An NFP office can help you reposition some of the identifiable inefficient financial statement items into more efficient assets and can potentially assist you in passing on more wealth, especially if you will be subject to estate and/or inheritance taxes.
One asset that can be attractive to reposition into is life insurance. For the following reasons, it has some potential advantages over other types of assets:
Inefficient assets that are not needed for retirement can be fully or partially liquidated and the proceeds can then be used to provide a potentially greater inheritance via the payment of premiums on a life insurance policy owned outside the taxable estate. Alternatively, additional leverage may be obtained by using the proceeds to purchase a single premium immediate annuity (SPIA) and using the income stream to pay the life insurance premiums.
The value of an investment portfolio is subject to market fluctuations. The amount of wealth transferred to your beneficiaries is based on the value of your investment portfolio at an indeterminate point in the future. Depending on the performance of the investment portfolio, your beneficiaries may receive more or less than expected. By allocating a small portion of your portfolio to purchase a life insurance death benefit, you may hedge market losses. In doing so, you may increase the amount of wealth transferred to your beneficiaries.
Life insurance is a unique asset in that the death benefit risk is borne by the life insurance carrier, which will pay the death benefit in full at the event of death no matter what the “timing.” As a result, life insurance provides you with a death benefit that is uncorrelated with other sectors of the investment marketplace, such as equities or bonds. In other words, the death benefit is based on the event of death — not a market event that can cause a downturn in value.