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It turns out that rich people need life insurance more than you and I.
I was chatting with my insurance agent this afternoon and he told me about a client that is worth probably $80 million. This person is taking out a life insurance policy worth probably $40 million.
One might wonder why someone with that kind of net worth would take out a life insurance policy worth that much money. This individual is taking the policy out to pay inheritance taxes. Life insurance proceeds to heirs are not taxed.
By taking out this insurance policy, this fellow gives his heirs the money to pay their inheritance taxes. That way they can keep the other assets that will be bequeathed to them.
The problem with inheriting those assets is Uncle Sam wants his part of the inheritance. In order to pay the chunk of money, these assets must be sold for cash. But the buyers will find out the heirs are selling the assets, like a building, to pay inheritance taxes. Knowing this, potential buyers can make a very favorable deal.
This hits the heirs twice. Not only do they have to pay inheritance taxes, but the assets they must sell to pay those taxes are now worth less money on the open market.
So the smart money buys life insurance just to pay inheritance taxes.
Posted by Ted at May 11, 2005 7:53 PM