--R.B., by e-mail from Houston A. One thing about insurance salespeople: they are very creative at finding ways to generate money for insurance premiums. Unfortunately, this idea won't do much for your estate unless you and your wife both die prematurely.
The reason is simple: it's really difficult to outrun the accumulating power of 8 percent interest. The taxes you haven't paid have been lent at an interest rate that is higher than the long-term cash value growth of most life insurance policies. More important, if one of you has the profound misfortune of living a long time, the accumulated tax liability will gobble up the policy proceeds.
Here's an example, very close to the teaser information given on the insurance agencies' website. Suppose you abate $4,000 in taxes and use the money to buy a $250,000 second to die policy, with the death benefit increasing by the amount of the premium each year. If you both die in a car wreck a month after you buy the policy, you've won the lottery. The death benefit is big. The tax liability is small.
But suppose you aren't so 'lucky'?
Ten years later the policy has a death benefit of $290,000 and you owe about $57,900 in back taxes, netting your estate $232,100. Not a bad deal, if you don't mind dying young.
Note, however, that the net death benefit is smaller than the original $250,000 death benefit. That happens because your tax liability grows faster than the annual increase in the death benefit. Year by year, your "net" --- the difference between the death benefit and the accumulated bill for unpaid taxes and interest---starts to decrease.
Around the 27th year, what you owe in back taxes will be about equal to the death benefit--- and it will all have been for nothing. Worse, one of you may still be alive. Remember, a second-to-die policy is based on your joint life expectancy. For a sixty-ish couple, that's just less than 25 years.
A joint expectancy of 25 years doesn't mean both of you will be dead in 25 years. It means there is a 50 percent chance one of you will still be alive in 25 years.
Now let's deal with the really hard part.
Life tends to get messy as we get older. Before either of you dies, you could need to sell the house. One of you could be in a nursing home. Or both of you could need to move to a retirement community.
If that happens, the tax liability on the house may have eaten away at your home equity. The tax liability will certainly be greater than the cash value of the policy.
You can confirm this by asking the selling agent to play some "what if" games with projections. Ask what the net death benefit of the policy is at, say, 20 and 25 years. Then ask what it's cash value will be. If your wife lives that long, ask what her life expectancy is at 86 or 91. Instead of building an estate, you could be building a real mess.
Bottom Line: This idea is a gimmick that can harm you.
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