Is this too much for life insurance?

[madoka]

I visited my parents last week and my mom asked if I could take her to the post office, because she wanted to mail off their annual life insurance payment. I told her to just put it in their mailbox, but she said it was a big payment so she wanted to drop it off at the post office. So I asked her how much, and she said $39K.

I asked what it was for, and she said that when both of them die, then it would pay off $4million which should cover any inheritance taxes. They were told by their lawyer to do this.

Never having bought life insurance before, does this amount sound right? They are in their mid-70s and are otherwise healthy.

 

[dullard]

If they put whole life insurance in a irrevocable trust so that the proceeds can be passed on without estate taxes, it seems reasonable. Otherwise, why even bother with life insurance when they and you don't need the money?

 

[preCRT]

The younger you are when buying, the cheaper the premiums.

 

[BoomerD]

At age 70, life insurance is hella expensive...for the obvious reasons.

 

[dasherHampton]

nm

 

[Jeeebus]

That sounds like a whole-life policy that presumably was purchased some years before. I can't see that being a term policy that anyone in their right mind would sell to them in their 70s.

I think I pay somewhere around $3k/year total for 2 term policies totaling $4 million, but I'm much younger than them and would never touch whole life with a 10 foot pole.

 

[Insomniator]

They could each easily live another 15-20 years. That would be $800k paid in life insurance.

I really don't know much about the topic, or your situation but I find it extremely hard to believe that is worth it.

 

[DietDrThunder]

The current Federal estate tax exemption is $11,200,000 for each of your parents, total $22,400,000. So unless your parents live in a State that has it's own estate tax, and have more money than the $22,400.000, then I would wonder about the life insurance as well. Depending on your State laws, I would have thought it would have to be handled in a different manner. For instance, they should have given you that money in an irrevocable trust in which you would then take that money and buy the insurance policy through that trust on your parents. Otherwise the insurance policy will be counted as part of the gross estate and may cause the estate taxes to be even higher.

 

[s0me0nesmind1]

Whatever the hell your parents are doing it's wrong. No matter what they think, either they aren't going to get $4m out of there or they have put substantially more than $4m in it in order for it to pay out that much.

It very much sounds like a whole-life type-ish policy - which are known for absorbent and ridiculous fees.

But most important, your parents missed the entire point of life insurance. Life insurance is there if say - A mom and dad couple has the dad pass away with a baby at the age of 2 Well, dad provided a good sum of the money, so a life insurance policy is meant to supplement the amount of money the mom has in order to make it through life where the kid can self-sustain.

People lose sight of the fact that at the end of the day life insurance (and insurance in general) is there to make a profit and it is there to make a bet of "ohhh, I bet you won't die this year". they do this through tons of calculations and information to determine if you are even worthy of insuring. The same goes for car insurance when an insurance company says "Hmmm, I'm willing to bet $500 you don't have a wreck in the next 6-months" is essentially the same. That is why the ONLY life insurance anyone with half a brain will tell you to get is a term-life policy where it cuts off after 10 or 20 years (or however long you want it to). The entire emphasis is that you get it for however long you need before you feel your family can self-sustain themselves.

If you just want to pass on inheritance then just invest money and let your kids inherit it - I guarantee you will come out more ahead then paying an insurance company.

 

[BoomerD]

But that's not what Jake...from State Farm told them...

 

[brianmanahan]

posting in a OP's mom brag thread

welcome back madoka

 

[DaveSimmons]

Wow, if they are in the US then they could just gift you $15K/year starting now and neither of you would owe any taxes on that money (that's the annual gift tax exclusion). That's in addition to the $5.49 million lifetime federal gift + estate exemption.

I find it hard to believe this is the most cost-effective way to deal with the estate, but I'm not a CPA.

 

[Skunk-Works]

Mail? What about a flipping wire transfer or auto deduction from an account?

 

[DietDrThunder]

Wow, if they are in the US then they could just gift you $15K/year starting now and neither of you would owe any taxes on that money (that's the annual gift tax exclusion). That's in addition to the $5.49 million lifetime federal gift + estate exemption.

I find it hard to believe this is the most cost-effective way to deal with the estate, but I'm not a CPA.

Dave, the federal estate tax exemption went from $5:49 million for each parent in 2017 to $11.2 million for each parent since January 1st of 2018.

 

[madoka]

If they put whole life insurance in a irrevocable trust so that the proceeds can be passed on without estate taxes, it seems reasonable.

I don't know what they've done. I'll ask them if it's a trust next time I see them.

The current Federal estate tax exemption is $11,200,000 for each of your parents, total $22,400,000. So unless your parents live in a State that has it's own estate tax, and have more money than the $22,400.000, then I would wonder about the life insurance as well. Depending on your State laws, I would have thought it would have to be handled in a different manner. For instance, they should have given you that money in an irrevocable trust in which you would then take that money and buy the insurance policy through that trust on your parents. Otherwise the insurance policy will be counted as part of the gross estate and may cause the estate taxes to be even higher.

FWIW, we live in CA. I know that they have a bunch of property that exceeds the $22.4million limit. I'll ask them about buying insurance through the trust.

Whatever the hell your parents are doing it's wrong. No matter what they think, either they aren't going to get $4m out of there or they have put substantially more than $4m in it in order for it to pay out that much.

It very much sounds like a whole-life type-ish policy - which are known for absorbent and ridiculous fees.

I'll admit, my family and I are not financially savvy people. I looked up the difference between term and whole life insurance, and it seems that the whole life insurance is appropriate for their goal of taking care of the estate tax:

https://www.nerdwallet.com/blog/insurance/what-is-the-difference-between-term-whole-life-insurance/

• You want to provide money for your heirs to pay estate taxes. In 2017, estates worth more than $5.49 million per individual and $10.98 million per couple are subject to federal estate taxes. State estate taxes vary. Here’s a map of state estate and inheritance taxes from the Tax Foundation.

• Without a life insurance payout, your heirs might be forced to sell off parts of the estate, such as heirlooms or property, to pay the tax bill.

Is that wrong?

 

[madoka]

If you just want to pass on inheritance then just invest money and let your kids inherit it - I guarantee you will come out more ahead then paying an insurance company.

My parents (and I) don't know how to invest. We've never done it; we are not financially knowledgable enough. The only thing they know to do is buy land, and to be fair, it's worked out well for them. The last major property they bought for $2million, and then sold it to a development company for $10mill. Then they took that $10mill and bought 20 acres of undeveloped beachfront property which my dad feels will be worth $40-50mill by the time he passes. All their money is tied up in land and they have very little liquid cash, so they live like misers.

 

[Skunk-Works]

Can I has at least $800 for a Mavic Pro drone please? I don't think it will kill you. LOL!

I's poor, yo!

Sure must be nice to have kiss my ass money. One day, ONE DAMN DAY I'll win the lotto.

 

[dullard]

My parents (and I) don't know how to invest. We've never done it; we are not financially knowledgable enough. The only thing they know to do is buy land, and to be fair, it's worked out well for them. The last major property they bought for $2million, and then sold it to a development company for $10mill. Then they took that $10mill and bought 20 acres of undeveloped beachfront property which my dad feels will be worth $40-50mill by the time he passes. All their money is tied up in land and they have very little liquid cash, so they live like misers.

I disagree that your family doesn’t know how to invest. They have invested in land!

You are correct about one major problem with real estate investing is that it leaves you wealthy but cash poor. The bigger issue that I have is they are putting all their eggs in one basket. If land values crash, then they will have nothing but some grains of sand and a pretty view. Living your whole life as a miserly pauper to have a good view is not a great tradeoff. Public beaches are free and private beaches are cheap if you are willing to travel. They could both live great and have that sandy beach view.

You don’t need to know much at all to invest. Do as Warren Buffet recommends – buy an index fund and forget about it. You didn’t mention any timelines, so I’ll just guess. If your parents had put $2 million into an S&P tracking fund that reinvests dividends in 1978 and had a terrible fund manager with 2% annual fees, then they’d have $90 million right now. Or, going with Vanguards 0.04% fee for VIMAX, their $2 million would now be worth $161 million. That is it, buy one fund and forget about it. There are other similar S&P tracking funds or even whole world tracking funds that are equally good, which one they pick isn’t important (as long as you avoid high fees), just investing is what is important.

If they buy a stock fund and forget about it until you inherit it, then remember that inherited stock gains are income tax free. There will be estate taxes on the gains, but no income taxes. Then you can immediately sell some inherited stock (income tax free) to pay any estate taxes on the property.

Investing really can be that simple. Buy one thing in a few minutes of time and you are done.

 

[tynopik]

my understanding is that life insurance isn't subject to probate or tax, so you can get all the money immediately and use that pay anything that comes up without being forced to sell off any land

 

[DietDrThunder]

my understanding is that life insurance isn't subject to probate or tax, so you can get all the money immediately and use that pay anything that comes up without being forced to sell off any land

I just took a 12 hour wills/estates/probate planning class at TCU tought by a estate planning lawyer, but I am no expert. Rules are different state by state, especially Louisiana, but the life insurance needs to have a designated beneficiary other than one of your parents so as not to be counted towards the gross estate. In one scenario where there was land values higher than the federal estate exemption, one alternative was to make an unrevokabe trust with all the children as trustees, then have the policy taken out on the parents and the premium paid for out of that trust. There were other ways to handle this situation, but I’ll have to look for my notes. I will never be in this situation, so I wasn’t too worried about it.

Things get really tricky when there are two or more siblings involved that inherit the same property, and one of them wants to sell for the money and the other doesn’t. Are you going to have enough money to buy them out of their share? If no one wants to sell, will everyone have enough money to pay their portion of the property taxes?

Unless all the siblings are totally thrilled with inherenting the property, things might be better if your parents sold the property, then moved to state with no estate taxes.

 

[Darwin333]

I'd highly recommend that they get an estate lawyer to walk them through a plan. I'm not really sure how it works but if they truly think that property will be worth 5X as much when they pass it would be beneficial to transfer as much as they can to you before it appreciates in price. Maybe they can put it in a trust and then transfer a percentage of that below every year that is right at the yearly gift limit? Like I said, not sure how it works but that is why you need an estate lawyer.

Edit: There are plenty of legal "loopholes" for avoiding a decent amount of the estate tax but per the spirit of the law you'd owe over $10M in estate taxes on the beach property alone so $4M won't even begin to cover it.

 

[DaveSimmons]

I'd highly recommend that they get an estate lawyer to walk them through a plan. I'm not really sure how it works but if they truly think that property will be worth 5X as much when they pass it would be beneficial to transfer as much as they can to you before it appreciates in price. Maybe they can put it in a trust and then transfer a percentage of that below every year that is right at the yearly gift limit? Like I said, not sure how it works but that is why you need an estate lawyer.

Edit: There are plenty of legal "loopholes" for avoiding a decent amount of the estate tax but per the spirit of the law you'd owe over $10M in estate taxes on the beach property alone so $4M won't even begin to cover it.

Yes, it does sound like having all of the estate tied up in land is going to be a problem. like dullard said there are fairly safe stock investments (S&P 500 index fund) that don't require hiring an investment manager and paying them 1% to make bad choices. It might also make sense to start selling some properties and converting to something even safer like bonds, CDs, or bond index funds. With bonds / CDs / index fund / ETF shares you can sell just enough to cover the estate taxes, and they are also easy to split up between several heirs.

The parents could also take some of the money and have fun with it, though I'm bad about that myself.

But again, I'm not a CPA or estate planner, just someone who's been investing for awhile.

 

[madoka]

Mail? What about a flipping wire transfer or auto deduction from an account?

They're in their mid-70s. Those concepts would take me a couple hours to explain. Just easier to let them mail checks out.

Sure must be nice to have kiss my ass money. One day, ONE DAMN DAY I'll win the lotto.

I'm never going to know what's it's like to have that kind of money. By the time I inherit it, I'll also be too old to benefit from it in any meaningful way. I'll just pass it on to my kids or grandkids. So it'll only ever be on paper. I might as well inherit an uber vorpal sword in a video game.

 

[madoka]

Things get really tricky when there are two or more siblings involved that inherit the same property, and one of them wants to sell for the money and the other doesn’t. Are you going to have enough money to buy them out of their share? If no one wants to sell, will everyone have enough money to pay their portion of the property taxes?

Yeah, they made some sort of trust between me and my two siblings giving us the beachfront property a few years ago. At first, I thought that was their way of making us pay all the property taxes on it, but they have been taking care of it so far. Outside of tax season, I honestly don't ever think about it, never visited it, and just don't care about it.

You're right though. At least one of my siblings won't be able to pay the property taxes on their share. I don't know what we'd do at that point.

I'd highly recommend that they get an estate lawyer to walk them through a plan.

I think that this is what their estate lawyer told them to do. I'm just checking to see if they got good advice because I was shocked at how much they are paying for that insurance.

 

[Schfifty Five]

But that's not what Jake...from State Farm told them...

You mean "Jake" who wears khaki's pants?