How To Manage Life Insurance Assets
Life Insurance provides cash at the death of a loved one that can protect a family's or business's assets. At death, lenders often demand payment in full of outstanding loans. Without the income of the deceased, payments on mortgages and other obligations are unable to be met without liquidating other assets. Families may lose their homes or other investments because life insurance proceeds were not available. Even wealthy people with substantial assets can be affected. That's why it's imperative to learn how to manage life insurance assets.
For example, an individual died who essentially had "all of his eggs in one basket". He owned an office building worth $10 million that generated $800,000 in rents annually. He owned the building free and clear. Estate tax rates at that point were as high as 55% on an estate of this size after an exemption of $1,000,000. This individual had a "cost basis" in his property of $1 million. How would this be handled?
The estate tax of $4,500,000 was due 9 months following death. The family had no alternative but to sell the building to pay the taxes. The market was a little soft so they could only quickly sell the property for $9 million on which they had selling and escrow expenses of $500,000. Capital Gains taxes at the time were 28%, so, in addition to the $4.5 million in estate tax and the $500,000 of expenses, the family had to pay $2.1 million of capital gains tax to the IRS ($8.5 million net sales proceeds less $1 million basis = $7.5 million times 28%) and $690,000 to the State of California ($7.5 million times 9.2%).
Let's summarize:
A $10 million asset producing $800,000 of annual income was reduced to $1,210,000 ($9 million sales price less $500,000 expenses, less $4.5 million estate tax, less $2.1 million capital gains tax, less $690,000 state income tax). Interestingly, this individual opted not to buy a $5 million universal life insurance policy that was guaranteed for life by the payment of a 10 year premium of $50,000 per year to protect this asset. This would have reduced his property income from $800,000 to $750,000. While that's a lot of premium, $500,000 over the 10 years is far less than the actual cost of $8,790,000 to the heirs (he died in what would have been the third year of the policy, so the actual cost would have been less than $150,000).
This was absolutely devastating to his family. Would you invest $500,000 to guarantee an $8,790,000 savings to your loved ones? How about a few dollars so your family doesn't lose its home or business? The purchase of term life insurance, universal life insurance or whole life insurance will enable your family to protect their assets in the event of your death.
