Discounting estate taxes

Estate taxes do not have to be so ominous anymore, now that there is a simple way to have them paid for you. And it’s done by the insurance companies. By purchasing life insurance based on life expectancy, which is 85, instead of the traditional way of paying until past the age of 100, you can buy a $20 million last-to-die life insurance policy for roughly $40,000 a year and let the insurance company – rather than your family — pay the estate tax.

“If you knew the only cost would be $40,000 a year, would you let the kids pay $20 million in taxes or would you buy the insurance and let the insurance company pay for it?” asks Barry Kaye, founder of the Wealth Creation and Preservation industry and author of the two all-time best-selling books on life insurance and estate planning. “Why let the kids pay $20 million in estate taxes when the insurance company effectively can pay it for them and all it costs you is the interest on a loan to pay a one-pay premium which is $40,000 a year, which could possibly be tax deductible?”

Smart Business spoke with Kaye about estate taxes and how life insurance policies can pay them for you.

How can life insurance become an investment alternative?
Let’s say, for example, you had an estate of $40 million. The estate tax is $20 million, so if a man wants $20 million of insurance, he should buy a last-to-die survivorship life insurance policy. In other words, you insure two people, the husband and wife, or just one person if you’re single. Now it’s cheaper to buy insurance on two people than it is on one because two people take longer to die than one person. If we buy a last-to-die policy, you can pay an annual premium. But it’s cheaper to pay a one-time premium where you pay it all at once. The next step is you borrow to pay the premium. Why borrow against it? Because the interest would be less than paying an annual premium.

How does life expectancy last-to-die differ from normal life insurance?
Most people buy insurance and pay for it so it lasts past the age of 100. Our concept is you pay for the policy based on life expectancy, which is usually 85 depending on your current age. Now some people may live to 100 and some people may die tomorrow. You cut the premiums in half if you pay all at once based on life expectancy of 85. If you pay until 100, it’s obviously more expensive than to pay to 85.

But if you live past 85, wouldn’t it be expensive to pay premiums at 85?
If your health is good and you live past 85, at some point you would pay an additional premium to offset that you are living longer.

Does that cost a lot more?
If you’re starting at age 65 and pay more at 85, and you started with $40 million of assets at 65, using simple compound interest you should be worth $80 million. Aren’t you in a better position to pay more at that time?

If you buy a car and you run out of gas, you don’t throw the car away; you put more gas in the tank. The gas for insurance policies is premiums or more money put into the policy. We should pay estate taxes with the insurance companies’ money, not our kids’. We can pay taxes at a great discount since the insurance companies pay for it and you borrow the premium to pay the policy at a great discount.

Can you give an example of this?
You and your wife are 60 and worth $40 million. The estate tax is $20 million, so you need $20 million of insurance. You buy the cheapest possible policy, which is based on life expectancy. You’ll never believe this, but one payment for $20 million at age 60 to age 85 is $800,000. If you’re a solid, conservative man at 60, by now you have no mortgage on your house and you have a substantial portfolio. The $800,000, if borrowed against your home, could possibly be tax deductible.

More important, you are paying only $40,000 a year interest. If you don’t like a mortgage, why not? It’s not gambling. No one will take the house away from you. Your insurance policy doesn’t go up or down like the stock market. LIBOR (London Interbank Offered Rate) interest is approximately 5 percent. And that’s being conservative. Now, 5 percent on $800,000 is $40,000 a year and you have $20 million of insurance.

BARRY KAYE is founder of Barry Kaye Associates, author and industry leader on life insurance and estate planning. Reach him at

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