ESTATE CREATION AND LIFE INSURANCE
So far, the past twelve posts concentrated on answering the question a reader raised – Do the Rich need life insurance? The posts addressed how the Rich use life insurance to protect their estate’s value, for inheritance by their survivors. However, estate protection is only one aspect of estate planning. A person may not be wealthy. He may desire to leave a worthwhile inheritance for the family on death.
We look at the other side of estate planning for non-wealthy people with a question. How can one create an estate without having substantial financial resources? The question is very relevant for low and medium-income earners. Their survivors need inheritance more than those of the Rich. With limited financial resources, one can leverage life insurance to create an estate far above one’s financial resources.
By nature, life insurance has a peculiar feature that can enhance wealth value. In a life insurance contract, a life office guarantees to pay a fixed benefit when a person dies. In exchange for the promise, the person pays a small regular amount (premium) from inception over the contract period. The agreed benefit is substantially higher than the premium. For example, the benefit may be GhC2,000,000 for a monthly premium of GhC5,000. The person created an estate worth GhC2,000,000, with the first monthly premium, immediately after the contract commenced. The life insurer is obliged to pay the benefit, even if the person dies a few months after. The benefit increased the estate value instantly.
SUITABLE LIFE INSURANCE CONTRACT FOR CREATING ESTATE
In considering a suitable life insurance contract for creating estate, we illustrate with an example. A young family man desires to create an estate worth ChC2,000,000. He will retire at age 60. That is 25 more years in employment. What is the most suitable contract for meeting his goal? His circumstance dictates that he should purchase a life policy for which premium payment stops before the retirement date. He should also be able to pay the premium without financial stress. The reason is to avoid the contract lapsing due to premium default before and after retirement.
A Limited Premium Whole Life Assurance is the most suitable contract for his need. The policy secures an agreed benefit (sum assured) throughout a person’s lifetime. The sum assured is payable whenever the life insured dies. Premium is payable over a fixed period, instead of throughout life. The period may be any number of years that the policyholder found suitable. Premium can also stop at the retirement age. However, the shorter the premium payment period, the higher will be the annual premium. In the above example, it is advisable that the policyholder choose a period that does not exceed 25 years.
A life insurance contract for estate creation has other advantages. It may serve the financial protection goal for dependents discussed in the first post. It may also reduce income tax, also discussed in one of the earlier posts.
In conclusion, you have no excuse for not leaving a substantial inheritance for your family.