Mitigating Inheritance Losses

Steve Spector, Managing Director of Risk Management Services   email | bio
June 2009

Many seniors have set aside inheritance funds for their heirs in bank certificates of deposit (CDs), stocks, bonds and other financial vehicles. Often this money yields small returns and becomes taxable at death or transfer to heirs. In addition, a portion of their inheritance is distributed to “unwanted heirs” including: federal estate taxes, state inheritance taxes and estate administrative costs. Life insurance is one way to mitigate this problem.

For example: An 80-year old male, non-smoker, rated in the standard health class has $100,000 sitting in an interest bearing CD that he wants to leave his grandchild as an inheritance. Assuming the CD is paying 4.07 percent of interest, the senior would have a potential total investment of $122,567, minus costs incurred upon transfer or death.

With life insurance the same client can put his $100,000 into a single-pay permanent policy and instantly have a death benefit of over $130,000 (depending on the insurer). Additionally, since it is a life policy, the payout to his heirs would not be taxable, and the death benefit may grow as the account value grows.

With the average life expectancy continuing to increase as people live longer, the need for life insurance in the senior market is continuing to grow as well. Seniors with nest eggs set aside for heirs in non-insurance investments may benefit by diversifying some money into the vehicle of life insurance.