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Tycoon Got $201 Million In Life Insurance. What Do You Need?

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Life insurance plays a valuable role in helping protect families from the financial impacts of an unexpected tragedy. For one billionaire, that was so attractive that it led to the biggest life insurance policy ever written. According to a CNBC report, an unnamed Silicon Valley tech tycoon bought the record-setting policy with a death benefit of $201 million, which required 19 insurance companies to participate in order to spread the risk.

You face some of the same financial risks -- albeit on a smaller scale -- that inspired this single entrepreneur to buy that policy. Here are four tips to make sure you choose the right life-insurance protection.

Consider the Long Run In Choosing Policy Size

Life insurance isn't just something you buy for today. Typically, the needs that prompt you to buy a life insurance policy now, such as the birth of a child or taking on a big financial obligation like a mortgage, will last for decades. What seems like a huge policy amount today might not look nearly as big after considering the impact of inflation over that time. When you choose a policy, consider the rising needs for your family, and also inquire about potentially adding coverage down the road without having to cancel your existing policy.

Make Sure You Pick a Healthy Insurer

Many people simply look for the lowest premiums. But choosing a life insurance company that doesn't have the financial strength to back up its policy obligations could leave you or your loved ones unable to collect on the benefits when they need them the most.
Although most states have guaranty associations that will give you a measure of protection if your insurance company goes insolvent, there are usually caps, with a typical maximum of $300,000 for life insurance death benefits. That's another reason why the tech tycoon's coverage comes from many companies.

One way to assess the strength of your insurance company is to look at third-party ratings. For instance, A.M. Best rates financial strength, with A++ and A+ indicating superior ability to meet insurance obligations and A and A- showing excellent capacity to pay claims. Grades further down the scale indicate rising uncertainty about a company's prospects. The peace of mind of not having to worry about your insurer's solvency can be worth the extra cost.

Be Wary of Insurance-Based Investment Products

Many insurance professionals will recommend more comprehensive life insurance products that include an investment element. Although these products aren't universally bad, they often come at an added cost, and they're almost always more complicated than similar non-insurance-based investments.

It's typically much easier for you to take whatever extra amount you would have spent on a whole or universal life policy and simply invest it in ordinary investment vehicles. Even if some of the unique features of insurance-based investments appeal to you, make sure you understand them completely before you commit to buying.

How You Own a Life Insurance Policy Matters -- Especially If It's Big

Most people own life insurance policies in their own name. But if your policy is big enough to have implications for estate planning, then alternatives can be a smarter move.

In particular, if you own a policy in your own name, then the death benefits your policy pays out will be included in your estate, subjecting that money to estate taxes of as much as 40 percent. One way to avoid that result is to create a life insurance trust to own your policy, thereby removing death benefit proceeds from your estate and delivering the full benefit amount to your policy beneficiaries. Creating a trust typically involves the added expense of a lawyer, but long-run savings can be worth the effort.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus.

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Do help determine how much coverage you need, there are a few excellent needs estimators online. Use them to get you in the right ballpark before you start looking for insurance.

Also, rates can vary from company to company by as much as 50%. So it pays to shop the market. Again, online term life quote sites can help you narrow down the competition.

QualityTermLife, where I got my policy offers both of those.

March 24 2014 at 12:52 PM Report abuse rate up rate down Reply

Its crazy to think how much the life insurance companies and agent are making on this. Its kind of disgusting, why does a billionaire need life insurance? I have it because I have little girls who need to be cared for if I pass away, but I bet this guy is paying more than the $35 a month I pay for my Life Ant policy. This is another case of the rich making themselves richer. Hasn't this guy ever heard of the Bill and Melinda Gates Foundation!

March 23 2014 at 5:38 PM Report abuse rate up rate down Reply

Warren Buffett is the most wisest billionaire ever!

March 20 2014 at 2:16 PM Report abuse rate up rate down Reply

Idiot, no thanks.

March 20 2014 at 2:15 PM Report abuse rate up rate down Reply

To the maximum federal rate of 40%, depending on what state you reside in, you may need to add the liability of that state's estate and/or inheritance taxes; Washington State's are the highest - at 19%, and most other states that have estate taxes take 16%, 31 states have neither estate nor inheritance taxes. A residual net estate of $1 billion is roughly 40% likely to see combined state and federal taxes in excess of $500,000,000. If that residual net estate isn't very liquid, e.g., it holds significant amounts of real-estate among its assets, bear in mind that the Treasury Department requires estate tax liabilities to be settled [paid] by the 1st day after the 9th month of the death of the second spouse. If an estate is illiquid - that could be a real [costly] problem, as assets may have to be sold off at bargain-basement prices. The primary reason the Wrigley-family sold the Chicago Cubs to the Tribune Corporation was because of poor liquidity to meet estate-tax obligations. The most cost-effective way to assure liquidity to pay estate taxes is through the vehicle of life insurance. Proper life insurance tools suitable for estate-planning [aka: estate conservation] can reduce the burdens to one's heirs or the charitable entity designated for perhaps a dime on a dollar.
The three major issues confronting large - truly large, estate planning with the tools afforded by life insurance are {1), having the liquidity to pay the premiums, (2) the insurability of those seeking coverage and, (3), lining up the number of insurers required to effect the amount of coverage desired due to issue and participation limits [how much a given insurer will write on one person's life and how much they find acceptable as an aggregate risk on an individual], along with the limitations of running into interlocking reinsurance treaties [few insurers will carry / keep tens - let alone hundreds, of millions of dollars of risk on any one life, so, they lay off much - is not most, of that risk to other insurers; the reinsurance markets are limited and the capacity to lay-off large amounts of life insurance risk on a given person's life does require no small degree of expertise in the field].
Much of what the issues of estate-planning through the vehicles of life insurance [the death-benefits of which - when properly structured, will be tax-exempt from the insured's estate] are boils down to the question of to whom and/ot which organization do people of considerable means/wealth want their estate to pass on to; the government, their heirs and/or charities of their choosing - or some combination of the above. The government {Treasury Department} will get theirs, however, there are ways to mitigate the effect of this taxation and the vehicle of life insurance is the most cost-effective way to do so.

March 20 2014 at 9:16 AM Report abuse +1 rate up rate down Reply

The article doesn't say who the mystery billionaire that bought the $201 million policy is, but
he's no mathematician. If he's already a billionaire, he could simply leave a billion to his aires without paying any insurance premiums at all.

The statistics show that less than 1% of all who buy life insurance policies ever collect on them.
It's why you see life insurance ads that pay $50,000 for $8.95 a month with no health exam.
Selling insurance is how Warren Buffett became a billionaire in the first place.
How many GEICO ads have you seen in the last 24 hours ?

March 20 2014 at 8:07 AM Report abuse +1 rate up rate down Reply
2 replies to alfredschrader's comment
Cool Hand

Please cite your source on that 1% statistic. I've seen you use it before, but I haven't been able to verify it. I would bet that number is much higher. For Whole Life policies, I know it is.
And I'll bet that multi-billionaire is a lot better at math than you are.
And the correct term is heirs, not aires.

March 20 2014 at 9:09 AM Report abuse rate up rate down Reply

PS. Schrader's simplistic assertions are both absurd amd simply wrong. People of wealth don't rely on mass-marketed term insurance for their estate planning insurance needs; they use much more... advanced life insurance vehicles and they're structured, as well as purchased with the intention of being in effect/in force when the insured... moves on. Simpletons and/or amateurs are out of their depth in this realm and should keep their misconceptions to themselves.

March 20 2014 at 9:25 AM Report abuse +1 rate up rate down Reply