Protect Assets Strategy

Life insurance can be a key element of an effective strategy for protecting assets by eliminating estate taxes. But for this protect assets strategy to work, one must be knowlegeable about the kind of life insurance that is effective in employing this strategy.

Term Life Insurance Policies

These popular policies are intended to pay at face value if the policy holder dies within the period of coverage. Premiums can be fixed for 10-20 years and sometimes can be renewed, with new premiums set by the company at that time. For example, a 20-year policy for $2 million might cost $10,000 per year at age 45. Depending on the policy, you may have the right to renew for another 10 or 15 years, but the premium will be reset by the insurer based on your new age. At 65 or 70, the annual premium might increase to several hundred thousand dollars per year. So at a time when the insured’s income is decreasing, the cost of the term insurance has increased so much as to make it virtually impossible to retain. Term life insurance is low cost because the actuarial tables indicate that few people die during the term of this type of policy. And few can afford to renew a term policy as they get older and really need the policy either to replace income if they died or to protect assets.

Term policies have one important and specific purpose: to replace lost income from a premature death. If you should die before your anticipated retirement date, how much insurance would be necessary to replace for your spouse and children all or a portion of your lost income? If the answer is “a lot,” you are probably a good candidate for term insurance—. It offers the most insurance for relatively low premiums. Term insurance effectively covers the risk of lost income for a set number of years, but it doesn’’t build or protect wealth for the future. If one is in a position in which he has a business that will increase in value and he needs a
source of funds to pay estate taxes without selling the business, then term life is probably not the strategy that will protect assets. Often when someone is young he purchases this type of policy because the agent recommended it and doesn’t look too closely at the details or think about the asset protection aspect of insurance.

Permanent Life Policies as an Asset Protection Strategy

Because your current term policy probably will be insufficient if you anticipate paying sizeable estate taxes or you want to leave money to your family, you’’ll probably need a “permanent” life insurance policy that lasts for your lifetime. There are many varieties of these policies, but they are often described as “Whole Life” or “Universal Life.” In addition to paying the specified death benefit, these policies also work like savings
accounts, building cash value that you can borrow against or redeem. They also get a big tax break because the earnings on the savings are not subject to income tax at any time. That may be an amazingly good asset protection strategy but it’s one that few people understand.

Another advantage of permanent life policies is their usefulness in wealth accumulation. Since they work like a savings account, the funds that have accumulated in them can be borrowed more easily than borrowing against the equity in your home or getting a loan from a bank. As the insured pays that loan back to his policy, he is free to pay it with interest, thus garnering the interest from his own “loan” and accumulating cash value in his policy.

Conclusion

Term policies and permanent policies meet important but different financial needs and are useful for different asset protection goals. Term life insurance efficiently and inexpensively protects against the risk of lost income for a specific number of years. Permanent policies are designed to last for a lifetime; they
effectively guarantee that a specified amount of wealth is accumulated for whatever family, charitable, or estate tax needs you might consider. The caveat is that there are huge differences in benefits and costs among all of the available plans. You owe it to yourself to talk to knowledgeable advisors about the real benefits and costs of any insurance plan you are considering.