Welcome to another installment of "Tell that to your Claims Adjuster," a weekly column that offers insurance advice from a man with more insurance war stories than he cares to admit. Yes, friends, hopefully my tales of woe will help you avoid the many insurance pitfalls I encountered as a swashbuckling yet ill-advised youth. In this week's column, I'm going to tell you an extraordinary story about life insurance and tax breaks. Life Insurance Saved Education
It just so happens that I have a buddy whose grandfather started a system of colleges in the South. This man, named Henry, erected his first school in the early part of this century. The school soon filled to capacity, prompting Henry to build another similar school in a nearby community. That second school fared as well as the first, prompting Henry to build even more of them. Today, there are five schools in total worth millions of dollars. Henry is now retired, and his sons are running the schools.
As many men do after retirement, Henry recently sat down with an estate planner to discuss his will. Upon his death, he wanted to pass the ownership of these schools to his sons. What he learned was devastating. The schools were worth so much that the taxes associated with transferring ownership would amount to approximately $100 million. Since much of the family's money was tied up in these schools, it would have been impossible for either Henry or his sons to pay that amount in taxes.
Henry's real estate planner came up with an answer. If Henry took out a life insurance policy equal to the amount needed to be paid in taxes to transfer the property to his sons upon his death, his family could come up with the money without having to sell any assets. This idea sounded great to both Henry and his sons, so they took the plunge. Although their monthly premiums are probably worth more than my soul, they will end up saving a lot of money in the long run.
A Life Insurance Policy Doubles as a great Tax Umbrella
Now regular readers know that I'm a bit obsessed with finding cheap insurance deals, and I really like passing this knowledge to all of my fellow cheapskates out there. Henry's story is definitely not about cheap insurance, but it does prove a point. There can be times when buying life insurance will save you lots of money in taxes. Those of us with miniscule estates and tiny little nest eggs can also benefit by investing in life insurance?even if we don't plan on dying anytime soon. A life insurance policy, when used as an investment tool, can help you avoid paying capital gains taxes, which run extremely high. Instead of investing in a financial product that pays straight interest and has to be reported to the IRS, you can put your money into a life insurance policy designed to eventually pay out similar returns. These returns are not considered capital gains, however, so they end up being worth a lot more through tax savings.
Finding the Right Policy - Look Online
So there you have it-life insurance can be a good idea for the fabulously wealthy and also for the rest of us. If you think it may be a good idea for you, start looking around at a few different policy offerings. These days, most of the major life insurance companies explain their products online, so you can compare rates and premiums from the comfort of your own home-or if you're Henry, you can tell your butler to do it for you.
About the Author
Kirk Bangstad is an artist, manager, and singer working in Chicago, IL. His previous experience includes consulting for technology companies in the Silicon Valley and serving as a field director and publicist for a statewide political campaign. Kirk holds a B.A. in government from Harvard University.
