my 80 yr old father in law was "invited" to USBank this week where he sat through a mind-numbing 2 hr presentation on a "great new program" called the Family Legacy Plan (single premium universal life insurance) a Great-West Financial plan. I am inherently distrustful of commercial banks, and highly skeptical of anything geared toward their "helping" seniors "protect" their money. I copied the brochure and can attach additional (4) pages if anyone cares to see more than the intro page (see below). I appreciate any feedback or prudent questions to ask as the only thing I know about such plans is to BE WARY!!
Hi Linda,
You are right to be wary, I don't know a bank/wire house firm that sells any product that is good compared to what else is available.
One limitation of what you have shared is that you are asking us to comment on the marketing part - that is the page that always looks great, and is designed to sell the product. First comment on that - annuities generally aren't good, so comparing it to one isn't ideal. They're using a Non Qualified Deferred Annuity to show how bad tax can be for your investment, because non-spousal beneficiaries are taxed at ordinary income rates on those products (this is how they frame the scene to sell).
The next marketing trick is the amount of tax paid. It states here you pay $19,653 on death. But since taxes are only due on the gain, that means $19,653/$59,556 = 33% Tax rate is being used for the example... you've got to wonder if the beneficiary will actually be in the 33% Federal bracket as they suggest here... what if they are in the 15% or 25% brackets? Marketing at work.
The next three considerations,:
Step up Basis rule
Under tax law, if they were to own taxable assets (regular brokerage account, invested in ETFs or Mutual Funds, and none of these bank products) at death, the value of the asset 'steps up' meaning if you bought it today for $50K, and it grew to $100K, then it passed to heirs who sold it, they would sell from a basis of $100K, essentially tax free if they sell fast (or they pay some tax if it appreciates further, but that's not something to complain about!)
Early Death
What is the payout if he (hopefully not) buys the $50K product today, and dies tomorrow?
Early need
What happens if he needs the cash 1 year, 2 years and 3 years from now (different scenarios), after tax and penalty, how much of his $50K comes back to him?
Conclusion
Life insurance to pass wealth is a good technique, but it typically comes in when you are above the Federal/State level of exemption (over $5M per person Federal and State varies by state). Generally, State Estate Tax isn't as bad as Federal, so even if you are over a State limit, you still might not want life insurance... it is really for when you are right at the top of the tax tables for such things where you could save money.
If you're here (multi-millionaire already) then you would be best served to not just buy a product off the shelf at a bank, but rather build a proper estate plan with an attorney and planner, who will also help find the best (lowest cost) insurance IF that insurance is appropriate (for 99/100 people it will not be appropriate).
