Changes that May Affect Your Retirement and Estate Planning

“There is nothing permanent except change.” -Heraclitus

{4:48 minutes to read}  As with everything else, the government is always changing things. Part of good financial estate and retirement planning is having plans that work under every circumstance.

Recently, a new tax law was signed and the estate tax laws have once again been changed. I am 56 years old with a life expectancy of approximately 86. How many times will they change the estate tax laws in the next 30 years?

The Problem

Over the last 10 or 15 years, people were encouraged to use what is known as guaranteed universal life to pay for estate taxes. These contracts were designed with guaranteed death benefits that last a lifetime. The premium on these contracts is usually lower than those for a whole life insurance policy, but I think there’s some real risk here.

In a hypothetical example, let’s say that in anticipation of taxes on my $20M estate, I bought a guaranteed universal life policy last year. At that time, both my wife and I could exempt approximately $5M each, reducing the taxable amount to $10M.

With the new estate tax law, the exemption is increased to about $11M for both me and my wife. That means that based upon the new tax law, the federal estate tax due is going to be zero because my wife and I can both pass $11M leaving nothing from our $20M estate for federal estate taxes.

But what about the sizeable guaranteed universal life policy I purchased last year? Somebody once said to me, “Whatever you get involved in, you need to have an exit strategy for.”

The upside on a guaranteed universal life policy is the lower premium, but I would have no exit strategy available to me because there would be no cash value. The only thing to do is keep the policy for the rest of my life and continue paying the premium.

This really creates some challenges for people when they are looking to get a bargain. There’s an old saying, “Beware of bargains in parachutes and life insurance.“

The Outcome

We like to have plans that work under every circumstance, so we traditionally recommend life insurance policies that have an increasing cash value and an increasing death benefit. That way if the size of your estate grows, so does the life insurance.

If you decided you didn’t want the policy anymore, you can cash it in. Many of our clients that made the decision to get cash value life insurance policies, are now using some of that cash value to make other investments outside the estate. One client, for instance, is keeping the policy, but taking out her cash value and using it to buy real estate for some businesses that she owns.

In a hypothetical example, if a 50-year-old person would purchase a $20 million 10-pay whole life insurance policy with a premium of $485,900 for 10 years, that policy would be paid up on a guaranteed basis, and based upon current dividends (not guaranteed), would grow to over $22M in death benefits by age 86. Letting those non-guaranteed dividends buy more insurance is generally a wise decision when estate planning because the estates will usually be increasing. Also, if the individual decides they no longer wanted the policy, the cash value at age 86 would be $18,879,357 which equates to a rate of return of 4.38% which includes dividends that are not guaranteed.

This, in many ways, is the road less traveled, but it works so well when people buy quality life insurance. I share this blog with you because sometimes things aren’t what they seem to be and the higher quality, cash value life insurance policies may be a better way to go.

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS. Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

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