"Life insurance is the most basic tool for estate planning. Put simply, inheritance is subject to the
estate tax, while life insurance benefits are untaxed. This drives up the demand for life insurance,
thus driving up the price.
The disparate tax treatment distorts the market so much that a wealthy person could buy a policy
knowing he will pay more in premiums than the value of the benefit – and it would still make
sense financially.
For example, if someone bought a $20 million whole life policy at age 60, and
paid $25 million over the years in premiums, he would still be giving more to heirs (an untaxed
$20 million) than if he just bequeathed that $25 million to his children – because after the estate
tax, that could be worth less than $20 million."
--This discussion has been really informative. Thanks to all.
http://www.nodeathtax.org/uploads/view/2313/life_insurance_b...
Excerpt:
"Life insurance is the most basic tool for estate planning. Put simply, inheritance is subject to the estate tax, while life insurance benefits are untaxed. This drives up the demand for life insurance, thus driving up the price. The disparate tax treatment distorts the market so much that a wealthy person could buy a policy knowing he will pay more in premiums than the value of the benefit – and it would still make sense financially.
For example, if someone bought a $20 million whole life policy at age 60, and paid $25 million over the years in premiums, he would still be giving more to heirs (an untaxed $20 million) than if he just bequeathed that $25 million to his children – because after the estate tax, that could be worth less than $20 million."
--This discussion has been really informative. Thanks to all.