MOM-enomics with Booth Parker, CPA

Whole Life Insurance can be a useful tool in specific situations when it comes to estates, but you'll need help navigating each factor around inheritance and the unified credit. Your own CPA, Booth, is here to help and provide educational information about this kind of insurance and how to use it to your advantage.

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  • (00:00) - Whole Life Insurance
  • (00:14) - Introduction: Whole Life Insurance
  • (03:12) - The Unified Credit
  • (05:22) - Example: Bob
  • (08:37) - Future Proofing for Legislation
  • (10:55) - Why Whole Life Insurance is Useful
  • (12:46) - Outro

This podcast is produced by Rooster High Productions.

Creators & Guests

Host
Booth Parker, CPA
Financial guru by day; domestic diva by night and sharing it all in between.

What is MOM-enomics with Booth Parker, CPA?

Real moms. Real mom financial issues. Real moms in business. Real stories. I am Booth Parker. A CPA, wife, and mom that loves all things home and family. In this podcast, I talk all things money for moms, families, and small business. From tips to ideas to info you just need to know, I break it down so moms can apply it to their own families and businesses!

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Introduction: Whole Life Insurance
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So today we are going to talk about whole life insurance.

So there are many different types of whole life insurance. We are not gonna go into all of those weeds, entrenches today. It's just gonna kind of be a general overview so that you know the difference between term and whole and when you need each one.

So a few key pieces about whole life insurance. First, it pays a guaranteed death benefit. So remember with the term, it would only pay out if you made a claim within the term of the policy. So if it was a policy up to age 50, then it would pay out only if you made a claim before age 50. The premiums. On a whole life insurance policy are significantly [00:01:00] higher than term because of that guaranteed death benefit.

So remember the term, uh, premiums are very reasonable. These are significantly higher. Whole life insurance builds what's called cash surrender value. So as you pay in over the years, it's building this cash surrender value. In the event you decided to cancel the policy, you would get some cash back.

One thing to note, whole life insurance is not designed to be. A retirement plan. There are a lot of financial people out there that, are pretty adamant that you should never have whole life insurance, and every example I've ever seen them give as to why they're using whole life as a retirement plan where the people are taking that cash surrender value out to use to fund their retirements.[00:02:00]

That's not the way to use whole life. I would agree with them that don't get whole life if you're going to use it as a retirement plan. However, I don't think I've ever heard a lot of these people that are adamant against whole life actually talk about what it is really good for.

And that is as an estate planning tool. So that is what I'm going to show you today. Not everyone needs whole life. You only need it if your estate meets a certain threshold. So it's generally for higher net worth individuals. And I kind of think those people that say you're never gonna need it are kind of telling you they don't think you're ever gonna have a higher, a high enough net worth to need it.

I tend to disagree. I think you're going to get there, and so I'm gonna show you why whole life could be a good estate planning tool for you. And the really good thing is the proceeds, when it does pay out, they are tax free because you're paying for the [00:03:00] premiums with after tax dollars. So the person you designate as your beneficiary when you die and that policy pays out, they receive the money tax free.

The Unified Credit
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The unified credits oftentimes called the Federal Estate Tax Exemption. The lifetime exclusion. It kind of has a lot of names, unfortunately 'cause that can make it confusing. But what the unified credit is, it's a set dollar amount that has been set by the government that is the threshold before estate taxes have to be paid when your estate passes.

So if you're married and you're the first spouse to die, everything can go to your spouse. No problem. but if you're a single or you're the last one, then it starts falling under individuals. So we are just gonna kinda look at it in that way. We're not going to jump all the way down into the marital [00:04:00] exclusion pieces.

We are gonna look more of it as an individual passing stuff to their children or other beneficiaries that they designate.

So federal estate taxes currently can be as high as 40%. It's a marginal rate, just like the income tax rate, but once you hit a million dollars, that 40% kicks in. That's a big number of the money you've . Accumulated and grown and earned over the years and saved to pass on to your loved ones. So since it can be as high as 40% once you hit a million dollars. You want to make sure that the tax can be covered. So that's where we're going right now.

So in 2024, the unified credit for an individual, remember we're not digging into the marital piece here, just for an individual, is $13.61 million, and you're probably saying that's a pretty big number. [00:05:00] My estate is not gonna be that big. This doesn't apply to me, but I want you to stay with me and hold on.

'cause I'm gonna show you something else in just a minute. Okay? Now, if your estate is larger than $13.61 million, this is where you need to pay attention and where whole life insurance. Could be a good option.

Example: Bob
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Okay, We're gonna change the example here and say that Bob's um, estate is worth $23.61 million. It is comprised of $500,000 of cash, $2 million in stocks, and $21.1 million in real estate. He has a really nice home, he has a really nice vacation home and he has bought a lot of land as investment over the years.

So he dies in 2024 and leaves everything to his son Ricky. So 23.61 million minus the unified credit of 13.61 million, [00:06:00] leaves $10 million of his estate. That would be subject to estate taxes. Now he would owe close to $4 million. Remember that marginal tax rate, so it's a little bit below 4 million. But he would owe close to $4 million in taxes.

But note there's only $500,000 of cash being given to him, so he's gonna have to have the cash to pay the taxes. This is where heirs end up having to sell very, very sentimental assets like the family farm to pay the tax. So what if Bob had also had a whole life insurance policy? So if Bob had had a $5 million whole life policy that named Ricky as the beneficiary. Then Ricky would've also received $5 million tax free [00:07:00] after Bob died. In addition to all the assets that were left to him, Ricky could turn around and use those life insurance proceeds to pay the estate tax rather than having to liquidate his father's assets that were left to him.

Now back to the amount, you don't foresee your estate being big enough for that to be an issue. This is the important thing to note and that I feel like there's a lot of people out there that are ignoring the need for potential whole life insurance because of this. Because the unified credit and the estate tax thing may affect a lot more people in the future, and this is why that current high amount is set to sunset, as they call it, on January 1st of 26.

There really hasn't been much done to keep it where [00:08:00] it is. There has also been some proposed legislation to bring the unified credit down as low as $3 million. Okay? So that would subject a lot of people's estate to estate tax if that were to happen.

But as it stands right now, when that sunset occurs, . The unified credit is gonna land somewhere around $7 million. Okay? It's adjusted for inflation and sort all sorts of things, but in essence, the current rate will basically be cut in half and then adjusted for inflation. So that's where that estimated $7 million numbers coming from.

Future Proofing for Legislation
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There's a lot more people within a state of eight, nine, $10 million than say $20 million. So if the sunset occurs and there hasn't been much to stop it at this point, if the sunset occurs or some of that proposed legislation does get passed through, when it comes down to three, four, or $5 million, there's going [00:09:00] to be a lot of estates subject to a estate tax, so this is where paying attention to where that unified credit number ends up whether or not you may need to get whole life insurance so that your heirs have the cash. To pay the estate tax when you die and you pass your assets onto them unless the majority of your assets are cash or you're making a plan to leave them a bunch of cash to pay the tax on, um, the estate so that they don't have to sell real estate and other assets like that, that's one way to do it. But whole life insurance is a way, a lot of people do it to make sure that their heirs have the cash to cover the estate tax. So most people go get whole life insurance policies maybe in their forties or so, and you [00:10:00] don't know what that unified credit's gonna look like in 40 years.

It may get increased dramatically and your estate isn't subject to estate tax and your heirs just get the full, um, tax, um, tax-free proceeds from your life insurance policy. But you want to prepare because the younger you buy that whole life insurance policy. The lower your premiums are going to be, the better your health is going to be.

You generally have to have a physical and things like that to get a whole life policy. So this is where when a lot of those financial experts and stuff, when they say you'll never need whole life insurance. I've never seen them use it as an example of an estate planning tool. They always talk about it as using the cash surrender value as a retirement plan, and that's not really what whole life insurance is designed to do.

Why Whole Life Insurance is Useful
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This is what whole life insurance is designed to do. So [00:11:00] I am not a life insurance salesperson. I get no commissions on telling you why you might need a whole life insurance policy or anything like that. But I have, I have seen, I this inaction I have seen people have to sell the family farm, and I have seen people not miss a beat and be able to keep the assets that their parents worked so hard to attain, and that had a lot of sentimental value to the family just by having a whole life insurance policy, planning ahead for estate tax so if you foresee your estate getting over the threshold and being subjected to estate taxes, then looking into whole life insurance may be a good avenue for you. Meeting with an attorney that does estate planning, things like that, they can be very helpful in kind of guiding you. Um, but you also want to, especially if you're [00:12:00] young, maybe you're in your thirties right now.

Pay attention to where that unified credit starts falling. You know, if it really does fall in 2026, pay attention to where it may fall. After that, it may go down, it may go back up. They may keep it where it is right now. We don't know. We don't know what they're gonna do from one day to the next, right? So you have to plan ahead for you and making a conservative plan, conservative plan being, making sure there's money for the tax, regardless of where the unified credit ends up, is a really good plan to help you sleep at night, to know that your assets are protected once you die and you pass them on to your heirs.

Outro
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So I hope this helped clear up some, maybe some questions you had about ways whole life insurance can work. Not everyone needs it. I will agree with that, but there are plenty of people who do, and there are plenty of [00:13:00] people who realize they need it really late in life, and their premiums at that point become unaffordable. So . Looking at it at a fairly young age when you start to kind of do some estate planning is key to locking in some better rates and making it affordable.

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