Overview

Main Menu Name: Discount

Calculates the discount obtained through a judicious purchase of life insurance as a means of paying the federal estate tax and other estate settlement costs. It also compares the cost per thousand dollars of death proceeds to premiums at the end of one, five, 10, and 20 years. And finally, it calculates cash available for new savings or investment.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

Federal estate taxes were designed to be extremely progressive for the purpose of redistributing wealth. Rates in 1987 and later range as high as 50 percent. Yet it is possible to pay these taxes (and other estate settlement expenses) at a "discount" through judiciously arranged life insurance.

Life insurance, if owned by a third party who is also the beneficiary, has a number of advantages. It is:

• Income tax free.
• Estate tax free if death occurs more than three years after any actual or constructive transfer of the policy by the insured.
• State inheritance tax free.
• Probate cost free.
• Not subject to administrative or transfer charges.

These factors alone would make life insurance a favored vehicle for the payment of the federal estate tax.

In addition to the fact that the modest estate owner can use life insurance to create an "instant estate," it has another important advantage. Life insurance is purchased on the "self canceling debt installment plan." In essence paying premiums on life insurance can provide, in advance, full payment of many debts, including federal estate tax. At the death of the insured, even though the premiums stop, the proceeds (and therefore the debt) can be paid.

Consider the amount of the "discount" when only a few premiums have been paid before the insured's death. Even if many years' premiums have been paid, the payment of the proceeds is payment of the estate tax (and many other costs) at a discount.

Why should I use this calculator?

• To illustrate the utility of life insurance and the importance of arranging it properly.
• To compare various life insurance policies used for estate planning.

Getting Started

Federal estate taxes were designed to be extremely progressive for the purpose of redistributing wealth. Rates in 1987 and later range as high as 50 percent. Yet it is possible to pay these taxes (and other estate settlement expenses) at a "discount" through judiciously arranged life insurance.

Life insurance, if owned by a third party who is also the beneficiary, has a number of advantages. It is:

• Income tax free.
• Estate tax free if death occurs more than three years after any actual or constructive transfer of the policy by the insured.
• State inheritance tax free.
• Probate cost free.
• Not subject to administrative or transfer charges.

These factors alone would make life insurance a favored vehicle for the payment of the federal estate tax.

In addition to the fact that the modest estate owner can use life insurance to create an "instant estate," it has another important advantage. Life insurance is purchased on the "self canceling debt installment plan." In essence paying premiums on life insurance provides, in advance, full payment of many debts, including federal estate tax. At the death of the insured, even though the premiums stop, the proceeds (and therefore the debt) are paid.

Consider the amount of the "discount" when only a few premiums have been paid before the insured's death. Even if many years' premiums have been paid, the payment of the proceeds is payment of the estate tax (and many other costs) at a discount.

Entering Data

1.  Amount Payable:  Enter the benefit payable from life insurance at the end of years one, five, 10, and 20.
2.  Cumulative Premiums:  Enter the cumulative premiums paid through years one, five, 10, and 20.
3.  Cash Value:  Enter the total cash value(s) for years one, five, 10, and 20.

These figures can readily be obtained from a life insurance policy ledger statement available at no cost from most life insurance company home offices.

Results

The program calculates the cost per dollar for proceeds paid, the tax-free proceeds paid in excess of premiums, and the policy cash value in excess of premiums.