Because you’re really, really, really rich?
Many of us don’t have this “problem,” but some people do, and it happened earlier this year in a big way. As quite a few news organizations have been reporting, a Silicon Valley-based billionaire — his name hasn’t been released to the public –purchased the world’s most valuable life insurance, worth $201 million.
The new policy is an official world’s record, according to the Guinness Book of World Records. The previous record was a life insurance policy worth $100 million, which was sold to Hollywood mogul David Geffen in 1990.
And, of course, now you just know a bunch of billionaires’ spouses are looking at them and saying, “Why isn’t our life insurance policy worth $201 million? Don’t you care about me and the kids?”
The annual premium — because we’re all wondering — is said to be in the low single digits of millions of dollars. If this billionaire would die prematurely, 19 different life insurance companies will make the payouts. Understandably, no one life insurance company wanted to take a $201 million bet. The billionaire’s age has not been disclosed.
In any case, the new world’s record begs a couple questions. Such as, is this unnamed billionaire crazy, or just crazy rich? Or is there actually a good reason to buy an insurance policy that could run many medium-sized cities? (Seriously. I looked it up. Portland, Maine’s fiscal 2015 budget is expected to be $220.85 million.)
My guess is that the billionaire isn’t certifiable — and, yes, there is one good reason to buy a tremendously big life insurance policy. I’m betting a few of you have already guessed.
That’s the main reason many millionaires buy life insurance, even when they know that they have enough saved up, and plenty of assets, that can support their spouse and children. After somebody dies, they can leave $5.34 million of their estate to their beneficiaries without paying any federal estate tax. But if you have more than that to give, the beneficiaries will be taxed for the additional money at a top rate of 40 percent.
Generally, if someone is worried about taxes, they’ll purchase some type of universal life or whole life policy. They also might set up an irrevocable life insurance trust.
Of course, if you’re reading this while eating a bologna sandwich, you might not be feeling too bad for that person. After all, hey, five million without taxes — and then more with? What’s not to like?
The problem — and this was surely the case for this billionaire — is that not every millionaire or billionaire live like Scrooge McDuck, who — for those of you who never read his comic books or saw the cartoons — would open his safe and swim in piles of money. Most rich and successful people have their assets tied up in property, a business or stocks — and while, yes, they could eventually, if they wanted to, sell it all and amass a swimming pool of cash, that would take time. A lot of time.
Meanwhile, federal estate taxes are due nine months after an individual passes away — and, of course, your state will want its share of taxes — and so it can be an unpleasant surprise to a spouse or child to suddenly receive a tax bill of millions of dollars. And a billionaire’s beneficiaries could expect to receive a tax bill of hundreds of millions of dollars.
And so no matter how rich you are, in theory, your leaving everything you have to your family — could potentially make them very poor. Or feel poor, anyway, as they rush to sell assets to pay off the IRS.
But certainly most people don’t need an oversized life insurance policy that will pay out hundreds or tens of millions of dollars — and most people wouldn’t be able to pay the premiums, anyway. The reasoning behind having life insurance isn’t to make your beneficiaries so wealthy beyond belief that they feel like they’ve won the Powerball lottery, that their lives are financially forever improved, so much so that they are, yikes, almost kind of not sorry you checked out early.
You also don’t want to go the other way and get such a small policy that your spouse or kids feel that with the funds you’ve left them, all they can afford to do is put your ashes in a coffee can and use the rest of the money for blankets, since they’re pretty sure it’ll be cold at the freeway underpass they’ll soon be calling home.
No, life insurance is finding that policy that lies in the sweet spot — a policy that gives enough money for your wife, husband, kids or whomever you care about and have been financially caring for, enough income that they can live comfortably — at least until they can get on their own financial feet. For some of us, that means getting a policy worth a quarter or half a million, or perhaps a million or two. For others, it means getting a policy worth $201 million. And no doubt about it — that’s definitely a sweet spot to be in.
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