What are the benefits of Using Life Insurance? 

Before I attended a life insurance seminar 10 years ago that focused on How the Rich Use Insurance To Pass on Wealth to Their Children, I thought life insurance served only one purpose, and that purpose is to leave money for your loved ones, when you pass away, to cover your burial expenses and the balance distributed as stated in your will, or as the executor/court deems fit if no will was left. 

After attending that seminar I learned that a whole life insurance has other benefits when you’re alive or become deceased. These additional benefits include: 

  1. Collateral loans to start a business, make a downpayment for a home/car, buy a whole life insurance for children/grandchildren
  2. Emergency funds
  3. Supplementing retirement income
  4. Leaving funds to pay estate fees and capital gain taxes

The benefit in #4 is the one that I will focus on here.

While real estate investment is one of the best strategies to accumulate wealth and leave a legacy for your loved ones. It is important to be cognizant of the high capital gain tax that real estate can attract when the properties are passed on to your children and grandchildren.

When the investment properties are deem disposed, which is when the last owner dies, any gain on the property since the purchase, is called capital gain. 50% of the capital gain amount will be taxed at the deceased marginal taxed rate which is usually close to the maximum tax amount since it would be like the deceased sold all the properties in the year of death and received all that income at the same time.

For instance, 

Supposed Mr. and Mrs. Smith bought 3 investment properties in joint tenancy for $900K when they were 35 years old. If the properties appreciate 5% per year, on average, and Mr. Smith dies 40 years later, the properties will be worth about $6.4M.

The capital gains at that time would be about $5.5M (6.4M – 900K), but Mrs. Smith would not be required to pay any taxes because the ownership of the properties will automatically passed on to her.

 If Mrs. Smith dies 15 years after Mr. Smith, the properties will be worth about $13.2M if they appreciate at the same rate of 5% per year.

The capital gains at the time of Mrs. Smith’s death will be $12.3M (13.2M – 900K). This means $6.15M (50% of $12.3M) will attract the capital gain tax. 

If Mrs. Smith’s marginal tax rate is 50% — at that high income it will likely be a bit more than 50% — when her final tax is filed, her capital gains tax bill alone will be a whopping $3.075M. 

How many loved ones have $3.075M to hand over to the government?

Mr. and Mrs. Smith’s loved ones will be forced to sell the properties to settle the tax bill.

If the Smiths had a joint last-to-die whole life policy for $3.5M, for instance, the death benefit from the policy when Mrs. Smith passes away would be sufficient to cover the capital gain taxes and then some to cover other expenses or estate taxes. 

This would leave their loved ones to grieve appropriately then decide how they want to deal with the investment propeties when they are in a better frame of mind after grieving their loss. 

So, if real estate is your preferred way for leaving a legacy for your loved ones, perhaps a life insurance policy to cover the capital gain taxes is necessary to prevent your loved ones from being saddled with a hefty tax bill when you die!

The death benefit from a life insurance is taxed free so all the proceeds will go to your loved ones to cover the taxes and more.

This may avoid your loved ones cursing you out, and likely see them appreciating you even more for the legacy that you left for them! 😁