Some ground work.

My parents are doing very well and want to pass on as much as they can when they pass.  I dont know currant IRA or ROTH balances but I have been told several times that currant plan is to only take minimum mandatory distributions from IRAs and 401K and not take any with draws from Roths.

I have asked her to set up the roth accounts with my children as beneficiary instead of me so the minimum with draw is less and depending on age may grow faster then they have to take it out.  Read about this in a book a few years ago.

This brings me to last night.  We were having dinner with mom and dad when mom tells me that they (her 66 and him 67) are planing to get a 1 mil life insurance policy that will only pay after the second spouse dies.  This the intent to leave me and my sister a half mil each.  She said the cost will be just over 1k per month.  Not sure what the term is on the plan (they could out live it) or if its a whole life plan.

Its their money and I have done my best to tell them to spend it all and have fun and go on the trips they want to but she still wants to do this.

I feel it is very risky in that a missed payment 15 or 20 years form now could be used to void the plan.  My thoughts are that if she wants to pass this cash on with 12k a year me and my sister each could max out our roth accounts at 5500.00 and take the cash I am putting in a roth and put it in a IRA or a roth in my wife's name.

So fist question is it wrong for me to even suggest this as it is her money to do with as she sees fit?  Second one is would the life insurance really be a better idea?

Guess how I know their financial advisor is a commission insurance salesman instead of a fee-only fiduciary.

I had not thought of that angel but ya.

IMO this is a much better plan, especially if your parents are healthy and their parents & grandparents lived into their 90's.

Imo life insurance is the best wealth transfer tool that exists.

To your questions. First, if you have opinions on a matter that will ultimately affect you,  then certainly bring it up.  Is life insurance better?  Well assuming 20 years of them maxing a Roth for you at 8% interest you'll end up with $300k vs $500k with life insurance. That's just one assumption,  but I'd say insurance is the safer option,  not the more risky option.

Asking a basic question, why go through this trouble?

Do they realize the heirs will NOT be paying taxes on the cash unless it's over 5.6 million? PER PERSON.

Do they realize they can directly give each person $15k tax free now? Meaning mom and dad can give child $30k tax free. Same with grandkids etc.

Sure a badass play is to parlay money is the "term life insurance plan on a wealthy old person": Spend $10k every year with a chance of someone receiving $1 million. If the nest egg is north of $5m now, sure, what's $10k to bet/play the game. But it's a luxury and not a necessity due to the current tax laws.

Good reading.

Respectfully disagree due to our tax laws today. "transfer" is the incorrect word. "creating wealth from wealth" might be what you mean?

If you are talking about a whole life policy paid for by a business entity to the owner and then the kids inherit it tax free, that's another conversation.

Her goal is not to transfer the cash tax free it is to leave us as much as she possibly can.  She sees this as a way to "make" money off the life insurance plan.

ETA the total after settling the estate will not be over 5 mil.

Insurance companies are not stupid, and they are not charities. They know your parents’ life expectancies. The net present cost of insurance over their life will be greater than the present value of the death benefit. If it were not the insurance company would not survive.

If they don't see your opinion as an expert opinion, have them spend a few hundred with a qualified estate planner (not an insurance salesman or a stock/mutual fund advisor) and they should quickly help them see that whatever is left at the amount you're referencing, will be tax free. Invest the 12,000/year and grow it without the insurance fees or give it to you or the grandkids now and let you guys invest.

This is very accurate based on current tax laws.

I have asked her to set up the roth accounts with my children as beneficiary instead of me so the minimum with draw is less and depending on age may grow faster then they have to take it out. Read about this in a book a few years ago.

The insurance part no idea but if the advisor is getting a large commision them its probably  not a good idea

Based on what you were looking for, if it was our family, hell yeah we would do it. But with a few assumptions:

Purchase clean term life insurance through someone like zanderinsurance.com (no funny business with whole life policies/premiums/savings/investments bs products)
Pay the premium the day it is due no questions asked
Escrow a couple years worth of premiums
They are consistently living on a budget
Preserving other retirement accounts
Still building wealth in retirement

This is a high end step 8 type of play. Not many people do it, but if you have the means. absolutely.

Based on the above, assuming no inflation on money and a few other standard things, you are getting 83:1 on your money in year 1.

THIS!!! that insurance company has sales people, an office building, ect ect, ALL that has to come from SOME sort of income... IE paying OUT LESS than they bring in. They literally have people who make their living off of looking at charts of when people die, and what they would MAKE in income during that time, vs lose during death, then they cut several percentages  off the pay out vs cost and you get a premium. Literally that is what insurance is, the math of risk vs the math of paying out with a commission taken out of it for the company.

I am not any sort of financial advisor, but if they want to transfer wealth and dodge taxes, why not simply go to the local gold eagle dealer every month and buy 100 dollars face worth of gold eagles. wealth transfer can happen at dinner with a small bag, then you can stick that money into a kids's roth account (paper route money) If your 15 year old could stash 5k in a roth for the next 45 years, the compounding interest on that would be INSANE by retirement(just did math, by retirement (at 65, with continuing 500 per month you are looking at about 3.5 MILLION bucks), not to mention any sort of 401k.

I would tell them to enjoy their money, whatever $1k a month gets them each month. It's a nice gesture, but life insurance is used to transfer risk, not in lieu of matching five numbers on Powerball.

What happens if they ever get in a position where they can't afford $1k a month, then it was all for nothing.

If they have spare money, just have them gift it to you, and your kids each year.

Also, they could buy property, transfer to you upon their death tax free, and if there were any capital gains, it would be tax free, as you inherit it at the stepped up basis.

That has to make you wonder "what's in it for the life insurance company?"

I'm going to go out on a limb and bet that the premiums aren't in fact fixed at $1k per month for the next 20+ years.  I'm here to learn, but I don't see why any insurance company would take that bet to collect 240k in in premiums between age 67 and 87 yet pay out 1,000k if they die at any point in that period.  That doesn't smell right.

Now on the other hand, in my understanding your first statement has merit in that life insurance policy proceeds aren't taxable so perhaps it's sort of a way around the inheritance tax?  If OP's parent's net worth is under the exemption limit though I don't know why that would matter at all.  I'm not an expert on that topic so I'm really just throwing that out there for debate.

How awful would it be for instance if your mom or dad had two years left on their term policy, we’re pretty ill, but could be rehabilitated.

And they say, let me die, so you can collect. Or if you or your sister were in a bind, and their POA, and make the decision to let them die.

Absolutely agree. But some families are wired a little bit differently.

The family is essentially betting on when ol grandma/grandpa pass away.

Some families can laugh about it and others, not so much.

This is something Im a little put off by and I think it worse that grandma is the one making the bet.

Permanent insurance policies will have a cash value that builds up inside the policy, and a good insurance agent will set it up so that a missed payment is immediately and automatically covered by a loan against the cash value inside the policy.

that's a technique, but it is not self-completing when the insured(s) die.  Your parents could give you $12K in Year 1 for you to put into those Roth accounts, and then they die and you have $12K.  They could pay $12K for Year One on the life insurance policies, and then die, and now you have $1M.  Tell us which is the better ROI.

There's one other thing to understand: as a permanent insurance policy's cash value increases via paid-up additions in the policy, it normally increases the death benefit above the face amount of the policy .  After 20 years of payments (assuming your parents live to 87-89yo, which is common today), a permanent policy with a $1M face amount death benefit might actually pay a lot more than $1M.  They and you would have to see the illustration the agent used.

My grandparents set up a universal life plan, which, IMO, is the absolute best option if you can afford the payments for the coverage you are looking for.

Read up on it a little here:
https://www.insurancescored.com/universal-life-insurance-works/

most of those advantages apply to whole life as well, except for the adjustability of the premium and of the death benefit.

What that page does NOT tell you is that in UL, the cost of insurance for the death benefit increases each year.  So in year 20 of a policy, you might have a MUCH larger charge for the cost of insurance coming out of the accrued cash value than in a whole life policy.

The benefit of UL is being able to have a permanent death benefit at a potentially lower cost than whole life, while being able to adjust the premium payments if you are short on cash flow in a month.

The downside is that consumers get told there is a Maximum Premium you can pay, a Target Premium you should pay to keep the policy in force, and a Minimum Premium to pay to keep the policy from being cancelled, but the only thing the consumer takes away is "oh, I only have to pay a Minimum Premium," so that's all they pay for 20 years then the policy implodes unless they triple their premium.

My first job out of Grad school back in 1988 was for a company that sold such a product.  It was a common product used for Estate Planning purposes back then and it's called a "Second to Die" policy.  Made much more sense for high net worth folks back then as the the total they could pass tax free was something like $1.2 million IF they had done it right.  The second to die policy allowed the face amount to pass tax free as all insurance policies do.  Lots of high worth people used the product back in the day, especially when one had medical issues and couldn't get coverage on their own.
With the increase of the amount that can be passed to over $11 million (per a quick DuckDuckGo search) the product makes much less sense today.

When I was in the trade we were required to provide a quote to the client based on the Guaranteed Rate of Return.  We'd also include illustrations with "assumed" rates of returns.  Bottom line your parents should be getting an illustration with the Guaranteed Rate of Return.  That one "can't" blow up.  Problem is it won't be economically feasible to buy either.

I got riffed from the firm in 1990 and went a different direction which was fine because I could never get excited about selling that type of product.  To sell a lot of it you have to "sell" some pretty aggressive assumptions in the illustrations you present a client.  Too much risk in my mind that something we sold would come up short before the second death and thus provide no coverage.  The other risk was it falling short and family having to put in much more to keep it in force for the same reason.

Bottom line in my opinion, there are much better ways to do the estate planning based on todays laws.  Your parents need advice from an estate planner, not an insurance salesperson.  Commissions on those policies were crazy high.
Be prepared to pay a fee for the advice but also avoid some serious commissions on the products that the sales oriented person is going to recommend.

I talked to Mom today it's a 30 year term policy.

She also asked that I come to the next meeting so we will see how it goes.

Do the term life policy.

That Universale/Whole life stuff is wack, and the only people that like them are the insurance agents that pretend to be financial planners. Most of the time, when the insured dies, the insurance company keeps the "cash value", and only payout the death benefit.

My insurance agent told me that on my term policy, their commission is all premiums for the first 12 months, and then 3% of each month after the first year.

permanent life insurance policies have their uses.  While they are not appropriate for every consumer, there are many advanced business planning applications where they are necessary.

that's bullshit.  The cash value is normally a set of paid-up additional policies within the original policy, so that the death benefit increases by that amount of cash value.

if he's a producing general agent, possibly. If he's just an agent under a general agent, his commission is 30-50% of the first-year premium and a small percent (like 3%) each year for the next 10 years.

But that's how it works on whole life and universal life policies too.  So what's the difference?

We just celebrated my MIL's 100th birthday.  Ask the person selling this what happens then?  The answer is that you'd get bumpkus.
To reiterate what I said in the previous post.  I really don't think the product fits the situation you describe.  Especially if its a term poliicy.

Aetna just screwed me for $12K for my dads life insurance....said he lied on his medical questionare.  FUCK THEM!

how many years had the policy been in force when your dad died?

Normally the insurance company cannot contest it after 2 years IIRC.

My mom asked the same question about her mom years ago...  I told her grandma can give up to $12k/year tax free, they didn't like that because they don't like to "spoil" kids they said.  I told her she could deposit money into an IRA for each grandkid/great-grandkid, same answer.  Then I told her to start 529 accounts for all the great-grandkids and put whatever amount she wanted in them.  It would meet all the requirements mom/grandma had and grow tax free(at the time the oldest grandkids was only a few years old).  They didn't like that either.  So they did nothing.

Insurance is a gamble, maybe it pays off or maybe it doesn't.  It has the worst case of paying zero though(miss/stop payments, insurance company says you lied about health, etc).  The only thing you can say for sure is that, on average, the insurance company comes out ahead.

Point is, I've seen multiple examples where old people say they want to divest assets before they die but don't actually do it.  Maybe your parents don't really mean what they say?  They might see insurance as a way to make payments over time, thus preserving their assets while also ensuring there is something to pass on.

When it comes to finances I like to keep it simple. WHy unnecessarily complicate things with life insurance. Just pass the wealth on now or if they want to wait until they die do it then, it takes millions before you run into the death tax.

except life insurance is a massive multiplier of wealth.  What else will give you $1,000,000 for a one-time payment of $1,000?

thats 1000.00 monthly.

I think I have talked her out of it at this point. I told her to take a extra trip or two each year but shes still talking about investing it for us.  We will see.

987654321

I was short on time when I typed that, I meant if someone dies after the first payment.

How many whole/universal life policies do you sell a week?

You know what’s a good multiplier of wealth? $2 for $1.5 billion.

People like Dave Ramsey or Clark Howard like to tell ordinary people that whole life insurance is a bad idea, and that is true that whole life insurance is terrible life insurance. And frankly it is not a good thing for and Sharon salesman to sell it to ordinary working jerk off you know that are working class for lower middle-class, but they often do because the premiums are high and there’s a lot of  Commission in it for them.

Nevertheless it seems to escape them that the entire reason for these plans to have been created in the first place was as a estate strategies for avoiding the inheritance tax. Insurance payouts are not taxed. In some cases this is a good way for somebody of considerable means to pass on money to their children.

There are two aspects of the plan like this the minute they get the plan is not going to be worth $1 million usually you have to gradually build up the money overtime by paying exorbitant can you build up what is called the cash value of the plan and it should be pointed out that your parents can take a loan against the cash value of that plan at any point if they need the money like maybe there some illnesses are some other things they want to spend more money than I think they do or they die they can just take a loan against the life insurance policy and if they do not pay back the loan amount before they die it is no big deal it Just reduces the benefit that you and your sister with it. So you know it is a way for them to have access to the money If they need itbut the still pass it onto you text free If they do not

Also usually the plans off earn interest you know the balance of the plants are in Central so they can hopefully keep up with inflation @least.

The only alternative I know of giving you money tax-free is for them to give you and your sister each like $13,000 a year or whatever the annual limit is for the gift tax. The problem with that is that if they end up needing the money later on unexpectedly then they have to count on you and your sister to be willing to help them out and they have to count on you and your sister both agreeing to help them out equally so that one or the other of you does not feel like the other is not contributing their fair share which could cause  A rift in the family. My point is just because whole life insurance is bad life insurance generally speaking does not mean that it is not a good estate strategy in some cases. Of course some of that will depend on me details of the particular plan

Right, and less they end up needing that money after all or some of it and then you and your sister have a conflict about how much the two of you should help out your parents

yeah, its probably a shit idea.

Yeah that is totally how it works...

There are a lot of other ways to transfer wealth to people. You form corporations, hold assets jointly etc. Yes, depending how you set it up and how much money you are trying to transfer on death there is a certain amount of trust you need to have but the bottom line is that a life insurance policy is not for the transfer of wealth. There are lawyers that know how to do all of these things.

Insurance is for 2 things.

1. To provide a family with replacement of income for a dead spouse that is somewhat young and died unexpectedly. That is why the math makes sense.
2. In very complex situations (not you, seriously almost nobody) where you can borrow off the fund and then use your death to repay a corporate entity, things like that. Anyway, still not a great deal for everyone but works in some situation.

there is this little thing called present value of future cash flows... so like... ummmm... that whole timing thing is not arbitrary. This is terrible math you have here.

if someone dies after the first payment, yes.  Even after 10 years, which is $120,000 of payments, that $120,000 becomes $1M.

I'm not saying life insurance is always the right answer, but you guys who say it is always the wrong answer should come down off your high horse.

1. Yes IF they both die after the first year it's a great deal. That is not how you estimate a return.

2. After 10 years is not $120,000 of payments because present value of future cash flows.  So yes year one is $12,000 which is worth more than each following, all of which per dollar are worth more than the $1 million per dollar.

Insurance companies exist to make money.  If they didn’t they wouldn’t exist.  That basic point explains a lot.  Tell them to set up tax free accounts and make yearly transfers to those accounts.  Print off and show them the benefit they are to the kids as encouragement to keep doing it yearly.  This strategy is screwy on so many levels least of which is who is getting the commission.

You know I was thinking.  Can you find someone who has successfully pulled off this strategy?   It shouldn’t be hard because there are a lot of people in there networth category. Whoever gave him the idea I would expect them to show real world results  I doubt they can.  Trying to beat life insurance isn’t a new game, but I could be wrong.

whole life insurance is a very effective way to transfer wealth.  life insurance proceeds are paid directly to surviving beneficiaries.  they pass outside of probate and are not subject to estate tax.  however the beneficiary must be living and not be the estate of the person who died, sometimes this happens if a beneficiary has passed before the insured and the death benefit is paid to the insured estate.

inherited IRA accounts (both traditional and roth) have required minimum distributions https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd

lots of rich people, especially politicians use whole life insurance policies to store wealth and transfer wealth.

at my previous investment firm, life insurance policies where used by many of our larger clients to reduce the burdens of estate taxes, many of those clients simply used us their trustee for ILIT (irrevocable life insurance trust).

i don't remember all of the details of when interest on a life insurance policy is taxable, but it usually is at some point.  a financial advisor would know this.

I wouldn't dismiss the strategy out of hand.  The important points are what is the cost of the insurance, and what is the dividend payouts of the insurance company underwriting the policy.

The best whole life policies i've seen are usually written by northwestern mutual, but they have very strict underwriting standards.

term-life is a bad deal, that's not a tool to build wealth, it's simply underwriting risk for a premium.  whole-life is different

I'm pretty sure they can only claim that if the policy is was written less than two years before he passed.  check the "contestability period" in your state.

I didn't go through all of the replies so this may have been hashed out, but here is my opinion as someone who has worked inside the business for a long time.  You are talking about a second to die policy.  It drastically reduces the cost of insurance relative to individual policies.  It is a permanent policy (not term) and it could be anything from a whole life, UL, indexed or variable.  They come in all forms.  The biggest thing is making sure that it is being funded correctly so that it doesn't lapse or need significant inflows in the future.  My personal preference is indexed policies right now.  Whole life is garbage, UL is basically garbage, I don't like variable with the market where it is either (big dips in the market increase the cost of insurance and make recovery harder) and good index policies will give you fixed positions as well as options for capped market based returns.  The big thing to make sure of is that it is being adequately funded and it will be fine.

Your suggestion on putting it in a roth is a pretty bad idea.  They would probably need to live for 50 years or more to have the same impact in an IRA as it will when they die and you get the money tax free.

What they should do, if they haven't already, is set up a trust.  The money needs to go into that trust so that it stays out of your estate when they die.  You can still take money out as you need it as long as it is set up correctly, but it makes it so that you don't have to worry about estate taxes when you die.  There should be a trust anyway for the rest of their estate.   I'm happy to answer questions if you want to IM me.  I didn't go into much detail, but wealthy families do what your parents are doing.  They aren't strategizing around a roth IRA.  They use cash value life insurance as roth IRA's.  Money goes in, grows tax differed, can be taken out tax free (at any age for any reason) if they need it and passes tax free upon death.  The difference is that there isn't a cap on how much can get funneled into them.

Every thing they have other than the checking account.  My sister and I are secondary trusties on the trust.