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Ask Dave

Wrong Way To Use Life Insurance

Ed has a wacky (and wrong) idea of how to use his universal life insurance policy to keep from paying too much tax.

QUESTION: Ed in Mississippi is debt free and has a net worth of $5 million. Should he invest in a variable universal life insurance policy strictly for the tax deductions? Dave thinks there’s something wrong if he’s trying to make money on a life insurance policy.

ANSWER: That’s a stupid idea. If some of your net worth is liquid, then you can use that to pay the estate tax. You’re under the illusion that you can make money from a life insurance policy as the customer. If you do that, then it means that the insurance policy is not making money. Don’t be that naïve. If you do a simple family trust, you should be able to avoid the tax on $4 million. So we’re only talking about tax filing on $1 million out of a $5 million net worth.