is used for. It’s a bit like trying to buy a Mercedes laying away $29.95 per month. It doesn’t endow a named chair or any other legacy gift. Naming gifts are usually highly negotiated transactions with the charity. Minimum amounts for chairs is usually in the $2 to $4 million range, depending on the institution and depending whether the chair in in Celtic literature or neurosurgery. Obviously spending $3 million today could achieve the desired result. $90,000 wouldn’t get the donor very far. He already gives $50,000 per year anyway. (Insurers often require a history of substantial giving to issue the policy.) This is a way to bump up the annual giving and leave a legacy.
Interesting that a promise to pay $3 Million at some unknown point in the future is adequate but giving them $90K a year for 10 years isn’t. But I suppose they don’t get the “named chair” until they keel over, do they?
I guess I’ll give you this one as a legitimate use.
I just want to point out that you can “bump up the annual giving,” “leave a legacy,” and probably in the end give more to the institution by investing it yourself until your death with or without a charitable trust and then having it go to the charity. If you die too soon, I guess you don’t get the chair named after you. You’re insuring against that risk by buying a cash value insurance product, and there’s a cost to that.
Most legitimate charitable organizations would be more than happy to take a $1M pledge payable over a term of years, and would be more than willing to accept terms, negotiate naming, etc. Most large gifts are made this way.
And as far as restricting donated funds goes, there is no minimum dollar threshold for which funds can be restricted to a given use. You can put a restriction on a $10.00 donation if you want to. If the charity doesn’t like it, they can refuse to accept the donation, but most legitimate organizations will rush to accommodate any reasonable desires of the donor.
lots of good info As said 99% of docs will not need perm life ins.
Another SOLD product rather than docs asking to buy it
We all know people who bought this w/o knowing they are best suited with TERM LIFE
Bought (Sold!!!!) a WL Northwestern Mutual Life policy as a resident or young attending 30-35 years ago. Very inappropriate for me. Waste of money. Cashed out early. Never explained, of course, whether appropriate for me. Seems like tactics have not changed. Being naive then most of problem, but predatory insurance agents also a problem. Caveat Emptor to any new doc “pitched” or”offered” one of these policies!
Happened to me in my residency just a few years ago, too. I came to my senses after a month or two, thankfully.
the schools need to step up to the plate and not allow these ins salesmen into the universities taking advantage of the naieve student
The local med society sells the info of new attendings to the area
I’ve been pestered nonstop by a whole life saleswoman hiding under the guise of a “financial planner” trying to sell me those products
Even as a “high income” physician, I’m glad I came across this site and have no intention of even returning her calls
I’m just here for the comments.
*popcorn to mouth*
Hilarious Eric!! Me too!
#9, in my opinion. Pension replacement. Due to no survivor benefit. When I retired from the Air Force the Survivor Benefit Plan was a bad deal in 1986. Since changed. I bought a whole life policy to replace the pension. If spouse predeceased me, then kids and/or grandkids would benefit. Later had to buy more policies as benefit increased with inflation adjustments. Full disclosure: former New York Life agent.
Thats uncommon though. Almost always the joint survivorship is a much better deal. Way too often people get suckered into taking the single life annuity/pension and buying insurance. Pensions are usually designed to be at least actuarialy fair so it requires a significant difference in age/health of the couple to make such a situation worthwhile.
They’re all uncommon Rex, that’s the point.
That seems like a reasonable use, I agree.
Glad to see this #9 suggestion, since that what my wife and I both did when we retired from the military. The benefit we saw in using insurance instead of the survivor benefit plan was that we expected to outlive the government version. Happily that has been the case, so the money we spent on premiums is still working for us. Of course if one of us had died early, it wouldn’t have been such a great idea.
So, for you military members reading, give it a thought!
Really great article. Even being in the estate planning profession, I often forget the legitimate uses that permanent policies can have. In my line of work, I most often see sophisticated clients employ permanent insurance for #2, #4 and sometimes #6. It’s almost always tied to a need for business continuity, but occasionally it’s to placate a forced heir, etc.
Very often it’s with buy-sell agreements among business partners who want to ensure they can buy out the deceased partner’s interest. Often this is done with term insurance, with the term length depending on the exit plan.
Also sometimes it’s necessary to provide liquidity to pay estate taxes to avoid a sale of the family business at death, although hopefully with careful planning the actual estate taxes owed can be minimized before that event.
Sixty-something widow in excellent health with a large taxable account as well as traditional and Roth retirement accounts. Given my modest lifestyle, I am very unlikely to spend it all during my lifetime unless I wind up with *huge* LTC needs down the road (Hopefully not, based on family history, but you never know.) No particular need or desire to take investment risks so I have only a small allocation to equity (as well as a good chunk in TIPS to deal with inflation risk). My conservative asset allocation means I have more fixed income than will fit in my tax-advantaged retirement accounts, so I am paying significant taxes at ordinary income rates on the interest income in taxable. A low cost MEC universal life insurance policy (“Intelligent Life” from TIAA-CREF) meets my needs well. I am getting a very competitive interest rate, the cash surrender value is fully liquid, and if (as I hope and mostly expect) I never need to touch the money during my lifetime, it goes to my heirs taxfree. If and when I do need LTC, my POA can withdraw money from the cash value and it will be taxable (but I will presumably have plenty of offsetting medical deductions in any years where that becomes necessary.) There was no load on the policy other than the mandatory state tax on policy premiums (70 basis points in my state; could be higher in others.) Given my asset allocation, I see my Intelligent Life policy as a very tax efficient way to hold a chunk of my fixed income assets that is unlikely to be spent during my lifetime (barring LTC needs) while maintaining liquidity and flexibility for unexpected needs. Currently earning close to 4% on fixed income (guarantee is 3%) and hope/expect to stay in the policy for the rest of my life but if return ever becomes noncompetitive down the road, I could 1035 it into a SPIA and/or an LTC policy and spread out and/or eliminate the tax hit from ending the policy during my lifetime. I note that you anticipate being in the 10-15% “marginal bracket” during retirement. Technically, I plan to manage my taxable income so I will be in 15% bracket during retirement (with carefully calibrated charitable donations of appreciated assets to a DAF to even out my taxable income) but due to things like IRMAA (income related medicare charges) and senior citizen property tax break limits, state income taxes and AMT, my effective marginal rate could be much higher than my official marginal bracket rate. (Disclosure: I am an academic, not a medical professional. I am definitely NOT now nor have I ever been in the insurance industry. I know a lot about the insurance industry and was highly skeptical and did a lot of tire-kicking before buying this policy.)
The university’s choice is not particularly interesting. I’ve raised major gifts for my alma mater for some time. Promising $900,000 over 10 years doesn’t really get to the estimated $3 million needed for a chair in 10 years.
Also the point isn’t entirely unknown. Few people live beyond 120 years, so the range of expectations is fairly well defined.
As noted in the first post, the client originally had the agreement for the chair to be created upon his death. The gift was in his will. So your snarky comment is actually correct and in-line with the client’s intentions.
Also, if he died in three years, after paying in $270,000 in your example, he would not achieve his objective.
So what’s your point?
My point is that, you’re right, this is a reasonable use for permanent life insurance.
I was almost SOLD the personal banking bit in the recent past. Fortunately I found WCI and the rest is history.
Interestingly I did trip over an article by Wade Pfau claiming WLI in combination with regular investing and a single life SPIA will provide increased retirement income as well as higher legacy wealth.
The “white paper” is clearly sponsored by an insurance company so I can’t help but wonder if/why Dr Pfau has sold out to the life insurance industry. I though he was one of the good guys… How can one trust his conclusions?
Forbes link: http://www.forbes.com/sites/wadepfau/2015/05/13/improving-retirement-outcomes-with-investments-life-insurance-and-income-annuities/2/
White paper link:
https://www.oneamerica.com/wps/wcm/connect/23b21fa6-8e9c-49c9-a49e-1a0b0ef95d91/OA_WP_Opt-Ret_Inc_05-15_web.pdf?MOD=AJPERES&CONVERT_TO=url&CACHEID=23b21fa6-8e9c-49c9-a49e-1a0b0ef95d91
I agree with Wade that SPIAs in particular can be useful for putting a retirement income floor underneath your assets and can help you maximize your spending. I’m not convinced that cash value life insurance is either needed or desirable for that purpose.
Studies like this one from Wade are all about garbage in-garbage out. The devil is in the details. So see if you agree with his assumptions prior to determining if you believe his conclusion. I think he clearly discloses those as well as the funding for the study, so I wouldn’t make him out to be a bad guy for this white paper.
For example, he assumes you’re paying an advisor 0.75% a year and your average portfolio ER is 0.84%. Well, my investments should do at least 1.5% better than that, which changes all the conclusions.
I haven’t read Wade’s article in great detail but for me the basic takeaway seemed to be that if you are choosing between:
A) a joint survivor life annuity covering yourself and a much younger annuity partner (where that partner could be, e.g., your spouse or your disabled child)
B) a single life annuity covering yourself only PLUS purchase of a permanent life policy on you the proceeds of which can purchase a life annuity (or be invested, whatever makes the most sense at that future time) for the person who would have been your annuity partner in Option A upon your death
Then option B will generally be far more tax efficient than option A. Basically “death benefits” provided through a joint life annuity in A) will generally be 100% taxable while the death benefits from the payout at your death will be not be taxed at all. Also, option B gives much better “optionality” for your annuity partner–the best decision for them can be made in the light of the facts known at the time of your death. (i.e., their health, tax laws, inflation, available investment vehicles, etc.)
It’s worth running the numbers for sure. If it works out better to get a single life plus insurance then great, go that route. In general, my understanding is you’re better off with the joint annuity, but that could be different I suppose with two folks whose ages greatly differ I suppose.
While it can potentially make sense if the spouse is of different age and or health. It isnt likely a good option if the spouse is a lot younger if one is talking about a typical pension. For instance if the pension owner is 65 and spouse is 45 then if they take the difference between the highest joint and the single “annuity” option and invest in permanent insurance then that death benefit is unlikely to be enough if the 65 year old dies relatively soon. It leaves the spouse very vulnerable and they would have certainly been better with the highest joint. Instead much better to take the highest joint since pension plans payment options typically assume the spouse is about the same age as the pension owner. Of course you have to look at each individual plan and who is buying what for instance in the scenario im talking about, the employer is buying or providing the pension/annuity. If you need a permanent death benefit and having a disabled child for instance could put you in that category especially since they likely arent eligible for your joint pension then you need a permanent death benefit.
Good points. Thanks for the reply.
Changing residency to florida to save a few hundred grand in nj estate taxes as well as state income taxes
Consider it
You say: However, trusts have very high tax rates. They reach their top bracket at just $11K in taxable income.
For 2015, I think that the top bracket is not reached until $12,301 in taxable income.
Looks like you’re right. Maybe I was looking at the number from a few years ago, which is probably the last time I looked it up. More likely, I just went from memory and remembered it wrong. At any rate, not much difference.
http://www.forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/
If I understand the way taxes on trusts work, this is not likely to be a problem for most trusts. First of all, as long as the person who established a trust is alive, the trust income is taxed to that person at the usual rates. Once the grantor of the trust has died, then income and realized capital gains that remain in the trust are taxed at the higher rate. However, if the income is distributed, then it will be taxed as income at the rate of the recipients. But if care is taken to select tax efficient investments, this won’t be a problem. If, for example, the trust consists entirely of an S&P 500 index fund, then almost all of the taxable proceeds will consist of dividends, currently about 2% a year. That would translate to $20,000 of taxable income per million, which would be taxed at the personal rate to the recipients. So, assets that are going to go into a trust should be chosen with tax efficiency in mind. If the trust is set up with some flexibility, then the trustees could distribute all the taxable income each year should it become necessary. But it would take an index fund worth 10 million dollars to generate $200,000 a year in taxable distributions. Therefore, I don’t see most doctors having a problem with trust taxes. Also, the usual exemptions apply, so depending on state law, the tax-exempt income in the trust, for example, from municipal bonds, can remain in the trust tax-free, while the taxable income is distributed and taxed at the individual rate.
Capital gains are also taxed in trusts, and reach the highest bracket quickly, so if possible, capital gains should only be generated if they will be distributed.
While a revocable trust may work that way tax-wise (and I’d have to check on that), I didn’t think an irrevocable one did. If I’m wrong, I’d love to be corrected.
I’m not a CPA, just a physician, but from what I have read in several places, when you create a living trust, it’s considered to be a grantor trust. It’s revocable, so the IRS ignores it completely. It’s tax ID number is the social security number of one of the grantors ( trust creators ) . All trust income is taxed to the grantor. Once the first spouse dies, it becomes an irrevocable trust. At that point, the trust get’s it’s own tax ID number, and has to file a return. The trust income is taxed at the higher rates, BUT all distributions are treated as deductions to the trust, and those distributions are taxed at the usual rates. Many trusts will stipulate that all income is to be distributed. So, there won’t be any trust income, and therefore no trust taxes at all. But there are two additional reasons not to worry about trust taxes. First, if the recipient will have total income ( personal earnings plus trust distributions ) that reaches into the top bracket, it becomes moot, because in or out of the trust, the marginal rate will be the same, at 39.5%. Secondly, if you compare the total tax liability of income in the trust to the liability at the usual rates, the maximum difference will be about $53,000. Now, that’s a lot of money, but it’s not a deal breaker. Compare that to what you might be paying an adviser at 1% of AUM on 5 or 10 million. So, if for some reason you want to keep the income in the trust, it’s not prohibitively expensive to do so.
If there’s an accountant reading this, I would look forward to correction or confirmation.
Thanks for the post. I’m first year in practice, and I was the target of a very hard sell for VUL from a financial advisor. I was very interested in the asset protection benefits, so I looked into it. I ended up making a huge spreadsheet with 30 years of projections, comparing returns in variable life, versus a variable annuity, and a taxable account.
I concluded that the variable annuity achieve the same asset protection benefits as universal life insurance,
I concluded that the variable annuity achieved the same asset protection benefits as universal life insurance, but returned far more under similar market conditions. The life insurance death benefit just becomes too prohibitively expensive towards the end of the policy. On top of that, interest from the policy loans eats away the principal. I can’t imagine a scenario where a variable annuity and term life insurance would be inferior to universal life insurance. I plan on being self insured in 30 years anyway.
The sad coda to all this is that just about everybody in my group has gleefully dived into variable universal life.
Might want to google unmet promises life insurance
That article will give u an idea how unlikely it is for a VUL to meet those illustrations
And that article was written by people in the life insurance industry
Thank you for sharing this article. As a professional in the insurance industry for 20+ years, I find myself going against the advice of most insurance people and recommending term. I like that you pointed out circumstances where it would make the most sense. These instances are few and far between and most people, if not all residents and students, are better off purchasing a term policy to cover their needs. With a limited budget and a potentially large need, it is more important to acquire the appropriate amount of coverage than locking in a large premium as a “savings plan.” I’m appalled when I hear from a colleague in the insurance industry that they paid a death claim to a client for a small amount ($250k) to a widow with small children because they sold them a whole life policy. I have also seen clients come to me years after they purchased a whole life policy from another agent and can no longer afford their mortgages or expenses because they feel locked in to paying the lofty premiums. I had a new client come to me this year looking for a disability insurance policy and couldn’t afford the premiums because he was paying over $100k a year in whole life premiums.
One thing that is important to note is that if you did purchase a whole life policy and feel stuck, you have the option to reduce the death benefit which would thereby reduce your premium. This would allow you to keep your policy and avoid having to cancel your policy. This is typically not disclosed to people and it is important for people to know that they can rectify their decision.
Beware of these “conventional wisdom” financial personalities like Dave Ramsey, Suze Orman and White Coat Investor dish out at regular.
Check their resumes. They are not financial professionals. They aren’t members of any financial regulatory agencies. They have not studied for a license. They are not held responsible for their advice.
One of the biggest and longest running jokes are about doctors as bad investors, bad money managers, horrible business men. I heard when i was in sales, I really hear it now that i’m in financial services.
I could literally sit here and counter everything you have ever published or written with actual facts.. not opinions. How privatized banking goes back to J.C Penny and Walt Disney, or how permanent life insurance has been proven to beat fixed accounts ( bank cds, money market, government bonds, saving accounts)
I could point to the Dalbar report that reports actual investor gains from the stock market and disapprove what you believe.
Or we can examine how fortune 500 companies and billionaire investors use life insurance and buy life insurance policy on the open market.
I could even point to the IRS codes and show you where you can find Roth IRA.. here’s a hint same section that governs life insurance.
But I won’t. A new generation is bucking the old trend of buy and hold, mutual funds, buy term and invest the rest, because they have already been proven NOT to work.
so you keep encouraging fellow doctors on how to put their money at risk, wait out the market, try to time the market, don’t invest in tax shelter like life insurance, don’t grow your money in all markets like life insurance does, and I’ll cater to the new generation that saw their parents and sibling struggle in 2008.
And yea, Doctors will continue to be the butt of every financial joke. Good Job
Wow! You made it two comments prior to jumping into the insults! That’s better than many agents.
You say you have facts that “counter everything I have ever published or written.” Yet you don’t share them. Apparently they’re top secret!
We discussed privatized banking in your previous comment. Readers can find details here: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-5/ and here:
https://www.whitecoatinvestor.com/a-twist-on-whole-life-insurance/
The Dalbar report has systematic issues (the fact that all investors underperform their investments in a rising market) but I agree that many investors have behavioral issues that keep them from getting market returns. The solution to that, however, is not to buy whole life insurance. It’s to learn how to invest.
I’m glad you are familiar with the IRS codes. You imply that whole life like a Roth IRA. That’s not true, as written here:
https://www.whitecoatinvestor.com/8-reasons-whole-life-insurance-is-not-like-a-roth-ira/
I’m curious where you found me recommending that doctors time the market.
Thanks for stopping by. Try to keep comments polite and avoid personal attacks and I’ll allow you to comment all you like. I’ll be honest though, most insurance agents who show up in these comments seem to have a very hard time doing so.
Daniel Daily, you take the cake for being responsible for the most self-serving and misleading post that I have ever seen on this blog. Just mentioning White Coat Investor in the same sentence with Dave Ramsey and Suzie Orman is slander in my judgement. I hope that a justifiable law suit is forthcoming (joking of course).
Daniel,
I didn’t see many facts in your argument, just rhetoric. I’ve run the numbers myself for a New York Life VUL plan using their own optimistic projections. In similar market conditions, even considering tax deferral, universal life underperforms compared to a taxable account in the same market. Even a deferred variable annuity beats it hands down, and with similar asset protection and tax deferral benefits. The death benefit and interest from policy loans just become too expensive. Besides, wealthy individuals don’t necessarily need to pay for a death benefit once they’re essentially self insured.
This isn’t a “common sense” argument. It’s an arithmetic argument.
What about for purposes of College Financial Aid? Would you consider that a legitimate use situation? E.g. as I understand it, life insurance is shielded from asset calculations in both the FAFSA and the CSS. I can conceive of circumstances where parents might get an unusual lump sum they hadn’t planned on, poorly timed right before child is applying to colleges (e.g. got laid off w/ severance package, an inheritance from a relative who died, etc..) Buying life insurance might be one way to prevent otherwise handing over that lump sum to an overpriced college because it artificially/temporarily looks like the “parents can afford it.”
Not an issue for most docs as their kids won’t qualify for anything but loans and merit-based scholarships anyway. But sure, in some very unique circumstances, perhaps.
I agree that for physicians children, not likely to qualify for FAFSA, however your thoughts about using insurance for nieces/nephews who will need help with college/education expenses and who will likely qualify for FAFSA money with their current parents income. 529 plans are nice but a bit restrictive, UTMA/UGMA accounts count towards FAFSA as student contributions. Currently I have set up taxable accounts for them and contribute yearly to buy equities but the tax consequences of the dividends every year are continuing to grow and become more burdensome. Looking for alternative ways to get them money, not disrupt potential for FAFSA money and minimize my tax consequences. Thoughts?
Is your goal to minimize the taxes or maximize the amount of money after tax? I think whole life is a terrible way to save for college due to the low returns over that short of a time period.
Why not open a 529 with you as the beneficiary, then change the beneficiary to them just in time to give them the money? Then it doesn’t count on the FAFSA, at least until the next year.
What I do for nieces/nephews, however, is open a 529 with me as the owner, them as the beneficiary, and forget the FAFSA consequences. Not sure why you feel a 529 is “restrictive.” It’s not restrictive at all if you spend the money on their college.
Note that CSS allows colleges to ask optional supplementary questions about anything they deem relevant. According to Forbes in 2014 “a few highly selective colleges” do ask about cash value of life insurance in their forms.
http://www.forbes.com/sites/troyonink/2014/02/14/how-assets-hurt-college-aid-eligibility-on-fafsa-and-css-profile/
I definitely remember *my parents* answering the cash value of your life insurance question on my “Parents Confidential Statement (PCS)”, the predecessor to the current CSS back in the early 1970s!
I would not count on cash value of life insurance being ignored by colleges awarding financial aid.
Great blog! Thanks. Even for a PhD doc ;-D
I’m considering the $100 fee to James Hunt but thought I’d take a shot here first.
I have Variable Universal Life with a death benefit of $155,000 ($65,000 in face value and $95,000 rider). Yes I’ve been hosed twice. I need the $155,000 death benefit.
Had the policy 13 years so there is no surrender value anymore and have roughly $11,000 in account value. I pay $71 a month so have paid roughly $13,000 in premiums.
Do keep or dump is the question?
Wondering if its best to buy term for the $155,000 death benefit and “cash out” the rest into account for kids college coming up in about 10 years.
I responded to you on the other thread you posted this on.
Ryan and Michael,
Ryan you didn’t read my post or understand it. I never endorse variable life insurance because its adding additional wealth transference in the amount of fees. Broker fees and taxes rob investors of potential earning. Then add to the fact of the typical American lack of financial literacy and it’s not surprising that over a 30 year span the market produced yields of 9.7% and the retail investor average yield 3 to 5%. Want a source? I’ll give the most respected source in the financial world. The Dalbar Report which is used by every financial news entity to evaluate and rate the stock market.
The Dalbar Report has issues. I don’t doubt the conclusion is generally right- that investors tend to underperform their investments due to stupid behavioral mistakes, but the study itself is flawed by its methods. In a rising market, an investor making periodic contributions underperforms (and vice versa.) So the effect isn’t nearly as big as the report claims.
At any rate, using the Dalbar report to suggest the stock market isn’t a good place to invest is a flaw. Rather it’s useful to demonstrate that an investor who wants to invest in the market should just invest in the market, rather than trying to pick stocks and time the market.
Exactly; so is ok for a life insurance company to invest like a granny in your behalf, but not ok for yourself?
If more retail investors were financially educated ( Yes most of you on here are retail investors) they would invest like institution invest. True diversity isn’t buying different stock it’s a combination of equality, hard assets, commercial and YES insurance. You have to balance RISK vs Security. Perfect example of this Warren Buffet. Whose into Insurance, Real estate, commercial investments, hard assets and equality investments. It was Warren Buffet who said that advisers should stop trying to beat the market and learn to mirror the market. That most investors and advisers over reach which leads to them actually LOSING money in the market. It was Warren Buffet who said stood in front a crowd of college kids and said that should invest in index funds over mutual funds. It was Warren Buffet who said that he has put bulk of his money in indexes and insurance. Now, for all you guru’s, retail investors, who I know have lost money in 2000, 2008, 2010.. Continue to circulate outdated advise and YOu will continue to lose your life earning
I disagree that permanent life insurance is a useful asset class as discussed here:
https://www.whitecoatinvestor.com/whole-life-insurance-is-not-an-attractive-asset-class/
I like Indexed Universal Life (IUL) with a death benefit guarantee rather than whole life. Some IUL’s have a waiver of surrender penalty to allow 100% access to the cash value. To learn more about IUL go to my website and request a copy of my free book.
I don’t think I’ve met someone yet who sells IUL and doesn’t like it. Unfortunately, it is also very rare to meet someone who doesn’t sell it who does like it.
Ouch.. my head is spinning from my manager explaining why a UL is such a nice product, while trying to use it like a term policy.
Can you explain why a UL totally sucks for most people, so I can take him on?