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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: of 17953  
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

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