A common misconception is that Cash Value life insurance makes great sense at least for estate planning for higher net worth individuals. Well, when people talk about estate planning, they are really just talking about tax planning or sheltering their money from taxes. For example, if you have a net worth of $10 million, when you and your spouse dies, and you have children and heirs who you are leaving the money to, you may have to pay around 50% in estate taxes to the government – or $5 million. So, for estate taxes, you would have to buy a $5 million life insurance policy that would pay the taxes and leave your family with the full $10 million. That is the reason for buying insurance for estate taxes.
Rule of 72, the variable annuity has doubled in 9 years working at 8%. So, you already have over $5 million in the variable annuity. Then when the wife dies, her $2.5 million goes into the variable annuity also. Now they have over $7.5 million in the variable annuity that can be used to pay the taxes and now the family can get the full $10 million. And the variable annuity is tax deferred or sheltered from taxes, just like a variable life insurance policy, so why would you get a variable life insurance policy?
The reason cash value agents don’t even suggest the Term solution is because they won’t make as much money. If you sell $2.5 million worth of life insurance, it is 4-5 times more expensive to buy Cash Value for the same amount. Let’s say it is $10,000/yr. for the Term, it may be $100,000/yr. for the Cash Value and the agent gets paid on the first year of premium. If he has a 100% contract, he either makes $10,000 or he makes $100,000 – Which one do you think he is going to sell?
So, even for high net worth people, Cash Value life insurance still doesn’t make any sense!
Cash Value never ever, ever, ever makes sense under any circumstances!
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