Deciding what assets to pass to your children and grandchildren can be complicated. That’s because when it comes to transferring wealth, all assets aren’t equal. Different assets are subject to different costs and problems when they are transferred. Some assets are illiquid or can lose value because of taxes, transfer costs, commissions or management fees. Other assets fluctuate in value; what they are worth can go up and down with changes in the marketplace. It can be very difficult to know how much your assets will be worth when they are passed to other family members. People who want to transfer their hard-earned wealth efficiently need to take a close look at their assets and analyze how much net value they are likely to pass on. Life insurance is an asset that can efficiently transfer wealth within a family. Well-to-do families often use life insurance as part of their wealth transfer planning because it has a unique combination of potential advantages:
1. Predictable Value – The policy may be structured to pay a known death benefit amount when the insured dies.
2. Value Not Directly Linked To Market Performance – The policy may be structured so that the death benefit may not directly depend on financial market performance.
3. Liquidity – The death benefits are automatically paid in cash; generally no income taxes, transfer costs, commissions or management fees are subtracted from the death benefit.
4. Growth/Leverage – Premiums paid for death benefit protection can provide significant leverage in the early years and a competitive rate of return through life expectancy.
5. Income Tax-Free Payment – Policy death benefits (including the amount in excess of premiums paid) are generally income tax free under IRC Section 101.
6. Easily Divisible – Death benefits can be easily divided among several beneficiaries; through the beneficiary designation the policy owner directs how the proceeds should be distributed.
7. Avoids Probate – Death benefits are paid directly to the beneficiaries without the costs and delays that often impact assets distributed through the probate court system.
8. May Avoid Estate Taxes – Ownership of the policy may be structured so that the death benefits will not be subject to federal estate taxes as part of the insured’s taxable estate.
9. Subject To Government Oversight – All life insurance policies offered for sale as well as the insurance companies and representatives who sell them must satisfy state standards.
Each of these advantages is valuable by itself. The ability of life insurance to deliver ALL these advantages makes it an effective wealth transfer tool. Wealth transfer planning is something you do for those you love. Life insurance may be able to help you do it even better.