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Author: dwalsh48 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 17919  
Subject: Last to Die Insurance Date: 4/5/2001 11:31 AM
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I have a salesman suggesting that I puchase Last to Die insurance for estate planning purposes. My estate will be somewhere in the 5 Mill. range. His logic is to use the insuranse to pay the taxes. Would I be better off investing the premiums in stocks.
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6074 of 17919
Subject: Re: Last to Die Insurance Date: 4/5/2001 11:51 AM
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dwalsh48 asks,

I have a salesman suggesting that I puchase Last to Die insurance for estate planning purposes. My estate will be somewhere in the 5 Mill. range. His logic is to use the insuranse to pay the taxes. Would I be better off investing the premiums in stocks.

That's what I found in my case. If I lived past age 84, using life insurance to avoid estate taxes actually DECREASED what was left to my heirs. The longer you live, the better off you are just continuing to let your portfolio grow and then just pay the estate taxes out of the much larger portfolio balance.

Of course, the younger you die, and the less you pay in premiums, the better life insurance looks.

Also, if Congress passes reductions in the estate tax, that may also lessen or eliminate the need to use life insurance as part of a tax avoidance scheme.

intercst









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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6082 of 17919
Subject: Re: Last to Die Insurance Date: 4/5/2001 1:56 PM
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dwalsh48, you asked:

<< I have a salesman suggesting that I puchase Last to Die insurance for estate planning purposes. My estate will be somewhere in the 5 Mill. range. His logic is to use the insuranse to pay the taxes. Would I be better off investing the premiums in stocks. >>

If you were to invest the premiums in stocks, what makes you think that there would be tax fee amount available to pay the estate tax (just look at current market conditions)? My point is, YES . . . it makes a LOT of sense to consider purchasing a Last to Die policy for paying estate taxes . . .IF, you have any interest in preserving as much of your estate as possible for your heirs. This is a VERY common approach to paying the taxes. And, actually it's a purchase done through a ILIT (Irrevocable Life Insurance Trust).

Note, buying such a policy IS NOT estate planning. The “estate planning” comes BEFORE you decide on how much life insurance to buy to pay the estate taxes. There are all kinds of estate planning techniques depending on just what assets you have and what you want done with them. (you might want to take a look at a couple of estate planning books in the personal finance section of your local book store – e.g. The 60 Minute Estate Planning Guide. Also, be sure you're working closely with a good experienced "estate-planning attorney" (not just any attorney). So, while you might consider applying for the life insurance, you might also consider doing some serious estate planning while you wait for the underwriting of the policy to see how much YOUR particular rate is going to be for the insurance. Then, when you have an idea of what you're estate taxes might be, you can then decide on just how much life insurance is appropriate and what it's going to cost.



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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6083 of 17919
Subject: Re: Last to Die Insurance Date: 4/5/2001 2:05 PM
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intercst, you wrote:

<< I have a salesman suggesting that I puchase Last to Die insurance for estate planning purposes. My estate will be somewhere in the 5 Mill. range. His logic is to use the insuranse to pay the taxes. Would I be better off investing the premiums in stocks.

That's what I found in my case. If I lived past age 84, using life insurance to avoid estate taxes actually DECREASED what was left to my heirs. The longer you live, the better off you are just continuing to let your portfolio grow and then just pay the estate taxes out of the much larger portfolio balance.
>>

Boy, I'd like to see proof of that! ;-) The only way I've seen that what you've say is true is when one knows exactly when one is going to die AND know just where the market is going to be at that time of death. Now, if one knows those two things or are willing to make certain assumtions . . .I will whole-heartedly agree with you. VBG




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Author: Biglad Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6087 of 17919
Subject: Re: Last to Die Insurance Date: 4/5/2001 11:49 PM
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Boy, I'd like to see proof of that! ;-) The only way I've seen that what you've say is true is when one knows exactly when one is going to die AND know just where the market is going to be at that time of death. Now, if one knows those two things or are willing to make certain assumtions . . .I will whole-heartedly agree with you. VBG

TT:

I too would like to see the assumptions that were made to determine this outcome.

While I have my own opinion as to what is going to happen to the Estate Tax legislation in the future, I am currently recommending (In certain circumstances) the use of term insurance as an intermediate alternative. Positives include the ability to place inside an ILIT, guaranteed insurability, ability to convert to a 2nd to die survivorship policy, an inexpensive way to wait and see how this whole mess unfolds.

Additionally, IF they do away with the Estate Tax, what will happen to the "step-up in basis"? I believe it may be eliminated too, thereby another reason for tax-free death benefit.

Whaddayathink?

Biglad


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Author: MikeMatheson Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6090 of 17919
Subject: Re: Last to Die Insurance Date: 4/7/2001 2:48 AM
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About using Life Insurance to pay Estate Taxes. What's the downside?

Lemme see ... if they discontinued Estate Taxes, you would leave more money to your children, right? I am assuming that this is a big interest anyway, or we wouldn't be discussing this. Therefore, the kids get more - and that would CERTAINLY be alright with me. Life Insurance creates or enhances intergenerational wealth. You might just want to increase your charitable gifting if this isn't a strong desire.

The upside, however, is huge. Check out www.barrykaye.com for some detail. I can't believe that people are still willing to depend on the stock market. Life Insurance proceeds are GUARANTEED tax-free cash ... right when your estate needs it most. Stocks have been known to fall over 10% in one day. Not much for someone with ten grand - they'd lose a thou, but on five million it's a half million dollar loss! Do you really want to take the risk?

Moreover, I can sell a plan here in Canada (I don't know if you have it in the USA, but I've got American clients who own it) that pays a death benefit consisting of (1) The original amount of Insurance (2) The return of all premiums paid (3) Interest that would have been earned had those premiums been invested elsewhere @ 6%. How could you lose with something like this?

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6091 of 17919
Subject: Re: Last to Die Insurance Date: 4/7/2001 12:12 PM
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MikeMatheson warns,

About using Life Insurance to pay Estate Taxes. What's the downside?

Lemme see ... if they discontinued Estate Taxes, you would leave more money to your children, right? I am assuming that this is a big interest anyway, or we wouldn't be discussing this. Therefore, the kids get more - and that would CERTAINLY be alright with me. Life Insurance creates or enhances intergenerational wealth. You might just want to increase your charitable gifting if this isn't a strong desire.

The upside, however, is huge. Check out www.barrykaye.com for some detail. I can't believe that people are still willing to depend on the stock market. Life Insurance proceeds are GUARANTEED tax-free cash ... right when your estate needs it most. Stocks have been known to fall over 10% in one day. Not much for someone with ten grand - they'd lose a thou, but on five million it's a half million dollar loss! Do you really want to take the risk?

Moreover, I can sell a plan here in Canada (I don't know if you have it in the USA, but I've got American clients who own it) that pays a death benefit consisting of (1) The original amount of Insurance (2) The return of all premiums paid (3) Interest that would have been earned had those premiums been invested elsewhere @ 6%. How could you lose with something like this?


There are few people who invest in the stock market on the basis of a one-day 10% loss (or gain).

Below is the distribution of returns for the S&P500 over the past 130 years for holding periods of 10 to 60 years. Since the WORST 30-year period had a compounded annual return of 5.44% per annum, having an insurance company guarantee me a 6% return doesn't seem terribly persuasive. Of the 100 30-Year holding periods examined, 95 had CAGRs higher than 6.0% per annum. The median return (CAGR) was 9.37% per annum over 30 years.

A $100,000 invested at 6% for 30 years returns $574,349 at the end of the period. A $100,000 at 9.37% returns $1,468,745. Even if I pay estate taxes at a 55% rate, I'm still left with $660,935 of my $1.4 million -- and of course, there's a 50/50 chance I'll have more.

S&P500 Returns (CAGR) (1871-2000 Shiller database)
Percentile/Holding Period
10 Year 20 Year 30 Year 40 Year 50 Year 60 Year
100% 19.08% 17.14% 13.40% 12.03% 13.23% 12.53%
90% 16.11% 14.03% 12.01% 11.48% 11.68% 11.06%
80% 14.62% 11.92% 10.55% 11.16% 10.52% 9.73%
70% 12.81% 10.66% 10.16% 10.48% 10.24% 9.53%
60% 9.60% 8.53% 9.83% 9.96% 9.50% 9.35%
50% 8.33% 7.81% 9.37% 9.14% 8.98% 9.18%
40% 7.32% 7.30% 8.05% 8.27% 8.19% 9.07%
30% 6.28% 7.16% 7.26% 7.40% 7.78% 8.00%
20% 4.75% 6.40% 6.70% 7.00% 7.18% 7.32%
10% 3.61% 5.60% 6.25% 6.43% 6.65% 6.69%
0% -1.23% 3.30% 5.13% 5.44% 5.65% 5.91%

# OF
PERIODS 120 110 100 90 80 70
EXAMINED

intercst


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Author: MikeMatheson Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6092 of 17919
Subject: Re: Last to Die Insurance Date: 4/7/2001 7:16 PM
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Intercst,

First of all, I don't think you read closely enough. The total death benefit consists of :

(1) The Original Sum Assured
(2) The Return of All Premiums Paid
(3) The Interest you WOULD HAVE earned had you invested the premiums elsewhere at an after tax 6%

I agree that six percent isn't terribly impressive - IF we are talking about a simple return on investment. However, we aren't. We are looking at a plan that has this IN ADDITION to the orginal amount of insurance AND getting all the premiums back.

You are also trying to compare a guaranteed death benefit with a fluctuating return on investment. What's more, you are using the past to try and predict the future. The 30 years between 1911 and 1941 are not like the 30 years between 1941 and 1971 , and are FAR different than the 30 years between 1971 and 2001. Between now and 2031? Who knows? I will not be the one to predict that this next 30 years will give us better (or worse) returns than any other time in history.

Investment returns are a funny thing too. If I invested $100,000 a year ago and lost 25%, I'm down to $75,000. I now need to get a 33.33% return to get me back to square one. If I need to make sure I time my death right, then I'm not interested in this type of "planning."

While I am impressed with your ability to find charts and reproduce them here, I don't think you have proven that you can be assured to do better than the guaranteed TAX-FREE benefits available with Life Insurance. There is no better way to handle your estate taxes.

=MPM=

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6093 of 17919
Subject: Re: Last to Die Insurance Date: 4/7/2001 9:19 PM
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MikeMatheson writes,

Intercst,

First of all, I don't think you read closely enough. The total death benefit consists of :

(1) The Original Sum Assured
(2) The Return of All Premiums Paid
(3) The Interest you WOULD HAVE earned had you invested the premiums elsewhere at an after tax 6%

I agree that six percent isn't terribly impressive - IF we are talking about a simple return on investment. However, we aren't. We are looking at a plan that has this IN ADDITION to the orginal amount of insurance AND getting all the premiums back.

While I am impressed with your ability to find charts and reproduce them here, I don't think you have proven that you can be assured to do better than the guaranteed TAX-FREE benefits available with Life Insurance. There is no better way to handle your estate taxes.


I guess it depends on the size of the death benefit and how much of my money the insurance company has tied up at a paltry 6% investment return. Guarantees get pretty expensive when what you're guaranteeing is pretty close to a worst-case investment return.

I agree that life insurance is a wonderful "investment" if you die early or young. It just not that an efficient "investment" vehicle if you live to a ripe old age -- even if it is tax-free.

intercst



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Author: MikeMatheson Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6095 of 17919
Subject: Re: Last to Die Insurance Date: 4/8/2001 7:34 PM
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Intercst, you must be pulling my leg. You seem to keep seeing this as the Insurance company taking your money and giving you a 6% return. Then you go on about Life Insurance being a less than efficient "investment" if one lives too long.

Okay, one more time. On this go 'round, I will spell it out a bit differently.

At one time, some consumers were unsatisfied with their Whole Life policies. They felt that the Insurance company was paying a death benefit but "keeping" the cash value. It seemed that millions of people were being cheated out of the savings they had accumulated over the years. This was far from the truth, but the agents who sell "Term only" had a field day explaining how the former agent had been lying to them. Of course, the Term salesperson was lying by propagating the myth that the Insurers were stealing the savings, but that's another story.

So along came a plan where you could see how much went to the risk charges and how much was being invested. Better still, such plans also had an option to pay a death benefit consisting of the original Sum Assured PLUS the Cash Value. When interest rates were better, you could also get a guaranteed rate of return of 6%.

Now intercst, if this was all that was available, you might say; "Yeah, so what? That's a normal Universal Life policy and I don't like it. You get the death benefit and they pay a paltry six percent on the savings portion. Count me out."

So then I offer a guarantee of the Death Benfit AND the Return of All your Premiums. "Wait a minute ..." some say. "How does the Insurance company do that? There must be a catch. That's like giving you the Insurance for free!" Others, however, were not quite as impressed.

They realized that the Insurance was not free. The Insurer got to use their money for a while and invest it - money which they could invest on their own. So along comes a "Cost Recovery" plan. The Insurer will pay back the premiums PLUS interest on death! Maybe not as much as you could get on your own, but to get 6% after tax here in Canada, you've got to get a pre-tax rate of about 11% - not so easy as a GUARANTEE. And that's what I'm describing.

Think of this intercst : You are offered an investment with a 6% return. Yawn ...

Now I tell you you get Life Insurance along with it. You're going to tell me that's no good? Well what about the policies that DON'T pay back premiums or interest on them? They're better? Chain yanker.

Mike


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6102 of 17919
Subject: Re: Last to Die Insurance Date: 4/9/2001 12:18 PM
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Intercst , you wrote:

<< Since the WORST 30-year period had a compounded annual return of 5.44% per annum, having an insurance company guarantee me a 6% return doesn't seem terribly persuasive. Of the 100 30-Year holding periods examined, 95 had CAGRs higher than 6.0% per annum. The median return (CAGR) was 9.37% per annum over 30 years. >>

OK, if you're not really a person concerned about certain guarantees, then there ARE policies that can give you the same kind of return you're suggesting . . . AND one can invest in the same S&P 500 investments. One would then simply look to variable type of life insurance contracts for it. They would result in MUCH, MUCH better results in order to pay the estate taxes (as I've stated before).

<< A $100,000 invested at 6% for 30 years returns $574,349 at the end of the period. A $100,000 at 9.37% returns $1,468,745. Even if I pay estate taxes at a 55% rate, I'm still left with $660,935 of my $1.4 million -- and of course, there's a 50/50 chance I'll have more. >>

Since you seem to want to ignore the tax issues as well and not use any insurance during the time of this accumulation, let's say you indeed can wind up with $1.4 million when you die in 30 years. With a variable life insurance policy using the same investment and the same return (calculated BEFORE policy expenses), a 35 year old could take that same $100,000 and have a tax free death benefit of $1,955,000 in 30 years. And of course, there's that 50/50 chance one would have more. ;-)

Don't forget that what we're talking about here is having CASH available to pay estate taxes in the most efficient way. In order to get that cash to pay estate taxes, assets must be SOLD. When the assets are sold, income taxes are due and paid on gains (no step up in basis as the step up is for the heirs AFTER all taxes have been paid).

A plan to take pay future estate taxes 30 years from now with a current $100,000 investment in the market IS NOT as effective as doing it through a life insurance policy. If you really think it does due to some analysis you've done, let's see your numbers because the one's you've shown so far are VERY inefficient for this purpose.


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6103 of 17919
Subject: Re: Last to Die Insurance Date: 4/9/2001 12:36 PM
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Intercst, you then wrote:

<< I agree that life insurance is a wonderful "investment" if you die early or young. It just not that an efficient "investment" vehicle if you live to a ripe old age -- even if it is tax-free. >>

Depending on just how one defines “ripe old age” it is true that as one become substantially old (approaching age 90 and more) that life insurance contracts become less and less “efficient” due to the COI (cost of insurance). BUT, there are a lot of variable factors to consider and very few people only have cash and/or liquid assets when they die. Because of this fact, even though life insurance becomes less efficient as one approaches age 100, life insurance can still be more efficient that other alternatives. To find this out, one needs to look VERY close at all the details and doe the analysis on a case by case basis to see what really makes sense. One CAN NOT make a blanket statement and just say that life insurance is “just not that efficient” “if you live to a ripe old age – even it if it is tax-free.”




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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6119 of 17919
Subject: Re: Last to Die Insurance Date: 4/10/2001 2:55 PM
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Additionally, IF they do away with the Estate Tax, what will happen to the "step-up in basis"? I believe it may be eliminated too, thereby another reason for tax-free death benefit.

Why try to avoid "normal" long-term capital gains taxes when you die ?

Can you sell me a policy while I am alive which will pay my long-term capital gains taxes when I sell appreciated shares ?


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6122 of 17919
Subject: Re: Last to Die Insurance Date: 4/10/2001 5:13 PM
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markr33, you asked:

<< Additionally, IF they do away with the Estate Tax, what will happen to the "step-up in basis"? I believe it may be eliminated too, thereby another reason for tax-free death benefit.

Why try to avoid "normal" long-term capital gains taxes when you die ?
>>

One of the primary reasons might be because of the accounting nightmare that is presented when trying to determine just what the basis is on one's deceased great-grandma 's various properties that she has had for 60 or so years when one goes to sell it. If one can't prove the basis then the basis is looked at as zero resulting in a double taxation of the principle amount.

<< Can you sell me a policy while I am alive which will pay my long-term capital gains taxes when I sell appreciated shares? >>

The issue has nothing to do with paying the tax while your still alive. It has to do with preserving the value of the asset(s) when heirs die. While cash type of assets are easily divided at the time of death and may not result in immediate tax issues, other assets ARE NOT easily done so. If they have to be sold so that it an asset can be divided among heirs, then there is the tax at that time that need to be paid and life insurance it a very good and efficient source of cash to help with these kinds of issues. With the elimination of the step up in basis, estate and tax planning won't any longer be for just the upper two percentile. It'll include a great many middle income families.


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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6123 of 17919
Subject: Re: Last to Die Insurance Date: 4/10/2001 10:29 PM
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<< Additionally, IF they do away with the Estate Tax, what will happen to the "step-up in basis"? I believe it may be eliminated too, thereby another reason for tax-free death benefit.

Why try to avoid "normal" long-term capital gains taxes when you die ? >>

One of the primary reasons might be because of the accounting nightmare that is presented when trying to determine just what the basis is on one's deceased great-grandma 's various properties that she has had for 60 or so years when one goes to sell it. If one can't prove the basis then the basis is looked at as zero resulting in a double taxation of the principle amount.


Actually, if you have the year of purchase, you may use the lowest price during that year as the basis. (same for decade, etc...)

If it really is 60 or so years, then the asset is probably worth somewhere on the order of magnitude of 100 times the basis. If that is the case, then what does the life insurance protect ? The 1% additional principal being taxed erroneously ? (Does this mean that for a $10M estate, all in appreciated stocks from 60 years ago, you would recommend a policy in the amount of $100,000 times 39% ??)

<< Can you sell me a policy while I am alive which will pay my long-term capital gains taxes when I sell appreciated shares? >>

The issue has nothing to do with paying the tax while your still alive. It has to do with preserving the value of the asset(s) when heirs die. While cash type of assets are easily divided at the time of death and may not result in immediate tax issues, other assets ARE NOT easily done so. If they have to be sold so that it an asset can be divided among heirs, then there is the tax at that time that need to be paid and life insurance it a very good and efficient source of cash to help with these kinds of issues. With the elimination of the step up in basis, estate and tax planning won't any longer be for just the upper two percentile. It'll include a great many middle income families.


Assuming that capital gains taxes are fair to begin with, there is no reason why they should be escaped simply because the person who owns the assets have died. (just like it isn't fair to tax income/wealth again simply because the owner has died)

The best proposal, in my opinion, is one in which assets pass untaxed to the heirs with the same basis as the original owner. They would only be taxed at the LTCG rate when sold.


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6124 of 17919
Subject: Re: Last to Die Insurance Date: 4/11/2001 12:13 AM
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markr33, you wrote:

<< Assuming that capital gains taxes are fair to begin with, there is no reason why they should be escaped simply because the person who owns the assets have died. (just like it isn't fair to tax income/wealth again simply because the owner has died) >>

You seem to be missing the whole point I was making. Try reading it again . . . ???

<< The best proposal, in my opinion, is one in which assets pass untaxed to the heirs with the same basis as the original owner. They would only be taxed at the LTCG rate when sold. >>

I would agree that this is the most "fair" way of handling things from an idealistic point of view. But it simply isn't practical in a great many if not a great majority of cases. The problem is tracking and maintaining documentation of what the basis was/is. If you've ever dealt with a few seniors and their record keeping and trying to find such documentation (especially documentation that goes back many years), you'd have a good idea of what I mean. It can be an accounting nightmare.



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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6125 of 17919
Subject: Re: Last to Die Insurance Date: 4/11/2001 1:38 AM
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markr33:

<<<<<One of the primary reasons might be because of the accounting nightmare that is presented when trying to determine just what the basis is on one's deceased great-grandma 's various properties that she has had for 60 or so years when one goes to sell it. If one can't prove the basis then the basis is looked at as zero resulting in a double taxation of the principle amount.>>>>>

"Actually, if you have the year of purchase, you may use the lowest price during that year as the basis. (same for decade, etc...)"

Do you any support for that proposition - IRC section or IRS publication or is that just a SWAG?

Curiously, JAFO


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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6128 of 17919
Subject: Re: Last to Die Insurance Date: 4/11/2001 1:14 PM
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<<"Actually, if you have the year of purchase, you may use the lowest price during that year as the basis. (same for decade, etc...)">>

Do you any support for that proposition - IRC section or IRS publication or is that just a SWAG?


If you know (and can prove if audited) that an equity was purchased in 1937 and that equity traded between 10 and 20 during 1937, but you don't know the exact price it was purchased, then there is no reason to use 0 rather than 10 as the basis. I don't have any reference to IRS documentation, maybe one of the experts on this board (or the tax board) has a reference ?


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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6129 of 17919
Subject: Re: Last to Die Insurance Date: 4/11/2001 1:31 PM
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<< Assuming that capital gains taxes are fair to begin with, there is no reason why they should be escaped simply because the person who owns the assets have died. (just like it isn't fair to tax income/wealth again simply because the owner has died) >>

You seem to be missing the whole point I was making. Try reading it again . . . ???


I thought the point was that since the basis information may have been lost, the basis amount will be taxed as well as the gains. To protect against this additional taxation, one should carry a second-to-die life insurance policy. (assuming estate taxes are gone and the step-up is gone as well)

My question is: How much should that policy cover ?

An example: If I have $1M in assets held for 30 years with a basis of $40k, but the records have been lost and this is not known, how much would you suggest the insurance policy be to protect my heirs ?


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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6134 of 17919
Subject: Re: Last to Die Insurance Date: 4/11/2001 6:14 PM
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markr33, you asked:

<< I thought the point was that since the basis information may have been lost, the basis amount will be taxed as well as the gains. To protect against this additional taxation, one should carry a second-to-die life insurance policy. (assuming estate taxes are gone and the step-up is gone as well) >>

A point was that with the elimination of the step-up in basis, there will be much more taxes collected by the government. The elimination of the estate tax and the step-up in basis is really an increase in taxes . . . NOT a reduction.

Then there's the issue of the complexity of the accounting involved in tracking the basis and/or determining just what the basis is. Accountants and attorney's don't do work for free, as a rule, and in addition to increase in taxes paid out, we'd still have the expenses of accounting and legal fees to deal with too.

<< My question is: How much should that policy cover ?

An example: If I have $1M in assets held for 30 years with a basis of $40k, but the records have been lost and this is not known, how much would you suggest the insurance policy be to protect my heirs ?
>>

It DEPENDS on the particular assets one is holding AND just how one wants those assets handled. You need to keep in mind that different people have different ideas as how they want things done when they die. You may not agree or like what they might like to do. But that's each of our privileges. However one might go about things, there will still be issues of estate planning that will need to be addresses - only the rules will be different if such elimination is done.

If this "asset" happens to be a house and one has 4 children (not to mention any plans for grandchildren) each of whom have no need or interest in owning the house but would like to have their share in cash, the home is going to have to be sold so that proceeds can be distributed evenly as expected. One can distribute what's left after taxes when the property is sold . . . or one can use life insurance to pay the taxes resulting in less shrinkage of one's hard earned estate. Such issues are not uncommon today when you look at the many extended families around and trying to balance everything fairly.

Assuming a long term capital gains tax of 20% on such a house valued at $1M with a $40K basis, that would mean might want to at least have $192,000 of life insurance to pay the tax at a COI of whatever the policy costs. But the cost of the policy will be less than paying the tax. And if one also wants to recover the COI (maybe even at a net present value), one can add additional insurance accordingly. As I said, it'll DEPEND on just what one may or may not want to do.


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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6136 of 17919
Subject: Re: Last to Die Insurance Date: 4/12/2001 8:20 AM
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It DEPENDS on the particular assets one is holding AND just how one wants those assets handled. You need to keep in mind that different people have different ideas as how they want things done when they die. You may not agree or like what they might like to do. But that's each of our privileges. However one might go about things, there will still be issues of estate planning that will need to be addresses - only the rules will be different if such elimination is done.

I agree 100% ... I don't need to agree nor do I need to care about how other people plan their estates. All I care about is how I can reduce my tax bite using various methods permitted under current (and future) tax law. Not only do I want to reduce the tax bite, but I want to maximize the overall benefit to my beneficiaries and heirs, preferably with as little complexity as possible.

<<house...>> Assuming a long term capital gains tax of 20% on such a house valued at $1M with a $40K basis, that would mean might want to at least have $192,000 of life insurance to pay the tax at a COI of whatever the policy costs. But the cost of the policy will be less than paying the tax. And if one also wants to recover the COI (maybe even at a net present value), one can add additional insurance accordingly. As I said, it'll DEPEND on just what one may or may not want to do.

I don't understand the bolded sentence above - "But the cost of the policy will be less than paying the tax." If this is really the case, how can the insurance companies produce a profit ??? If they sell lots of these types of policies, assuming the bolded statement is true, there are 2 possibilities:

1. The insurance companies earn a profit on these policies over the average which would mean that the policies are "worth" buying for somewhat less than half the people.

2. The insurance companies don't earn a profit on these types of policies, but rather "subsidize" them using other products. (such as other types of life insurance, or casualty insurance - auto, home, etc...)

I still can't believe that the bolded statement can be generally true. Again, I don't really understand the insurance industry very well, perhaps they have special investments which have higher safe yields than available to anyone else. (as is the case in many other countries, especially for pension and health fund investments)






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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6137 of 17919
Subject: Re: Last to Die Insurance Date: 4/12/2001 12:24 PM
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Warning: Long Post

markr33, you wrote:

<< Not only do I want to reduce the tax bite, but I want to maximize the overall benefit to my beneficiaries and heirs, preferably with as little complexity as possible. >>

Yup, that's what most everyone I know wants. It's just that too often in order to maximize the overall benefit to one's beneficiaries can't be done with “little complexity” thanks to our tax laws. ;-(

<< I don't understand the bolded sentence above - "But the cost of the policy will be less than paying the tax." If this is really the case, how can the insurance companies produce a profit ??? If they sell lots of these types of policies, assuming the bolded statement is true, there are 2 possibilities:

1. The insurance companies earn a profit on these policies over the average which would mean that the policies are "worth" buying for somewhat less than half the people.

2. The insurance companies don't earn a profit on these types of policies, but rather "subsidize" them using other products. (such as other types of life insurance, or casualty insurance - auto, home, etc...)
>>

I'm not an actuary and can not give you detail you seem to be after in order for you to understand at such a detailed level. Be that as it may, I can tell you that the actuaries of insurance companies who work on these details work with the laws of probability concerning LARGE numbers. When they price a product they do take into account things like Loss History, Lapse History, expected investment returns and of course expenses underwriting expenses and other company expenses. And since insurance companies are in the business to make a profit, the actuaries do all this with the idea there being a profit. Actuaries can NOT point to a particular individual and say what an outcome is going to be and any particular time. That's the nature of insurance . . . any kind of insurance.

In your item (1) I feel you're partly on the right track. Since “insurance” in general is based on the principle that risk is SHARED and that not everyone is to collect from their policy, we can know that not “everyone” is going to benefit from their policy except to the extent that they've had the protection if they had needed it. When you look at numbers like . . . . (a) Less than 2% of all term life insurance policies sold paid a death benefit and (b) Less than 7% of permanent (non-term) life insurance policies sold have paid out, then this should help you understand as it relates to your item (1).

The fact that these percentages are so low is NOT a reflection on whether or not a particular life insurance contract can work as expected for any individual. These are just numbers that show how things are working. The percentages deal with LARGE numbers and (as far as I know) include things like those who may lapse a policy as they buy a replacement. These particular percentages really have no bearing as to whether or not a particular policy will be “worth” buying or not for an “individual”.

Perhaps in some ways the principle idea is like the percentages of people who actually make money in the stock market – from an actual end result, there are more people that loose than win. But that doesn't keep people from trying to be on the winning - even though one must know that in the stock market, for every buy there's a sell. huh? ;-)

As for you're item (2), there is SOME so called “subsidizing” as you've suggested. But it is VERY limited way. There are laws, especially concerning maintaining reserves for various types of insurance coverage's as well as laws concerning commingling of such funds. For the most part, the various areas of insurances are kept as separate profit centers and if they can't make a profit, that block of business is sold to some other company . . . which happens quite often.

Note it's each state that determines the laws and regulation by which any insurance company operates in their state. Like any business, insurance companies will operate out of a state that gives them the most advantages. That's why some states have more insurance company home offices and why many insurance companies do not have their products sold in other states.

<< I still can't believe that the bolded statement can be generally true. Again, I don't really understand the insurance industry very well, perhaps they have special investments which have higher safe yields than available to anyone else. (as is the case in many other countries, especially for pension and health fund investments) >>

While the statement may not be true for a whole population (talking about LARGE numbers again), the statement is true for an individual. YOU are and individual and it can work that way for YOU or me, if you or I want it to. For the most part, the numbers as they relate to the law of large numbers doesn't change much and it that fact that we put faith in our insurance coverage to cover us a individuals. There's well over 100 years of history where life insurance has been working. So, I don't see why anyone would be so concerned with general issues like your items (1) and (2). . . .???

There are no “special investments” that insurance companies have access to. Though, because they do deal with large blocks of cash, they can have access to discounts. The fact is, insurance companies CAN NOT be speculative to much of any degree and needs to keep their asset allocation in a very conservative and liquid position (primarily for claim paying reasons). This is why most of their investing is in bonds. Just a few years ago a large major life insurance company went bust when they tried to be too speculative by investing in junk bonds. So don't think they make a killing on investing in the stock market to make up any shortcomings in their underwriting . . . because they don't.


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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6138 of 17919
Subject: Re: Last to Die Insurance Date: 4/12/2001 5:10 PM
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markr33:

TTRoberts: <<<<Assuming a long term capital gains tax of 20% on such a house valued at $1M with a $40K basis, that would mean might want to at least have $192,000 of life insurance to pay the tax at a COI of whatever the policy costs. But the cost of the policy will be less than paying the tax. And if one also wants to recover the COI (maybe even at a net present value), one can add additional insurance accordingly. As I said, it'll DEPEND on just what one may or may not want to do.>>>>

"I don't understand the bolded sentence above - "But the cost of the policy will be less than paying the tax." "

Ted gave a nice response, but let me try another way. Without insurance, we posit that it would take 192k of your assets to pay the tax. Ted is suggesting that if you buy insurance in the amoun tof 192K, it is not likely to cost you 192k in total premiums, and that if strucured properly, the insurance will be excluded form the value of your estate and not generate any tax on its proceeds.

Now there is a time value of money issue lurking here, too. The 192k is future dollars, at some indefinite future date. The insurance premiums will be due monthly, quarterly, semi-annually or annually (maybe longer, but I have never heard of periods longer than 1 year) from now until that indefinite date. If that indefinite date is far enough out in the future and you have an alternative high return investment available to you, it might be that the present value of the 192k tax at that indefinite future date is less thanthe present value of the stream of insurance policy payments, but we cannot calculate that cross-over point without knowing both the rate of reurn and the exact time of the indefinite date --- and therin lies the rub --- which of us knows with certainty, right now, when he/she is going to die?

Maybe one of the regulars, especially from the actuaries, wants to hold forth on the concept of float in the insurance business; I know just enough to know that Warren Buffet considers it golden.

Hope this helps. Regards, JAFO

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6139 of 17919
Subject: Re: Last to Die Insurance Date: 4/12/2001 5:38 PM
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JAF031 writes,

Maybe one of the regulars, especially from the actuaries, wants to hold forth on the concept of float in the insurance business; I know just enough to know that Warren Buffet considers it golden.

I think it's safe to say that as an "investment", Warren Buffett sells far more insurance policies than he buys. <grin>

intercst


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Author: libc Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6192 of 17919
Subject: Re: Last to Die Insurance Date: 4/25/2001 11:20 PM
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I guess it depends on the size of the death benefit and how much of my money the insurance company has tied up at a paltry 6% investment return. Guarantees get pretty expensive when what you're guaranteeing is pretty close to a worst-case investment return.

I agree that life insurance is a wonderful "investment" if you die early or young. It just not that an efficient "investment" vehicle if you live to a ripe old age -- even if it is tax-free.

intercst

[Sorry...you are totally out of touch with the reality of the rate of return upon death. Here is just one example (this freebie...is worth about $300 on a fee-for-service basis by a licensed life insurance adviser...like myself.

Example:

Life insurance provides an extremely acceptable internal rate of return as a death benefit prior to a person's life expectancy. In fact, the return is so significant that duplicating it in any other financial service product might be impossible or at least very difficult. This is particularly true during the first 20 years of the life of the policy, or perhaps even longer depending on the particular plan of life insurance purchased.

Because of the time value of money, the longer the policy is in force the lower the internal rate of return as a death benefit. However, depending on one's tax bracket and as long as the Congress of the United States allows life insurance proceeds (paid by reason of death) to be exempt from federal income tax, it may continue to be difficult to duplicate in another financial service product the internal rate of return which life insurance provides as a death benefit.

HERE IS A HYPOTHETICAL EXAMPLE MALE ISSUE AGE 35

Years Total death benefit IRR

1 $500,000 7,691.12%
5 509,749 112.15%
10 543,008 37.43%
15 602,809 20.90%
20 662,033 14.13%
38 702,408 6.78%

In fact, if measured to age 100 the IRR on death essentially converges to the IRR on surrender (not taking taxes into consideration).

This is a hypothetical example of a $500,000 whole life policy contract issued to a 35-year old male person. I have assumed that the policy contract is issued on a preferred standard basis. The annual premium is $6,420. The declared and paid dividends are projected to purchase additional paid-up life insurance. The annual premium of $6,420 is to be paid for 18 years. From the 19th year on the projected declared and paid dividends are to offset the premium. In addition supplemental retirement income by way of non-guaranteed dividends (versus tax-exempt loans) is to be paid to the policy-owner. In order to pay the projected dividends the insurance company assumes it must earn 8.25 percent. The recommended premium payment for 18 years is based on reducing the current dividend interest assumption from 8.25 percent to 6.25 percent. Year 38 is the current life expectancy of a 35-year old male.

This hypothetical example is to be used for educational purposes only. You should not assume that this supposed illustration is typical for a current purchase. Interest rate assumptions, mortality experience, costs of doing business, emphasis on a similar particular product versus another by a specific company—all have a bearing on the present pricing of a whole life contract.

Once the rate of return upon death is known, it can be determined what would have to be earned before taxes (assuming that the death benefit is considered life insurance proceeds and as such is not subject to federal income tax) in another financial service product. For example: a mutual fund, a certificate of deposit, a stock, a bond, a real estate purchase in order to duplicate the tax-exempt rate of return provided by life insurance.

The before tax required IRR is determined by dividing the life insurance IRR by your marginal ordinary income tax bracket subtracted from 100 percent. Long-term capital rate is a separate issue. The process for determining the before-tax amount of money required for (1) marginal ordinary income tax rates and (2) long-term capital gain rate is on the following page.

Rate of return upon death provided by life insurance during specific time-periods

7,691.12% Year 1
112.15% Year 5
37.43% Year 10
20.90% Year 15
14.13% Year 20
6.78% Year 38
6.17% Year 42

Marginal Tax Bracket Before-Tax Factors

15% 0.85
28% 0.72
31% 0.69
36% 0.64
39.6% 0.604

Long Term Capital Gain Rate Before-Tax factor

20% 0.20

LIBC
William D. Brownlie, CLU, ChFC, CIP, LIA

P.S. If the columns do not line up...sorry!

This email advice is designed to provide accurate information in regard to the subject matter covered. It is performed with the understanding that William D. Brownlie is not engaged in rendering legal, accounting or other professional service including actively selling life, disability, long term health care insurance, and investment advice. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.



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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6193 of 17919
Subject: Re: Last to Die Insurance Date: 4/26/2001 12:49 AM
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libc writes,

<<<<<<I guess it depends on the size of the death benefit and how much of my money the insurance company has tied up at a paltry 6% investment return. Guarantees get pretty expensive when what you're guaranteeing is pretty close to a worst-case investment return.

I agree that life insurance is a wonderful "investment" if you die early or young. It just not that an efficient "investment" vehicle if you live to a ripe old age -- even if it is tax-free.

intercst>>>>>>

[Sorry...you are totally out of touch with the reality of the rate of return upon death. Here is just one example (this freebie...is worth about $300 on a fee-for-service basis by a licensed life insurance adviser...like myself.

Example:

Life insurance provides an extremely acceptable internal rate of return as a death benefit prior to a person's life expectancy. In fact, the return is so significant that duplicating it in any other financial service product might be impossible or at least very difficult. This is particularly true during the first 20 years of the life of the policy, or perhaps even longer depending on the particular plan of life insurance purchased.

Because of the time value of money, the longer the policy is in force the lower the internal rate of return as a death benefit. However, depending on one's tax bracket and as long as the Congress of the United States allows life insurance proceeds (paid by reason of death) to be exempt from federal income tax, it may continue to be difficult to duplicate in another financial service product the internal rate of return which life insurance provides as a death benefit.

HERE IS A HYPOTHETICAL EXAMPLE MALE ISSUE AGE 35

Years Total death benefit IRR

1 $500,000 7,691.12%
5 509,749 112.15%
10 543,008 37.43%
15 602,809 20.90%
20 662,033 14.13%
38 702,408 6.78%

In fact, if measured to age 100 the IRR on death essentially converges to the IRR on surrender (not taking taxes into consideration).

This is a hypothetical example of a $500,000 whole life policy contract issued to a 35-year old male person. I have assumed that the policy contract is issued on a preferred standard basis. The annual premium is $6,420. The declared and paid dividends are projected to purchase additional paid-up life insurance. The annual premium of $6,420 is to be paid for 18 years. From the 19th year on the projected declared and paid dividends are to offset the premium. In addition supplemental retirement income by way of non-guaranteed dividends (versus tax-exempt loans) is to be paid to the policy-owner. In order to pay the projected dividends the insurance company assumes it must earn 8.25 percent. The recommended premium payment for 18 years is based on reducing the current dividend interest assumption from 8.25 percent to 6.25 percent. Year 38 is the current life expectancy of a 35-year old male.

This hypothetical example is to be used for educational purposes only. You should not assume that this supposed illustration is typical for a current purchase. Interest rate assumptions, mortality experience, costs of doing business, emphasis on a similar particular product versus another by a specific company—all have a bearing on the present pricing of a whole life contract.

Once the rate of return upon death is known, it can be determined what would have to be earned before taxes (assuming that the death benefit is considered life insurance proceeds and as such is not subject to federal income tax) in another financial service product. For example: a mutual fund, a certificate of deposit, a stock, a bond, a real estate purchase in order to duplicate the tax-exempt rate of return provided by life insurance.

The before tax required IRR is determined by dividing the life insurance IRR by your marginal ordinary income tax bracket subtracted from 100 percent. Long-term capital rate is a separate issue. The process for determining the before-tax amount of money required for (1) marginal ordinary income tax rates and (2) long-term capital gain rate is on the following page.

Rate of return upon death provided by life insurance during specific time-periods

7,691.12% Year 1
112.15% Year 5
37.43% Year 10
20.90% Year 15
14.13% Year 20
6.78% Year 38
6.17% Year 42

Marginal Tax Bracket Before-Tax Factors

15% 0.85
28% 0.72
31% 0.69
36% 0.64
39.6% 0.604

Long Term Capital Gain Rate Before-Tax factor

20% 0.20

LIBC
William D. Brownlie, CLU, ChFC, CIP, LIA



Thank you very much for your detailed analysis, but I think you've made my point for me.

Accepting your analysis that a 35-year-old (who should live another 47.2 years to age 82.2 according to IRS tables) will earn an average annual return of 6.17% per year for 42 years, I still think I can do better in an S&P500 index fund AFTER TAXES.

Looking at all 40-year holding periods for the S&P500 from 1871 to 2000, the median CAGR is 9.14% per annum.

Let's look at the after tax value of $1,000 after 42 years.

Life Insurance $1,000 x 1.0617^42 = $12,362 tax-free

S&P500 index fund $1,000 x 1.0914^42 = $39,384
Capital Gains tax at 20% = 7,877

Total after tax= $31,507

The S&P500 index fund pays about a 1% annual dividend which would be taxed each year as ordinary income to the investor. Assuming the investor is in the 28% tax bracket, that would reduce his return by about 0.28%. Running the numbers again for a 9.14%-0.28% = 8.86% annual return yields the following.

S&P500 index fund $1,000 x 1.0886^42 = $35,357
Capital Gains tax at 20% = 7,071

Total after tax= $28,286

At least where I went to school, $28,286 after taxes is more than $12,362 "tax-free". <grin>

intercst




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Author: libc Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6195 of 17919
Subject: Re: Last to Die Insurance Date: 4/26/2001 7:10 AM
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Accepting your analysis that a 35-year-old (who should live another 47.2 years to age 82.2 according to IRS tables) will earn an average annual return of 6.17% per year for 42 years, I still think I can do better in an S&P500 index fund AFTER TAXES.

[First of all keep the following in mind: one half of the 35 year olds will die before their life expectancy and one half after. Now lets look at the before tax results required to net 6.17 after taxes.

Ordinary Income:

15%====7.26 percent
28%====8.57 percent
31%====8.94 percent
36%====9.64 percent
39.6===10.22 percent

Long Term Capital Gain*

20%====7.71 percent

*Assumes all values taxed at a long term capital gain rate which is not reality because paid dividends, if any, subject to ordinary income tax.

Also keep in mind that the analysis I provided was for a single life.

As I see it here are the unknowns:

1. The actual rate of return for a second-to-die policy when both insureds are dead. This fact is and will remain unknown for the following reasons: (a) the time of the death claim will remain unknown, (b) the financials on the ledger statement mean nothing==actual insurance company results will always be an unknown.

2. Most likely ONLY 36 and 39.6 marginal taxpayers are candidates for a second-to-die purchase. It would be my GUESS that the hypothetical rate of return at the death (life expectancy) of the youngest person being insured SHOULD range between 7 and 9 percent.

3. The before tax numbers should range between 10.94, 14.06 (36 percenters) 11.59, 14.90 (39.6 percenters) and 8.75, 11.25 (20 percenters).

4. When you consider the 50% dying before and 50% after life expectancy...a second-to-die policy may make sense PROVIDED ONE DOES NOT MIND SPENDING THEIR PRESENT VALUE MONEY.

LIBC
William D. Brownlie, CLU, ChFC, CIP, LIA

This email advice is designed to provide accurate information in regard to the subject matter covered. It is performed with the understanding that William D. Brownlie is not engaged in rendering legal, accounting or other professional service including actively selling life, disability, long term health care insurance, and investment advice. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.






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