With the stock market hitting severe turbulence, the sales pitches are going to increase for tax-free, riskless savings and investment vehicles that will grow and escape estate taxes. Beware! Many salespersons cloak the wolf of extremely high-commission insurance products in the sheep’s clothing of an investment product.
This is not an attack on life insurance. For young families, the need to ensure that a surviving spouse can continue to pay the mortgage and that their children will have funds to complete college, life insurance is an essential financial planning tool. However, insurance was designed to protect against losses, not as a vehicle to grow assets.
Whole life insurance products are unnecessarily complex, with the insurance agent intentionally speaking over the customer’s head while touting unrealistic market projections ... until they feel financially unsophisticated, while their trust is betrayed with a product they don’t need ...”
In a July 10, 2018 Forbes Magazine article “,” the magazine awarded one of the five spots to whole life insurance and another spot to indexed universal life insurance policies. In fact, in the Forbes March 2020 issue naming the best wealth advisors, and in the Barron’s March 16, 2020 issue naming the 1,200 best financial advisors, not one insurance agency was named as a top firm that grows clients’ wealth. And yet, the middle class — especially firefighters and police officers during work hours — are the frequent targets of cult-like whole life insurance sales pitches.
Fiduciaries — financial consultants who are required to put their clients’ interests before their own commissions — almost exclusively recommend term insurance policies. As one gets older, with mortgage payments and child-raising responsibilities mostly in the rearview mirror, it is generally unnecessary to even start a life insurance policy.
As only an example, using GEICO’s online term insurance calculator, a 30-year old police officer can lock in $2 million worth of term life insurance for only $80 per month over a 20-year period. Compare that to the Forbes article (above) that reported a whole life insurance policy insuring $2 million would cost $2,288 per month ¾ fully 28 times more expensive than term life insurance!
Whole life insurance policies are often masked with names like: Super Roth, Lazer, or tax-free retirement strategies. Just about all of the selling points used to convince the unwary to fork over a huge commission to an insurance agent can be achieved through vanilla investments like stocks, mutual funds, exchange-traded funds (ETF’s), or real estate investments, because:
• Like a whole life insurance policy, there is no estate tax for middle-class or public safety officers who have a net worth under $11 million;
• Like a whole life insurance policy, money can be borrowed against a house or brokerage account without triggering an income tax;
• Like a whole life insurance policy, the appreciation on stocks, mutual funds, ETF’s, and real estate is not taxed if held until one dies; and
• Unlike whole life insurance policies where frequently 80% to 100% of the customers’ first year of payments goes into the insurance agent’s pocket, mutual fund and brokerage firms are mostly phasing out commissions completely.
Whole life insurance products are unnecessarily complex, with the insurance agent intentionally speaking over the customer’s head while touting unrealistic market projections. The memorized slick sales pitch is intended to wear down unwary customers until they feel financially unsophisticated, while their trust is betrayed with a product they don’t need, just so the insurance agents can earn their huge commissions.
If you are being pressured into one of these products, as a CPA I can provide you with a second opinion on the tax aspects. Otherwise, be safe and watch your wallet!
The views above are Lou Barberini’s, not the Westside Observer newspaper. Lou is a CPA, has an MBA in Taxation, and maintains the AICPA’s financial planning license. He has worked for Ernst & Young, Drexel Burnham, and Charles Schwab. He currently works for NICH Capital Partners, a fiduciary advisory firm, with assets held in custodianship at Charles Schwab & Co. While Lou has passed the California Life Insurance exam, neither he nor NICH Capital Partners sells or markets any insurance products. Nor do they have any relationship with GEICO. Lou can be reached at firstname.lastname@example.org
If you don’t have a living trust, a married couple should not hold their property titled as “community property.” Huh? If your house or brokerage account is titled as “community property,” a surviving spouse will pay a probate tax when they receive their deceased spouse’s share.
Example: Assume the combined value of a couple’s house and brokerage account is $2 million. Currently, when the first spouse dies the surviving spouse will not be subject to federal estate tax, and California imposes no death taxes. However, there will be about a $33,000 probate tax just to prove that the deceased spouse wanted his/her assets to go their surviving spouse.
If you don’t have a living trust but add four simple words to the title of your property or your brokerage accounts, you can avoid the $33,000 probate tax. Adding to Joe and Mary Smith Community Property “With Rights of Survivorship,” or the abbreviation “WROS,” will eliminate the probate tax.
If your house or brokerage account is titled as “community property,” a surviving spouse will pay a probate tax when they receive their deceased spouse’s share.”
Adding “With Rights of Survivorship” will not trigger any capital gains, transfer taxes, or an increase in property taxes. Nor should “With Rights of Survivorship” be considered a substitute for a will or how you want to be treated if you become ill.
Think about it: Both death and taxes are the only 100% certainties in life. By adding four simple words to the title of your property or brokerage account, you can avoid a 100% certain probate tax. (This doesn’t apply to titling 401k or IRA accounts.)
Lou Barberini, CPA has an MBA in Taxation and the American Institute of CPA’s financial planning designation. Lou acts as a fiduciary and conducts financial planning and investment guidance through NICH Capital Partners. All assets are held at Charles Schwab Lou@nichcapitalpartners.com