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Ask Dave

Estates and Insurance

Karen learns the ropes from Dave on why keeping a whole life insurance policy to pay estate taxes is not a good investment.

QUESTION: Karen and her husband are about to cancel their whole life insurance policies. The whole life agent is arguing with her about needing the policy for estate planning purposes. If you are arguing with someone who works for you, Dave says, try something radical.

ANSWER: Should you have estate taxes, there are basically two ways to pay them. One is pay the taxes with cash in the estate, or have some term life insurance until you have the liquidity do cover it. They way whole life insurance works is you put a lot of money in the policy and use that to pay estate taxes. If you took that money and instead invested it in mutual funds, you’d have more than enough money to pay the estate taxes when they are due.

You are better off to invest and create your own tax fund than invest poorly and let them create the tax fund. If you don’t have enough cash today, you’d have something like a term life insurance policy. Don’t keep a bad investment program to fund estate taxes, which is what you’re doing with this whole life insurance.