Life Insurance To Cover Future Taxes
In those jurisdictions where life insurance proceeds are only tax free at death, tax liabilities that come due at death are often offset by a policy of the same size. Since the mathematics required to compare different strategies is quite complex, most consumers defer to an accountant or life insurance agent for advice. However, there is often vast differences of opinion between these professionals, even given the same starting conditions. This should not be surprising, given the huge future differences that even small variances in starting conditions can make.
For example, assume that an individual is likely to owe $100,000.00 in taxes at death. If a permanent life insurance policy with a $100,000.00 death benefit costs $1,000 per year (remaining level for life), and the life expectancy of the person is 30 years, then the following events could occur.
- The individual could die early. In this case, it is unlikely that any alternative investment of the $1000 per year would have yielded the required $100,000.00 at death.
- The individual could live much longer than expected. The individual could have built up a significant cash value within the policy, depending on investment selection. As such, the individual would have access to these cash values tax-free regardless of growth, provided it is set up properly.
Since one normally does not know which of these will occur (see adverse selection) calculations must be based on expected life expectancies for people of similar gender, physical condition, and behaviour.
Read more about this topic: Life Insurance Tax Shelter
Famous quotes containing the words life, insurance, cover, future and/or taxes:
“And we wept that one so lovely should have a life so brief;”
—William Cullen Bryant (1794–1878)
“Women hock their jewels and their husbands’ insurance policies to acquire an unaccustomed shade in hair or crêpe de chine. Why then is it that when anyone commits anything novel in the arts he should be always greeted by this same peevish howl of pain and surprise? One is led to suspect that the interest people show in these much talked of commodities, painting, music, and writing, cannot be very deep or very genuine when they so wince under an unexpected impact.”
—John Dos Passos (1896–1970)
“Between us, we cover all knowledge; he knows all that can be known and I know the rest.”
—Mark Twain [Samuel Langhorne Clemens] (1835–1910)
“I imagine, on the benches of an assembly, the most intrepid of thinkers, a brilliant mind, one of those men who, when they ascend the tribune, feel it beneath them like the tripod of the oracle, suddenly grow in stature and become colossal, surpass by a head the massive appearances that mask reality, and see clearly the future over the high, frowning wall of the present.”
—Victor Hugo (1802–1885)
“The law before us, my lords, seems to be the effect of that practice of which it is intended likewise to be the cause, and to be dictated by the liquor of which it so effectually promotes the use; for surely it never before was conceived by any man entrusted with the administration of public affairs, to raise taxes by the destruction of the people.”
—Philip Dormer Stanhope, 4th Earl Chesterfield (1694–1773)