By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate Planning Attorney
Recently a life insurance agent suggested to my 63 year old client that he purchase a single premium $300,000 face value life insurance policy for $150,000 for his kids and grandkids (a sort of guaranteed inheritance). The question raised to me was whether it was a good or bad investment (i.e. nearly doubling one’s money, for someone who truly wants to give some money to his/her kids when he or she dies, whether or not he or she dies young or lives long).
My reaction was mixed. Yes the plan guarantees an inheritance of $300,000, and if he dies a young man his estate will have $300,000 upon his death. However, he’s also guaranteeing that he’ll only have $300,000 and not one cent more upon his death. The IRS’ tables say that a person age 63 has a life expectancy of 23.5 years. If he lives 23.5 years and earns 5% a year on $150,000, he’ll have $472,106. If he lives more than 23.5 years or he earns more than 5%, he’ll have more than $472,106. He’s paying a substantial price to guarantee that he won’t have less than $300,000 at his death.
Life insurance is primarily to insure against the risk of dying substantially before life expectancy, and your family suffering a financial hardship as a result of your death. It’s generally not an investment. The insurance company collects the premiums, invests the money (mainly in bonds), and pays out the money, less their expenses (which are substantial) to the beneficiaries. Indeed, in this case, if he’s retired, his children will be better off financially if he dies sooner rather than later, since his living expenses will end and they’ll get their inheritance sooner.
If he wants to give away $150,000 he can simply give his children $150,000 now or perhaps over several years and let them invest it carefully.
To discuss your NJ Estate Planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at email@example.com. Please ask us about our video conferencing consultations if you are unable to come to our office.