Life Insurance and Protecting Your Heirs: Yes, They’re Both Worth It

Life Insurance and Protecting Your Heirs: Yes, They’re Both Worth It

There’s a famous old advertisement for gentlemen’s clothes out of the 1930s, often reprinted for its bona fide weirdness, that launches with this inimitable line: “Panty-waist stuff burns me.”

Say that today and get ready for perplexity.

Proud in his grey flannels, unconcerned that his cigar is making the whole office reek, the ‘chief’ glares at the audience with a pen-and-ink stare. It’s like he’s challenging us to ask him what the heck he’s on about.

The chief is clearly a financier: there’s no mistaking the type. We’re more liberated today, but his disinterest in sentiment remains front and center in our business. We try to understand our clients in all their humanity and curiously, that makes us cooler still, because we know they depend on us. They aren’t numbers; we’re talking about families, children, legacies that span generations. It’s the responsibility that keeps us up at night.

We aren’t sentimental in our business, with the exception of our kids – dogs and cats may qualify. But in the life insurance realm, our product comes laden with exceptional emotionality. Mention it and the dread topic is raised: mortality. A pressing responsibility rests in our hands. Yes, we tell our clients, we need to talk about it. Your heirs will assuredly suffer, we warn, if you don’t have coverage. Everyone needs it – middle-class families vitally so, but perhaps surprisingly, the wealthy may be in even greater need.

High-net-worth clients can get lost in the estate planning forest. Their advisors construct plans of Gordian complexity, correctly no doubt, but with a troublesome side effect: the basics slip from view. Life insurance remains one of the sharpest tools in the planner’s shed. Why is it so commonly forgotten?

In truth, this regrettable trend is shifting. Leaving securities to heirs means capital gains taxes. Real estate is the thorniest of thickets. Heirlooms and artworks lead to lawsuits that can tear up once-loving families. Not so with a death benefit: the assigned sum goes to the beneficiary, no fuss, tax free. The latter advantage can confound our clients: it sounds too good to be true.

The death benefit can strike clients as morbid, of course, particularly in the US, where a certain delicacy remains in discussing the cold-cash aspects of life. An instructive story might help break the ice. One of our team shared their experience of the 2008 financial meltdown, a personal revelation with a lesson to teach. The crisis nearly finished Alicia: job lost, investments crippled, marriage ruined. It was as precipitous a drop from the penthouse to the poorhouse (in fact, a decrepit wreck on the Upper East Side of Manhattan, of all places). She almost went under.

In the nick of time – it might have been cinematic, if not so tragic – the life insurance settlement following her mother’s death arrived in her account. That money allowed Alicia to relocate to another country, claw back into her career and return to what earthlings call a normal life, eternally perched, as we are, on the precipice.

Perhaps we dismissed sentiment too quickly. Alicia came out tougher, naturally, but her heart still beat true. It occurred to her, she told us, that even with her parents dead, they were still taking care of her. They knew she was capable, a professional, now middle aged, hardly a needy lost child. But they knew things can happen, as old folks do – so they just made sure.

“My mother used to call my father the Rock of Gibraltar – out of earshot, she didn’t want him to get an even bigger head,” says Alicia. I observed that the Rock is the great symbol of the insurance industry, provoking a roll of the eyes. I fear not everyone finds our industry so majestic.

HNW individuals with estates valued in excess of the current exemption limit should beware, as their heirs may end up grappling with a sizeable estate tax bill. A life policy can be purchased specifically to cover the estimated future bill, a simple move that has saved estates from dismantlement to pay taxes.

Major estates facing future tax liabilities should consider the added value that comes from buying substantial life policies. Every dollar spent on life insurance draws down the estate’s value, while the eventual payout is tax free to recipients. This strategy works particularly well for estates near the exemption limit, as it can take them under the line, but real tax savings can be earned at any level.

Business partners operating under buy-and-sell agreements commonly take out life policies on one another – in the world of film noir this leads to many a plot twist, but in three dimensions and color, it obviates real agony. Partner A passes away; partners B and C receive life insurance payouts sufficient to purchase A’s shares; business resumes as normal without unwanted heirs suddenly appearing in the boardroom, full of ideas. There’s a whole library of films based on this scenario, too, and it happens often enough in real life, where you can forget the happy ending.

Clients can be pleasantly surprised to find they can own more than one life insurance policy and still enjoy the tax and planning advantages. Some of them – and we find this among sophisticated customers – even worry that they’re somehow cheating in doing so. One more time, it sounds too good.

Nonsense. You may not be able to cheat the Reaper, we counsel – mind you, we don’t mention his name – but the tax man, despite his reputation, has vulnerabilities. Tax authorities play rough and when taking them on in that eternal duel, we see no need for sentiment.

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