Facts of life: Creative uses for life insurance

Life insurance protects our loved ones from financial disaster should a family lose a breadwinner due to premature death. In fact, insurance often is an essential part of your financial planning, perhaps far more important than investing.

However, there are other innovative uses that can make life insurance a low-cost solution to certain financial problems. Author Paul Grimes writes about some of those in his excellent book, The Facts of Life – How to Build Wealth and Protect Your Assets With Life Insurance.

Many people dislike life insurance. They don’t understand it, they hate pushy agents and they’re annoyed at paying for something that may never payout.

However, life insurance is often the only feasible solution to financial problems. If you’re in your 30s and earning a six-figure income, there is no more effective way to protect your spouse and kids who rely on your income.

Let’s say you’re in your 70s and have a family cabin worth $400,000. You want to leave it to your children who spent many summers there (and now the grandkids are regularly enjoying the property). The problem is you paid $50,000 and the capital gain on your death would be huge, perhaps forcing your kids to sell the property to pay the taxes.

A joint last-to-die (JLTD) insurance policy would cover the capital gains taxes on that cabin. Because this type of insurance pays out only on the second death – when it’s really needed – it’s inexpensive. “With the death of the second spouse,” Grimes writes, “the policy pays out the death benefit to the kids, who use the money to pay the capital gains taxes. And – voila – the cottage stays in the family, and one child is not forced to go into debt or sell his or her share.”

JLTD insurance can also provide a useful solution for people who are self-insured against the death of one spouse, but not both. Imagine that you and your partner earn high incomes and can maintain the family’s lifestyle in the event of the death of the other. You don’t need insurance, right? Hold on. Do you have enough savings to provide for your children in the event of both deaths?

“If both spouses die, then those kids could be in a lot of trouble,” Grimes writes. “That’s a great use for joint last-to-die policies.”

JLTD insurance generally costs less than the death benefit. “For pricing purposes,” Grimes explains, “the insurance company converts the ages of the two people into the equivalent single-life age. A 68-year-old man and a 65-year-old woman, both non-smokers, might be insured for the price of a 54-year-old….You’d almost always pay less in premiums than you would get in benefits.”

Imagine that you and your spouse take a $200,000 JLTD policy. Let’s say the premiums are $4,000 per year and the second death occurs in 20 years. You’ve paid $80,000, and your estate collects $200,000. The $120,000 gain represents a tax-free return of about 8.8 percent for your beneficiaries.

If you can’t afford the cost, your children may want to purchase it in your lives. This can be a great strategy for protecting that cabin for your family.

Your insurance advisor can do a needs analysis to determine if you should buy this insurance – and the cost.

Depending on your financial and life priorities, life insurance may be one of the best investments you’ll ever make. Joint last-to-die life insurance has some interesting uses.

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